Sharda Cropchem Ltd : Adverse currency movement hurt margins; guidance revised; Buy- Anand Rathi Shares and Stock Brokers
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For growth, Sharda is expanding its range of products in each region, exploring newer markets and penetrating deeper into existing ones. We are positive about its future performance, considering its focus on registrations, rising proportion of high-margin products and deeper penetration. However, adverse currency movements would put pressure on margins in the short term.
Adverse currency movements hurt H1 performance. Higher prices (up 34% y/y) and a better product mix helped Sharda to 12% y/y Q2 revenue growth (to Rs7.2bn) while volumes fell 23%. Nearly 41% of agrochemicals sales were to Europe. The Q2 gross margin was impacted 66bps y/y, to 27.3%, by the unexpected weakening of the euro to the dollar and by the increase in input costs. However, sequentially the gross margin rose 193bps, supported by price revision. The EBITDA margin contracted 164bps y/y to 14.4%, while q/q it improved 271bps. Profit declined 62.2% y/y, 46.6% q/q, to Rs121m, impacted by Rs386m forex losses (vs. Rs132m a year ago).
Outlook. Per management, currency movement estimation is difficult in the present global market situation. The company is taking steps to reduce forex losses, like price hikes, RM sourcing in euros, shift in geographical mix (more sales in NAFTA) and hedging to reduce a negative currency impact. Sharda is adding products, strengthening its position in markets and registering in new regions as old products are not generating further revenue and margins. Considering the challenging H1 performance, management revised its guidance of 15-20% revenue growth to 15-18% in FY23, with 15-18% EBITDA margins (earlier 18-20%). H1 FY23 capex was Rs2.3bn; FY23 Rs3.8bn-Rs4bn.
Valuation. Considering the H1 performance and margin pressure, we cut our FY23e/FY24e profit. We roll over to FY25e and maintain our Buy rating, with a TP of Rs580, valuing the stock at 13x FY25e earnings. Risks: Forex movements, dependence on China for raw material, delay in registrations.
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