Sharda Cropchem: Asset-light Agrochem Play

NameReco DateReco priceTargetProspero RatingReport Date*
Sharda Cropchem08Sep2014 Rs. 156Rs. 3008 / 1008Sep2014

A) Company background:

Sharda Cropchem Ltd. (SCL) is primarily a crop protection company engaged in identifying generic molecules, preparing dossiers, seeking registrations, marketing and distributing formulations across the globe. Sharda Cropchem does not have any manufacturing plants of its own and gets most of its products manufactured in China.

The marketing is done through third party distributors or their own sales force. SCL has total consolidated revenue of Rs. 815 crores of which agrochemicals business contributes 80%+ revenues while the remaining share is contributed by its non-agrochemicals business.

Sharda Cropchem IPO 
Issue size (cr. shares)2.25
Issue size (Rs. cr)327 – 352
Issue open date05-Sep-14
Issue close date09-Sep-14
Price bandRs. 145 – Rs. 156

B) Global Agrochemical Industry:

The global agrochemical industry stands at around $57 billion and is expected to witness a growth of 5% of next 3-5 years. The major reasons for this growth include demand for nutritious and high-quality food; shrinking of arable land; and focus on yield / productivity. The Agrochemical can be bifurcated as Insecticide, Fungicides and Herbicides.

1.     Insecticides are used to kill insects

2.     Fungicides are used to control disease attacks on crops

3.     Herbicides are used to kill unwanted plants

C) Investment arguments:

1.     Large basket of registered products: Sharda Cropchem (SCL) has a presence in all major agrochemicals segments –Insecticide, Fungicides and Herbicides. SCL primarily focuses on  identifying chemical molecules, preparing for its registrations (known as dossiers) and applying for registrations in various countries. Over the years, SCL has been able to register 150 products in various countries with 1,200 registrations (1 product multiple countries). Most of these registrations are done for the products that have gone off-patent in countries like Europe and Latin America.

2.     Asset light model: A typical agrochemical value chain consists of following activities – (a) basic research, (b) identifications of new product and registration opportunities, (c) seeking registrations, (d) manufacture of active ingredient, (e) formulation and packaging, (f) marketing and distribution. SCL is engaged only in activities (b), (c) and (f). The entire manufacturing of the products is outsourced to vendors in China and India which further helps them to mitigate the sourcing risk. It is able to maintain an asset light model owing to non-investment in land, plant and equipment for research and manufacturing activities. Due to this, it is cash rich company with superior return ratios – its Return on Capital Employed (RoCE) has consistently improved from 10% in FY10 to 25% in FY14.

3.     Wide geographic footprint: SCl’s agrochemicals business is spread over 70 countries across Europe, NAFTA, Latin America and Rest of the World offering diverse range of formulations and generic active ingredients in fungicide, herbicide, insecticide and biocide segments. In order to establish a stronger foothold in these 70 countries, it has also laid a thrust on setting up its own sales force; they have 400+ third party distributors and 80 personnel of their own sales force. The company’s non-agrochemicals business is also spread over 35 countries in the aforementioned continents. Europe accounts for nearly 40%+ revenue. A wide geographic presence has helped it to diversify its revenue stream and reduce the risk coming related to trade policy and regulatory issues.

4.     Note on Valuations: At the upper price band of Rs. 156 (Market Cap=Rs. 1,400 crores), the price to earnings at 13.2x FY14 EPS of Rs. 11.85 is quite attractive. Based on the feedback on promoters, clean balance sheet, cheap valuations and healthy expected growth, there is no doubt that investors should subscribe to  Sharda Cropchem IPO. We further think that one should BUY Sharda Cropchem even after listing at Rs. 215 at a valuation of 18 times its FY14 earnings with a long term target of Rs. 300 to Rs. 350.

D) Financials:

Sales (Rs. cr)450620791815
Profits (Rs. cr)426884107
EPS (Rs.)
Debt (Rs.)2.83.445.940.0
RoCE (%)13.6%20%20%20%

*Bonus issue was declared in the ratio of 4:1 in FY12

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