Company Name – Sharda Cropchem Limited (Sharda Cropchem) Current Share Price – INR 481 (December 9, 2022) Market Cap – INR 4,344 cr |
1. What is interesting about the stock?
“This is the essence of the Agricultural Revolution: the ability to keep more people alive under worse conditions.”
― Yuval Noah Harari, Sapiens: A Brief History of Humankind
The agricultural revolution increased agricultural production in parts of the world, beginning most markedly in the late 1960s. The initiatives resulted in the adoption of new technologies, including high-yielding varieties (HYVs) of cereals. It was associated with chemical fertilizers, agrochemicals, controlled water supply (usually involving irrigation), and newer methods of cultivation, including mechanization. All of these were seen as a 'package of practices' to supersede 'traditional' technology and be adopted as a whole.
Agrochemicals played a pivotal role in the revolution!
Sharda Cropchem started as two proprietary firms, set up by Ramprakash Bubna and Sharda Bubna, respectively, and, in March 2004, changed to Sharda Worldwide Exports Private Limited combining the agrochemicals and non-agrochemicals businesses of the two firms. On September 18, 2013, it was converted into a public limited company with the name Sharda Cropchem Limited.
The business comprises two segments:
Agrochemicals - Company markets formulations and generic active ingredients globally (fungicides, herbicides, insecticides to protect varied crops) as well as specialty markets and biocides. It focuses on identifying generic molecules, preparing dossiers, seeking registrations, and marketing & distributing formulations or generic active ingredients rather than basic R&D and manufacturing. The segment contributed 84% of revenue in FY22 with a growth of 46% on a YoY basis. Product-wise split in FY22 was:
Herbicide – 54% (53% YoY growth in FY22)
Insecticide – 20% (31% YoY growth in FY22)
Fungicide – 26% (44% YoY growth in FY22)
Region-wise break-up of agrochemical revenue in FY22 was:
NAFTA region (United States, Canada, and Mexico): 38%
Latin America region (like Brazil): 11%
Rest of the world: 5%
Non-agrochemicals – The Company procures conveyor belts, general chemicals, dyes, and dye intermediates from Chinese or Indian manufacturers, and supplies them to more than 30 countries in Europe, North America, Latin America, Australia, and Asia. The segment contributed 16% of revenue in FY22 with a growth of 71% on a YoY basis.
The Company has an asset-light business model whereby it focuses on identifying generic molecules, preparing dossiers, seeking registrations, marketing, and distributing formulations through third-party distributors or its own sales force. The Company's core competence lies in developing product dossiers and seeking product registrations in different countries. Sharda Cropchem did a capex of ~ INR 400 cr in preparing dossiers and seeking registrations for newer formulations.
Sharda Cropchem has a presence in 80+ countries with a sales force of 400+ and 500+ distributors. The Company's sourcing strategy through a global network of suppliers provides flexibility and nimbleness.
The global crop protection chemicals market size in 2020 is ~ USD 60 billion and is expected to grow at a CAGR of ~3.5% for the next 10 years. Key drivers for growth are:
Growing world population; significant jump in purchasing power of larger segments of the population
Middle-class fueled demand led to increased food and protein production
Arable land is expected to decrease from half an acre per person today to less than one-third of an acre per person by 2050 – which implies that production yield needs to be increased and agrochemicals play a critical role in such productivity improvement
Future Prospects
The Company has a strong pipeline of formulation filings that can provide 15-20% annual revenue growth in the next few years with stable EBITDA margins. In the near term, Sharda Cropchem faces the following challenges:
European business could get affected by Ukraine – Russia conflict
Disruption in the supply chain (freight containers) and production issues due to the recent COVID surge in China
Management Background
The promoters and the management have rich experience in agrochemicals and are technically qualified.
Ramprakash Bubna is the Chairman and Managing Director. He holds a Bachelor’s Degree in Technology in Chemical Engineering from IIT, Bombay. He has over 53 years of experience in chemicals, agrochemicals, and related businesses. He is responsible for the Company’s overall business operations and strategy.
Strengths (Why invest in Sharda Cropchem?)
Asset light business model
Large distribution network
Strong formulation pipeline (registration takes 4/5 year process)
Experienced management team
Weakness
Poor cash flow conversion
Dependency on China for sourcing API – expected to get impacted by the recent COVID outbreak
Exposure to geopolitical risks - impacted currency in H1FY23
Food security becoming key for all countries – they may move to localize the production of agrochemicals
2. Key Historical Financials
Company had excellent results in FY22 – revenue growth of 49% and net profit growth of 52% on a YoY basis
Revenue growth slowed to 12% in Q2FY22
EBITDA margin has been stable at around 19-20% in FY21 and FY22; EBITDA margin fell from 14% in Q2FY22 to 9% in Q1FY22 due to adverse FX impact (dollar strength) and higher freight cost
Robust ROCE and ROE at 26% and 20% respectively in FY22
Cash Flow Analysis
The Company has very poor cash flow convertibility (CFO/EBITDA) of 39% in FY22 vs 50% in FY21 – this is due to high receivables (partly due to the seasonal nature of business) and high inventory level. Management expects the capex to be ~ INR 400 cr in the next few years. Company would need to dip into cash reserves or take debt to fund the capex and dividend.
3. What is my view on company valuation?
The share price of the Company has jumped ~ 50% in the last 1 year.
Sharda Cropchem trades at an EV/EBITDA ratio of 6.5x vs UPL at 8x and PI Industries at 34x. Company trades at a P/E (TTM) ratio of 14x vs its 5-year average of 16x vs UPL at 14x and PI Industries at 51x. Valuation is not unreasonable, but it does not provide any margin of safety.
However, I would be wary of the high working capital need of the business which drives poor cash flow convertibility.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Supply chain disruption risk
Forex currency risk – as Company earns in Euros and Dollars
Increase in consumption of organic products which do not use traditional agrochemicals
De-globalization - move to localize production of agrochemical
About the Author
I have over 15 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have had no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.