Buy Sumitomo Chemicals Ltd For Target Rs.520 - ICICI Direct
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Strong momentum from exports continues…
About the stock: Incorporated in 2000, Sumitomo Chemical India (SCI) is present in the three business verticals of agro solutions (ASD), environmental health (EHD) and animal nutrition business (AND)
SCI provides solutions for insecticide, herbicide, fungicide, plant growth regulator (PGR) under agro segment. Under animal nutrition, it manufactures methionine for feed additive use
In terms of revenue contribution, insecticide constitutes ~51% while around 19% is from herbicide, 9% from fungicide and 20% from other segments such as PGR, AND & EHD
Q3FY22 Results: Overall numbers were above our estimates, led by strong growth from both insecticides and herbicides segments.
Reported revenue growth of 26% YoY to | 707.2 crore, led by 45% YoY growth in the insecticides along with 25.9% YoY growth in herbicides
Gross margins remained flat at 37.6% while EBITDA margin expanded 400 bps YoY to 17.9%
EBITDA was up 65% YoY to | 122.3 crore
PAT increased 64% YoY to | 88.9 crore owing to strong operational performance
What should investors do? The stock appreciated at 45% CAGR in last two years.
We retain BUY rating on the back of better growth outlook from outsourcing opportunity of SCC Japan
Target Price and Valuation: We value Sumitomo Chemicals at 45x P/E FY24E EPS to arrive at a target price of | 520/share (earlier | 505/share).
Key triggers for future price performance:
Upcoming capex for five molecules, which will be supplied to SCC Japan. Capex is earmarked at | 100-110 crore with an asset turn of around 2-2.5x
Potential opportunity of technicals manufacturing for Nufarm to improve export share meaningfully
Allocation of incremental FCF towards organic/inorganic growth likely to expand return ratios further
Alternate Stock Idea: Apart from Sumitomo Chemicals, in our chemical coverage we also like Neogen Chemical.
Trigger for Neogen Chemical’s future revenue growth would be increasing CRAMS opportunity
BUY with a target price of | 2160
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