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

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FY22 was a great year for Sharda, with sales growing by 49% and PAT by 52%. Management is confident of achieving 15-20% sales growth in FY23. My notes from concall is below.

  • Focusing on expanding biocide registrations
  • Recently there has been some impact on their Chinese shipments due to lockdowns where goods are stuck at ports. This hasn’t yet made much business impact as Q1 is a lean season
  • Expecting to grow at 15-20% in FY23 (value wise). Expect to maintain gross margins in similar range (30% types)
  • Have also shipped certain consignments through air to be a reliable supplier
  • FY22 sales growth components: Volume (+) 24%, Price (+) 25% and (+) 1% through forex gain
  • For Q4, volume (-) 11%, price (+) 42%. Currently selling prices are stable
  • Main driver of growth in belt (non-agro) business is because of reliability of supplies and quality of products
  • Margins have been impacted in belt business due to inflation in freight cost which form a significant proportion (15-25% of increase in freight costs had to be absorbed by Sharda). Overall margins in belt business is 17-18%
  • Channel inventory dried up post covid which benefitted Sharda. It’s hard to estimate current state of channel inventory
  • Gross margin breakup: EU (36%), NAFTA (29-30%), LATAM (15%), ROW (22%)
  • FY23 capex should be 380-450 cr. FY22 capex was 413 cr. (some of this is expensed out, that’s why on cashflow statement it appears lower)

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

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Just to add one point
Mr Gupta confirmed that he is observing the “soft corner” for the generics companies(such as Sharda) compared to the innovator due to lower prices and similar quality. Because of the trust that Sharda’s quality has created with customers, there is an increased preference witnessed as against the innovator. This trend can be one of the driver for Sharda to win higher volumes/business

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  • Expecting to grow at 15-20% in FY23 (value wise). Expect to maintain gross margins in similar range (30% types)

I think there is some confusion around this.15-20% is volume growth guidance,pricing no one is sure and with a 42% jump in pricing in Q4 I doubt Bubna ji meant value guidance of only 15-20%.Pricing growth(if any) will be over & above this 15-20% was my understanding.

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15-20% should be the revenue growth as per this interview with CNBC.

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1:35 clearly says volume growth.

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Management categorically said 15-20% revenue growth during the concall, also reiterated the same in today’s interview.

One interesting takeaway from this interview is working capital can go up from 89 days to 100-105 days in FY23

Disclosure: same as before

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What are the FY 23 guidance for total sales and profits then ?
should it go to around 4500 cr in sales as per the 25% volume increase then the net profits will come out to be around 450 cr right ? :thinking:
So at current market cap of 6,694 it would be at around 15 times FY23 earnings.

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I think sharda cropchem business model of buying raw materials from china in dollars and selling in Europe in Euros are responsible for current business headwinds due to dollar appreciation and freight cost increase. These headwinds are going to stay for few quarters. Mr. Market will give much better opportunity in sharda cropchem in terms of lower share prices. Ukraine russia war and climate change in europe are fuelling the headwinds.
Dis. Not invested will keep close watch.

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Topline grew by 32%, however gross margins were severely impacted due to Euro weakening vs USD. Management is confident of recouping margins and is guiding for 15-20% sales growth & 18-20% EBITDA margins in FY23. Concall notes below.

FY23Q1 concall

  • Expect sales growth of 15-20% with 18-20% EBITDA margins in FY23, expect significant margin revival going forward
  • Gross margin impacted due to Euro weakening against dollar, PAT was impacted by higher depreciation and forex losses. Confused as what to do as Euro weakening was very unexpected. Don’t want to move all the Chinese supply contracts to Euro as Euro can also strengthen and company doesn’t want to lose that benefit if it happens
  • Hoping to end FY23 with gross margins similar to FY22
  • This Euro weakening against dollars benefit Indian suppliers tremendously, especially those who have lower import dependence i.e. their cost base is in INR and not USD
  • Gross margin breakup for agchem: EU (31% vs 42% last year), NAFTA (24% vs 25% last year), LATAM (17%, same as last year), ROW (23% vs 31% last year)
  • Agchem volumes: 4mn vs 3.5mn in EU, 2mn vs 2.4mn in NAFTA, 1.1mn vs 1.5mn in LATAM, 300’000 vs 340’000 in ROW
  • Demand for agchem division is good in Europe, there has been pressure on demand in NAFTA due to weather. Not seeing much pricing pressure
  • Contribution for Western Europe is higher than Eastern Europe for agchem
  • Capex: 102 cr. (special focus is on expanding biocide registrations). This is expected to be in the same range or increase slightly
  • Sales growth components for entire sales: Volume (-) 2.5%, Price (+) 38% and (-) 3.3% through forex loss. Is most of price increase due to non-agro division? Yes
  • What is contributing to such high growth in non-agro business? Marketing strategy is helping where Sharda is supplying tailor made products to customers, also quality of products is much better. Additionally, Chinese suppliers had higher bandwidth to fulfill these orders. Margins have improved from 14% to 22% due to passing on of higher freight rates

Disclosure: Invested (position size here, sold few shares in last-30 days to bring position size closer to model portfolio)

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Dear @harsh.beria93 , we would like to hear from you about the current headwinds in business which Sharda cropchem is facing. As far as We know you follow Agrochemical sector very closely. I have positions in Agrochemical sector through Meghmani Organics. MOL results of this quarter are very much superb looking at its valuation. What’s your take on Sharda cropchem valuation with current business headwinds.

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@harsh.beria93 - The key aspect is - Management has tried to clarify - attributing the disastrous Q1 margins to Euro vs Dollar. But the key question is - Is that all true :)…does it make full sense or management is hiding something beyond the currency headwind and freight cost issues.

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During this quarter, the miss was on gross margin which management blamed on cross currency headwinds (Euro weakening vs Dollar).

To give a bit of historical context, reduction of gross margins happened since FY18 when market derated Sharda Cropchem (from 2-3x EV/sales to 1-2x EV/sales). There were two main reasons for gross margin compression:

  1. Sharda targeted USA as its next growth frontier, where they started offering products at lower realizations (thereby lower gross margins). This is a common business strategy, to sell at lower prices to break in the market, and over time establish credibility and increase prices

  2. Chinese pollution issues started cropping up which meant Sharda’s suppliers demanded higher costs from Sharda

In agrochemical market, prices are set by innovators and the generic cos generally undercut these innovators. In 2019, innovators were offering ludicrous prices, which management pointed out aptly in FY19 concalls. Thus, Sharda was squeezed on both sides.

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During this quarter, gross margins was at decadal lows (25%), and market has duly penalized the stock.

Future outlook
From industry perspective, Indian agchem exports have been growing very well since FY18. This is the second good cycle that this sector is witnessing (first was 2013-16 which then slowed down in 2017). So that we have had 3-4 bumper years of growth, its quite possible that growth slows down for a couple of years. Also, for a few cos, most growth has come due to realizations and they will get hit massively. This was somewhat visible in quarterly numbers of Rallis and Astec. Actually, next few quarters will help us understand which company has robust sourcing networks. Those whose margins are massively hit will likely have much higher dependence on Chinese suppliers (likes of Astec, Sharda, even Rallis to an extent). Whereas integrated players (like Meghmani, Heranba) should show lower margin pressure. As Meghmani’s numbers are out, we can clearly see that they haven’t faced margin pressures, so they actually have more indigenised sourcing of RM. Lets see what Heranba reports.

For Sharda, all this doesn’t make a lot of difference as their growth is a function of registrations. About margins, USD to Euro is still close to parity which implies Sharda’s hedge acts against it. Anyway, company has no control over currency fluctuation and I feel they shouldn’t waste a lot of time on this.
Valuation wise, I feel they can only trade at 2014-17 valuations if gross margins go back to 35% levels, which I am not sure about. The good thing with a company like Sharda is their business is becoming more diversified (both in terms of markets they sell in and the product range). Their non-agchem business has now grown past 200 cr. in quarterly revenues (just for context, the biggest belt exporter from India does lower sales). Also, Sharda was able to pass on freight cost increase in non-ag division, as a result of which margins have increased to 20%+. Lets see what the future unfolds.

Disclosure: Same as before

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@harsh.beria93 - Is it fair to see Sharda as a Krsnna diagnostic of Agrochem. Having a different business model than the rest within the sector. I am not sure if the rest of the players revenue varies based on the no. of registrations?

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I don’t think Krsnaa is an opt comparison. Sharda’s business model is that of a pure marketeer, who outsources manufacturing and spends money on registration of its products and on marketing. If you want a peer from a different industry, cos like Chaman Lal Setia (basmati rice), Symphony (coolers) or Dash Pharma (US generic pharma) come to mind, where manufacturing is outsourced and company is only responsible for marketing.

Yes, a company needs to register its products to sell in regulated markets (EU, NAFTA, LATAM). The difference in other cos is they only register a few products (which they manufacture in their factories) in multiple geographies. Whereas, Sharda registers multiple products in multiple geographies, as they are not manufacturing them and don’t have to spend money in building dedicated lines for any product. In a way, Sharda’s business model is akin to a trader, where the entry barrier is distributor relationship and registration.

In its early days, Ajanta Pharma also used to do this, i.e. register products which are in demand in a given market and then get it manufactured with a third party.

Hope this is of some help.

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Hi @harsh.beria93 I am studying the whole thread of sharda cropchem in valuepicker about its business model. Asset light model based on buying from china and selling to highly regulated market of US ,Europe and other latin american country through registration. Getting registration from developed countries are very difficult and have long gestation period.Risk of forex losses due to currency price fluctuation is also understood. But one thing which is difficult to predict is whether we are in uptrend of agrochemical cycle or at its peak of cycle? Please help newbie person like us in predicting where we are currently in agrochemical cycle?
Disclaimer: Studying before putting my hard earned money.

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Rising gas prices in EU should benefit Sharda right? Wondering why the stock hasn’t reacted positively to this development.

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Is this company really cyclical?Its opm has been pretty stable over the years…My point is it seems to be well managed.

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In any cyclical sector, its hard to tell if we are at peak of a cycle. However, we can say with reasonable certainty whether we are in higher part or lower part of the cycle. For global agrochemicals, we have had a couple of very good years and are definitely towards the higher end of the cycle. Also, I have a feeling that we also crossed the peak as realizations of a number of technical grade pesticides have fallen off in the past few weeks. This has come on the back of droughts in China and a very hot summer in Europe. So, the post covid boom is probably over and we might be in for a couple of flat years. This is my current understanding.

While rising gas prices in EU shifts more business towards Asia, it has also impacted Euro in an adverse way. Sharda realizes half of its sales from Europe and procures in USD. The adverse currency movement has impacted Sharda significantly.

If you go back and read this post, you will see that margins have been adversely impacted since 2018. In last few quarters, it seemed that gross margins would revive but that has been reversed in Q1FY23. Its agchem margins are definitely cyclical.

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

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