Sharda Cropchem - Can it get into indian market in a bigger way?

Topline grew by 12%, gross margin pressure continued due to adverse movement of Euro vs USD. Management continue their guidance of 15-18% growth in revenue and EBITDA for FY23. Concall notes below.

FY23Q2 concall

  • Guiding for 26-30% gross margins for FY23. Expect 15-18% growth in revenue and EBITDA for FY23
  • Capex: 230 cr. in H1FY23
  • Demand situation in Europe is good and has improved from last quarter
  • Sourcing from multiple manufacturers in India and China. Don’t have long term agreements for sales or procurement. Everything is done on spot basis
  • For Q2, volume (-) 23%, price (+) 34%
  • For H1, volume (-) 13%, price (+) 36%
  • Agchem quarterly volumes: 3mn vs 3.4mn in EU, 1.9mn vs 2.35mn in NAFTA, 0.6mn vs 1.4mn in LATAM, 0.75mn vs 1mn in ROW (overall volume declined by ~22.7%)
  • Higher realizations are because of better product mix where company is benefitting from newer molecules that have higher realizations, even though blended volumes are lower because of older molecules whose volumes are high but realizations are low
  • Gross margin breakup: EU (29% vs 33% last year), NAFTA (26% vs 28% last year), LATAM (24% vs 15% last year), ROW (30% vs 20% last year)

Changes made to counter forex issues

  • Focusing more on NAFTA region (shown in increase in contribution to 40% of agchem sales which is almost same as EU). NAFTA + EU accounted for 81% of agchem sales in Q2FY23
  • Sourcing more in Euro, not easy to simply change currency of procurement
  • Improving hedging
  • Passing on price increase to customers

Its good that most of these forex issues have happened in first half of the year, as Sharda gets most of its business during second half of the year (mostly in Q4).

About other points being made on hedging, I dont think it will be as beneficial as its being made out to be as Sharda’s core business is to play on currency differential. They buy products in USD and sell them after a few months in Euro, so a large part of their margins in captured in this differential. They will need to pay 3-6% on hedging and also will need to take a directional call on currency. Currently, they are getting the stick which can also get reversed in the future. Over longer periods, this is not what they should optimize for.

Their focus should be on getting more registrations, increasing customer base, and improving contribution from better markets (in terms of realization and working capital). They have done all this, their US + EU contribution was 80% of Q2 agchem sales which speaks a lot about business execution. Also, given the fact the biggest quarter is still sometime away, the full year nos can change significantly.

Disclosure: Invested (position size here, no transactions in last-30 days)