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Multiple agrochem headwinds impact numbers…

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 ~43% while ~24% is from herbicide, 9% from fungicide and 24% from other segments such as PGR AND & EHD

Q4FY23 Results: Topline numbers were below estimates led by lower demand from the domestic and international market.

* Reported revenue was down 2% YoY to | 651.6 crore, led by 2.2% YoY degrowth in insecticides along with 10% YoY de-growth in fungicides

* Gross margins were down 682 bps YoY to 31.3% while EBITDA margin degrew 402 bps YoY to 12.4%

* Absolute EBITDA was down 26% YoY to | 80.6 crore while PAT declined 3% YoY to | 72.1 crore

What should investors do? The stock appreciated at 20.4% CAGR in the last three years.

* We downgrade from BUY to HOLD rating on the back of 1) impending threat of Chinese dumping especially in the generic agrochem export markets 2) high-cost inventories and falling prices and 3) unexpected changes in the monsoon distribution pattern and changes associated with the same

Target Price and Valuation: We value Sumitomo Chemicals at 32x FY25E EPS of |13.2 to arrive at a target price of | 420/share (earlier | 525/share).

Key triggers for future price performance:

* Potential of five molecules, which will be supplied to SCC Japan. Estimated revenues from five molecules is ~ | 250-300 crore

* Potential opportunity of technical manufacturing for Nufarm to improve export share meaningfully

* Growing demand of current product in the international market to aid export business

Alternate Stock Idea: Apart from Sumitomo Chemicals, in our chemical coverage we like PI industries.

* Trigger for PI Industries future revenue growth would be strong order backlog in CSM and foray into pharma CDMO.

* BUY with a target price of | 3880.

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