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Sumitomo Chemicals locked in upper circuit; Prabhudas Lilladher starts buy call, sees multibagger opportunity

After the merger, Sumitomo Chemical Company and its affiliates (Japan) held 80.3 percent shareholding in the merged entity Sumitomo Chemical India.

January 27, 2020 / 01:12 PM IST
 
 
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Shares of Sumitomo Chemicals India were locked in 5 percent upper circuit on January 27, the first day of trading after merger with Excel Crop Care.

The stock was trading at Rs 204.75, up 5 percent with volume of 1.89 lakh shares on the BSE, and was up 5 percent at Rs 200.70 with volume of 2.77 lakh shares on the National Stock Exchange.

Equity shares listed on the exchange in the list of T group securities, where the upper/lower circuit limit is 5 percent.

Prabhudas Lilladher initiated coverage on Sumitomo Chemicals India (SUMICHEM) with buy rating and target price of Rs 206 based on 30x FY22 EPS of Rs 6.9.

The brokerage believes, a well-managed business, MNC parentage (80 percent holding currently), significant earnings growth (27 percent CAGR between FY20-22E), attractive valuations and low float of shares makes SUMICHEM a potential a multi-bagger in the long run.

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With technical expertise, financial strength and market reach of Sumitomo Chemical Corporation (SCC) coming in, the research house expects stark improvement in the operations and financial performance of SUMICHEM.

"SUMICHEM's diversified portfolio, strong brand, rich product pipeline from parent and its active ingredients and broad range of innovative products will enable sales and PAT CAGR of 14 percent and 27 percent between FY20-22," it said.

Before merger, Sumitomo Chemical Company and its affiliates (Japan) held 44.68 percent stake and its 100 percent Indian subsidiary Sumitomo Chemical India held 19.98 percent in Excel Crop Care.

Sumitomo Chemical India, which caters to agrochemical, household insecticides and animal nutrition sectors, completed the merger of Excel Crop Care with itselt in August 2019.

After the merger, Sumitomo Chemical Company and its affiliates (Japan) held 80.3 percent shareholding in the merged entity Sumitomo Chemical India. Company will divest 5 percent stake in the company to comply with minimum public shareholding norms.

Prabhudas Lilladher said Sumitomo Chemical Corporation (SCC) parentage gives SUMICHEM unique advantage of access to world class portfolio, greener chemistries, superior innovative capabilities, good brand recall and wider access to international markets for its products.

"Crop protection is a major focus area for parent currently as SCC is targeting 42 percent growth in topline and 2.8x growth in profitability in health & crop science during 2018-2021 driven primarily by volumes. SUMICHEM's export portfolio of Excel Crop Care will benefit from global standing of SCC due to its innovative image and global reach," it added.

According to the brokerage, exports could be fast growth engine for SUMICHEM as SCC, an innovator with patented/proprietary molecules, will use SUMICHEM generic portfolio to further deepen its distribution reach globally.

SUMICHEM has large pipeline of new products consisting of proprietary molecules, combination products, off-patent generics, etc. It plans to launch 1 proprietary product from the parent every year in addition to its own developed combination products/pre-mixtures. SUMICHEM has 11 products in pipeline including commercialisation of 2 technicals. The company is also working on technical and off-patent molecules some of which are in various stages of launch.

"SCC's launch pipeline of innovative molecules till 2025 is already planned and SUMICHEM is likely to test these molecules for Indian market," Prabhudas Lilladher said, adding SUMICHEM has potential to become a procurement entity for the SCC.

"Excel Crop Care's cost competitive manufacturing capabilities, SCC's focus on Indian markets, diversifying supply chain strategy and India emerging as a key player in chemical manufacturing are expected to drive business towards SUMICHEM from the parent," the brokerage said.

SUMICHEM is already working on 2 molecules (1 insecticide and 1 herbicide). SCC is currently manufacturing 1 of these molecules but wants to shift production to India.

"These molecules have the opportunity to become sizeable in 2-3 years from launch. SUMICHEM is working on those molecules and they are likely to reach at commercialisation stage in coming months. While it may take time for SUMICHEM to do material business with parent, the certainty of this happening is imminent," said the brokerage.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol News
first published: Jan 27, 2020 01:12 pm

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