Sharda Cropchem IPO opens: Should you subscribe?

Sharda Cropchem is a crop protection chemical company engaged in the marketing and distribution of a wide range of formulations and generic active ingredients globally. It is also involved in order based procurement and supply of belts, general chemicals, dyes and dye intermediates.

So, should you subscribe?

Brokerages advise subscribing the issue, citing reasonable valuations, asset-light business model with core competence in registration of ingredients and healthy balance sheet.

“The company with its asset light business model, core competency in seeking registrations, global distribution network and diversified portfolio is looking attractive investment opportunity,” said Hem Securities.

Why should you subscribe?

Asset-light business model, core competency, global distribution network

Sharda has an asset-light business model whereby it focuses on identifying generic molecules, preparing dossiers, seeking registrations, marketing and distributing formulations or generic active ingredients in fungicide, herbicide and insecticide segments through third-party distributors or its own sales force.

The company as of FY14 holds around 1200 registrations of which the European Union constitutes around 45 percent (534 registrations), Latin America around 26 percent (312 registrations), NAFTA around 6 percent while the rest of world (RoW) comprises the remaining around 23 percent.

As of August 5, 2014, SCL has filed over 500 applications for registrations globally which are pending at different stages.

With an objective to increase its presence in the agrochemical value chain, the company has set up its own sales force in various countries in Europe as well as in Mexico, Colombia, South Africa and India. As of date it has over 440 third-party distributors and over 100 personnel in its own sales force.

According to WealthRays, pending registrations and its expansion in sales force to reduce dependency on third party are keys on sustaining and strengthening its strong financials. Recent entry into biocide segment is also positive for the company, it added.

The company has recently entered into the biocide segment and has acquired several registrations from the existing registration holders, primarily, in Europe.

Strong sourcing capabilities, strong geographic spread and diversified portfolio

The availability of multiple manufacturers and formulators in the agrochemical industry helps the company in not being dependent on a single or limited number of manufacturers or formulators.

Agrochemical business operations of the company are spread in over 60 countries across Europe, NAFTA, Latin America and Rest of the World.

Financial strength

SCL has a strong balance sheet with healthy return ratios. It has maintained a focus on capital efficiency and maintained a conservative debt policy. It has a short term borrowings of Rs 40 crore as against cash and cash equivalent of Rs 215 crore as of FY14. It also has good reserves of Rs 465.52 crore in FY14.

“We are comfortable with Sharda's lean balance sheet structure with FY14 debt-equity of 0.1x,” said ICICIdirect.

The company has demonstrated a consistent track record of profitability over the last three years. It had reported a 25 percent compounded annual growth in the net income over FY2012-14. It has strong return on capital employed (RoCE) of 25 percent and return on equity (RoE) of close to 20 percent.

"The net working capital days have also improved over the last four years and at the end of FY2014 the net working capital days stood at 99 days as compared with 143 days in FY2010,” said Sharekhan.

In FY14, the company clocked a consolidated topline of Rs 782 crore (up 0.54 percent over FY13) with around 82.5 percent being contributed by the agrochemical business (Rs 645 crore), Rs 15.8 percent being contributed by the conveyor belt business (Rs 123 crore) and around 1.7 percent being contributed by other business (dyes). Net profit of the company in FY14 grew by 26.8 percent year-on-year to Rs 106.9 crore compared to previous financial year supported by other income and lower depreciation.

Mehta Equities said considering the above rationale and valuation parse this issue is reasonable priced when compared with other listed entities which are trading in the higher PEx range (25x-30x).

On overall valuations at the upper band of the price Rs 156, the stock trades at 13x which is almost 50 percent lower as compared to its peers domestically like PI Industries and Rallis India.

Mehta Equities believes with healthy growth in the agrochemical industry globally, Sharda is well placed to tap the opportunity.

However, according to brokerages, the key risks are:>Any further deterioration of working capital cycle may put pressure on the company’s financials;>Growth of genetically manufactured crops may limit growth of agro chemicals;>Any change in rules and regulations governing agro chemicals in countries (where it operates) may impact product sales;>Any volatility in the local currency may affect the earnings (as majorly deals in USD and Euro);>Registration failure or delay may adversely affect its performance;>Heavy dependency on top customers (top ten agrochemical contributes heavily in revenue of the company); and>Pproduct concentration (top five products constitute 36.3 percent of consolidated topline in FY14).

WealthRays said stable CAGR can be expected for the company as it has many registrations pending in pipeline and plans to make strategic acquisitions. Financials of the company are strong but focus should be on further addition of registrations and how the company mitigates currency risks and increases its presence in other segments like biocide, it added.

Edelweiss Financial Services Limited and IDFC Capital Limited are book running lead managers to the issue while Karvy Computershare Private Limited is the registrar.

Posted by Sunil Shankar Matkar