Ruchi Agrawal Moneycontrol Research
DCM Shriram reported a disappointing set of Q4 FY18 numbers on account of substantially lower realisations and volumes from the sugar segment, despite a decent 18 percent year-on-year (YoY) volume growth in the chemical business. Overall revenue declined around 3.3 percent YoY. Operating profit contracted almost 79 percent YoY on account of lower realisations and an uptick in power costs. Earnings before interest, tax, depreciation and amortisation (EBITDA) margins more than halved YoY at 5.2 percent. On a sequential basis, the performance remained weak as well.
Result snapshot
Segmental performance
Healthy growth in the chemicals business
The chemical business saw a healthy volume and revenue growth of 18 percent and 89 percent YoY, respectively, during the quarter gone by. This was on the back of the entire capacity utilisation post Bharuch expansion and improved realisation on account of a 67 percent YoY uptick in chlor-alkali prices, which is moderating now.
Caustic soda prices have been following the global trend (seeing a tad bit of softening). Domestic demand seems strong. However, owing to additional upcoming capacity, prices might see some softening in the coming term. The management was quick to allay concerns that with growing demand the impact would not be much.
For a major part of FY18, chlorine prices remain negative, with companies having to pay to get chlorine lifted from factories. With increasing chlorine demand, this scenario improved towards the end of FY18, with prices becoming less negative, almost coming to zero, thereby improving overall realisations.
The chemical segment witnessed increased costs due to rising coal prices which continue to remain on an upward trajectory. Expansion projects at Kota and Bharuch are progressing as per schedule and are expected to reduce coal consumption, thereby ushering in long-term traction for the segment.
Sugar business: A drag on profitability
The sugar business remained a drag on overall profitability. With a 13 percent YoY fall in sugar prices owing to a bumper harvest, realisations dropped substantially. Sales restrictions by the Centre led to a 14 percent YoY fall in volumes. The segment was also impacted by an Rs 163 crore inventory write-down on account of falling prices.
The segment is currently suffering from negative margins of almost Rs 8 per kg. As per the management, molasses prices in Uttar Pradesh has fallen to zero at present from Rs 300 per quintal earlier, which are eating into profitability of the segment. With forecast of another bumper year for sugar production, the segment is expected to remain weak.
Weak quarter for agri inputs
Its farm solution business reported a 40 percent YoY contraction in revenues during the quarter under review on account of a strategic shift from bulk to value-added products. The seeds business witnessed a 30 percent YoY revenue decline owing to a seasonally weak quarter and write-off of old, slow moving inventory. Fertiliser segment revenues saw a five percent YoY increase with an uptick in product prices. However, operating margins contracted 60 basis points and volumes remained nearly flat.
While overall revenue from its own products increasing, revenue from traded products saw a downtick. Subsidy reimbursements still remain an overhang on working capital requirements, with outstandings of Rs 383 crore. The management said its pan-India extension of direct benefit transfer (DBT) has stretched its working capital cycle for urea manufacturing.
It endeavours to imbibe higher operating efficiencies, coupled with a better product mix and overall positive environment, to drive future growth for the segment.
Outlook
The stock has corrected 25 percent in the last 12 months and is trading 55 percent below its 52-week high. It is currently trading at a 5.9 times FY19e earnings. The company saw mixed performance across segments during the quarter. The business is highly dependent on global and domestic prices of commodities like caustic soda, chlorine, sugar etc. With forecast of another bumper sugar year, we expect the segment to remain a drag. We stay cautious owing to the weak pricing and the price volatility, which may impact the company’s profitability and stock returns.
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