Sharda Cropchem Q4 encouraging, normalisation of Chinese supply key to future show

After a subdued performance in the past few quarters, Sharda Cropchem reported an encouraging set of Q4FY18 numbers led by healthy volume growth and a favorable product mix. According to the company, easing raw material concerns from China could improve future prospects, which makes it a key monitorable. The recent rally caps the upside potential.

Revenue saw a healthy growth of around 29 percent year-on-year (YoY) and profit after tax grew 15 percent YoY despite a substantial increase in the finance costs. Earnings before interest tax and depreciation (EBITDA) grew around 21 percent YoY, however, the EBITDA margins contracted 160 basis points (bps) mostly due to persisting pressure from on material costs.

Apart from being a seasonally good quarter, the healthy growth in Q4 performance was aided by improved market conditions and product portfolio in Europe and the NAFTA regions. The company has a robust pipeline of upcoming products for these regions which are expected to drive growth in the coming quarters.

The company saw a strong volume uptick during the quarter at around 18 percent YoY which aided the topline expansion. Having a product mix skewed towards high margin products support the overall margins. Moreover, a favorable currency impact of 5 percent aided the performance. The company saw a healthy growth in the Agrochemical revenue at around 28 percent YoY in NAFTA and Rest of the World (ROW) segments.

The interest costs increased substantially, which the management said is mainly due to a jump in working capital requirement, inventory stock, and high receivables. It is expected to normalise in two quarters of FY19. The company has funded the working capital requirements from promoters at an interest cost of approximately 10 percent, which reflects in the Profit and loss statement pulling up the finance costs.

Sharda is highly dependent on sourcing input materials from China. The management has indicated the supply side pressure which had built up last year due to shut down of factories and implementations of more stringent pollution control norms in China is now normalising. The management is the first on the street to indicate that the factories are now coming back in production due to which the supplies are ramping up. This should bring about some relief on the raw material costs in the coming term, a major overhang on performance lately. Moreover, this is a positive for the entire Indian Agrochemicals space as Chinese raw material sourcing concerns had been impacting many players in the last three quarters.

Post the announcement of the Q4 results the stock has had a smart rally. The stock has corrected almost 21 percent in the last 1 year and is currently 25 percent below its 52-week high. It is trading at a 2019E PE of 15.5x and an EV/EBITDA of 8.4x. Expected relief from the Chinese supply which had been a major overhang for the company is a positive takeaway from the quarterly result.

The company faces high seasonality usually with the fourth quarter being the strongest followed by 2nd, 1st, and 3rd in that order. With the probability of some respite on the raw material front and the robust pipeline of registrations, we expect Q1 to see slight improvement YoY and normalisation to follow further in Q2. Chinese supply situation would be worth watching out for.

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