Sharda raises funds, looks they will repay the high cost funds from promoters (10%).
Con call transcript, company confident about the cost to either remain steady or tend to come down, no more escalation. China market, according to management is turning from sellers market to buyers ( more suppliers are available), looks the bad time is fading away. NAFTA region performance is very good and regarding trade war between US and China, Trump will try to avoid farmers as they are his vote banks and if he does, prime victims will be Chinese companies.
I was looking at this company because the following seemed nice
Agrochemicals space is currently growing fast due to exports picking up and this company exporting to US and NAFTA, LatAm countries was a big plus
P/E of 18 for a company with 20% Sales growth and 22% Profit growth last 3 years (as per screener).
RoCE of 49% and D/E of 0 looked excellent.
Promoter holding of 75% as well was a big plus.
It ticked a lot of the boxes in my checklist but these kept me out.
FY17 to FY18 PAT growth has been nil despite topline growth of 22%
OPM dropped from 23% to 18%. Effect due to Crude?
Inventory increased from 287 Cr to 530 Cr between FY18 and FY17.
Receivables at 892 Cr (672 in FY17) with the inventory pile-up means this company is having trouble managing its working capital.
This is apparent when looking at short-term loans - Its now 170 Cr from being nil in FY17. So the D/E of 0 doesn’t hold anymore.
Receivables + Inventory - Payables i.e WC was 500 Cr in FY17 and is now 772 Cr. That’s quite a big jump.
Debtor days was 175 days in FY17 is now 190 days so the deterioration in receivables isn’t proportionate to sales.
Inventory turns was at 4.87 in FY17 is now at 3.2. There is a clear deterioration on all things related to working capital here.
I think this balance of old positives and new negatives are captured in the price as well beautifully as it rests on FY15/FY16 top. The H&S pattern could breakdown if the market doesn’t see signs of improvement going forward or the support could hold if the inventory build-up is justified by the sales going forward.
Sharda neither manufacture nor develop anything rather they buy where is cheap and sell where pricier, that is what Sharda call themselves " Asset Light Model" company. The only real asset Sharda hold is " registrations" and this model generates profit with out much investment. The risk part is, any country/region can keep Sharda away but not a developer/research company. The story is same for generic pharmaceutical companies which enjoy the cheap cost of production in India.
OPM was dropped due to the crack down in China due to pollution control causing lesser suppliers which
continued through out FY-18 and definitely, as you mentioned, crude has played a part.
2.Expecting a good Q4 high inventory level was build up in Q3 ( Con call Q3) and Q4 , capital was borrowed
(short term )from promoters ( Con call Q4). Company has posted ever best Q4.
3.Inventory turn over remains high , probably expecting better Q1-19 or as you observe longer receivable
days which is a cause of concern. Q1 and Q2 inventory levels will provide better idea about receivables.
I am also waiting for Q1 to make sure the worst is behind us.
Current price scenario, most probably is due to, utterly negative sentiments prevailing towards mid/small cap stocks which may continue until FIIs turns positive.
As far as Sharda Cropchem is concerned, the expenses of procuring a licence to distribute its products ( registrations ) are put on the balance sheet under the name Intangibles. These are an integral part of their business and are also part of the capital employed in the business. These need to be included in calculating the return ratios.
This counter is looking attractive at recent levels. My query in screener is mentioned below. Evidently a fundamentally strong stock. Any particular reason for hitting the lower circuit? Tried to figure out through surfing the recent news. Couldn’t find anything specific.
YOY Quarterly sales growth > 10 and
YOY Quarterly profit growth > 10 and
Market Capitalization > 1000 AND
Average return on equity 5years > 20 AND
Promoter holding >= 40 AND
Sales Last Year >= 10 AND
sales growth >= 10% AND
Debt to equity < 0.1 AND
Average return on capital employed 5Years >30 AND
EPS last year >20 AND
Return on equity > 20 AND
Net cash flow last year > 1
I have done some analysis on Sharda and what I found is that while their receivables are always remained at 50% of sales where as payables as % of sales has been consistently increasing. This shows the confidence of business as suppliers are confident of taking the money back with delays. Also, WC days has been reducing consistently every year.
FY18 was exceptional due to Chinese government strict regulations lot of manufacturing firms had shut down. In last con call management mentioned that things are turning around and working capital should be back to normal.
HDFC recently increased the stake to around 7.8% while CRISIL report shows that things are on track to achieve sustained growth in medium term. This is backed by increase in number of registrations in pipeline (978 vs 852).
Sharda cropchem is not only agro chemical company Also has non core business like industrial belt and conveyer belt business . I believe market doesn’t like non core business . That’s the reason of low PE. But company in highly regulated market like europ and niche product asset light but still market expect something
I find the operations of the company quite complicated. It has 41 subsidiaries in multiple countries. Bulk of these subsidiaries are operational which means sales happen in multiple jurisdictions (about 35% of their sales comes from sales of these subsidiaries) with implications of taxes related to sales and on profits in each of these countries. It would require quite a large set up to deal with these issues and optimise the tax liabilities as well as deal with multiple currencies and manage the forex part and also deal with regulatory filings in each of the countries.
While scrutinising the accounts, I was trying to figure out the cause for fall in ROCE over last few years. The company capitalises its cost for product registrations and also amortises the same fairly aggressively. But its very clear that while the company has been able to create new product registrations and licences at a fast pace the sales have not kept pace.
Rs in crs
Sales/ Net Block
As a result while the intangible assets have gone up along with the balance sheet size as well, the sales and profits have not kept up. Unless the company is able to drive sales from its license portfolio ROCE will not improve and that is clearly reflected in the stock price.