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Demand seems to have hit trough

Negative operating leverage dragging EBITDA

Sumitomo Chemicals (SUMICHEM IN) reported a 28% decline in topline to INR 5.4bn (INR 5.9bn estimated), led by 55% and 17% deceleration in exports and domestic sales, respectively. Gross margin expanded 432bps to 39.7% (35% estimated) due to pricing discipline in the domestic market even though it came at the cost of lower sales. EBITDA declined 45% YoY to INR 659mn (INR 638mn estimated), margin contracted 380bps to 12.2% (10.8% estimated) as lower volumes led to negative operating leverage. Other income increased 104% to INR 268mn (INR 300mn estimated). APAT declined 39% to INR 549mn (INR 580mn estimated).

FY25 guidance optimistic

SUMICHEM expects demand to normalise from Q4FY24 and realisation to improve FY25 onwards following demand normalisation. It expects exports to pick up as well. Margins may improve, led by better realisation and operating leverage.         

Capex to scale up FY25 onwards

SUMICHEM is expected to invest INR 3bn in a new greenfield facility, which will be set up to garner business from its parent. Talks between the company and its parent have been ongoing for new investments in India. Another INR 500-750mn would be invested in product-specific capacity enhancement and maintenance capex.

Valuation: Reiterate Accumulate with a higher TP of INR 423

Per management’s positive outlook, demand from customers seem to have hit a trough in both domestic and export markets. SUMICHEM’s structural growth story – increasing share of parent’s business (manufacturing molecules for the parent, selling generic molecules to affiliate companies and proprietary product launch domestically) – is intact. But we pare topline/EBITDA/PAT estimates 8%/16%/13% for FY24E and 12%/17%/14% for FY25E due to delayed business uptick. We introduce FY26E estimates and roll forward. Reiterate Accumulate with a higher TP of INR 423 (from INR 401), on 37x (35x earlier) FY26E EPS of INR 11.4.