On robust demand across portfolios, Sumitomo Chemical geared to gain market share

Incorporated in 2000, Sumitomo Chemical India (SCI) is present in the 3 business verticals of agro solutions (ASD), environmental health (EHD) and animal nutrition business (AND).

Company provides solutions for insecticide, herbicide, fungicide, plant growth regulator (PGR) under agro segment. Under animal nutrition, it manufactures methionine for feed additive use.

In terms of revenue contribution, insecticide constitutes ~51% while ~19% is from herbicide, 9% from fungicide and 20% from other segments such as PGR, AND & EHD

Let’s understand the strength of Sumitomo chemical.

A diversified product portfolio including insecticides, weedicides, fungicides, fumigants, and rodenticides as well as plant growth nutrition products, bio-rationals and plant growth regulators, well-balanced technical and formulations manufacturing capabilities and access to sumichem’s proprietary products has helped sumichem establish itself as one of major players in this space.

Product Profile

Product portfolio is well diversified with company’s agro chemical products covering multiple crop segments. In both Kharif and Rabi season and non-agrochemical including animal nutrition and environment health products. With over 13,000 distributors, company’s distribution network covers close to 85% of mainland India, providing geographic diversity. Further, close to 20% of the revenue (in the first 9 months of fiscal 2022) is generated from export markets, partially offsetting the risk related to demand cyclicality in the domestic market.

Revenue Contribution for FY22

Source: Investor Presentations

• Greater focus on high growth, stable and high profitable segments such as Herbicides, PGR, Bio-rational products.
• Increasing contribution from PGR segment and offerings for both Kharif and Rabi crops to reduce seasonality in the business.
• One of the highest proportions of environmentally friendly products in the industry

Demand outlook for future

Company sees a robust demand across their product portfolios of insecticides, herbicides, fungicides, and PGR. They expect to gain market share from unorganized players due to a wide supply chain network and strong branding of their products. Company aims to focus more on high growth, stable and high profitable segments, such as herbicides, PGRs and biorational products. Company plans to increase contribution from PGR segment and have increased product offerings for both Kharif and Rabi crops to reduce seasonality in the business.

In the current year they witnessed some challenges in one or two PGR soil nutrition products, which impacted the volume. However, they continue to focus their efforts and remain confident to grow this segment as one of the leaders in this segment and have planned some new product launches in this segment.

Another company in the Agrochemical space is Rallis India. The company is into manufacturing of Agrochemicals and is present across the value chain of agriculture inputs - from seeds to organic plant growth nutrients. Rallis is also in the business of contract manufacturing for global corporations. In the year FY22, rallis witnessed some challenges in one or two PGR soil nutrition products, which impacted the volume.

Financial Performance

FY22 revenue stood at Rs. 3,065 crore. Crossing the Rs. 3,000 crore sales mark is a significant milestone. Debt has been nil. Healthy annual cash accrual has enabled robust debt protection metrics. Continued healthy cash generation, and prudent capital spending should lead to further improvement in financial risk profile over the medium term.

RALLIS v/s SUMICHEM

On a full-year basis, rallis growth is 7.2%, which is split between crop care growth of 11.2% and seeds of 13. Increased demand for illegal herbicide tolerant cotton seeds during the year impacted the overall growth momentum and profitability of the business. Business faced de-growth of 13% during the year.

EBITDA percentage for full year stands at 10.5% as against 13.3% in the base year. This is impacted due to pricing volatility and inability to fully absorb seed inflation and the mix led headwind because of degrowth in seeds.

While Sumichem’s revenue increased by 16% year on year to ₹3,065 crores during the FY22. During the same FY22 the Rallis posted consolidated revenues of ₹2,604 crore.

Sumichem’s EBITDA witnessed a growth of 23% from 488 crores in FY 20-21 to 603 crores in FY 21-22. Sumichem’s EBITDA margin stood at 19.6% in FY '21-'22 as compared to 18.4% in the same period last year. Sumichem can maintain and to some extent, improve their operating margin as a result of their initiative to pass on higher input costs.

Rallis EBITDA percentage for FY 22 stands at 10.5% as against 13.3% in the FY21. This is impacted due to pricing volatility and inability to fully absorb seed inflation and the mix led headwind because of degrowth in seeds.

On Capex, Rallis has overall spent during the year amounted to Rs. 185 crore, and earmaked Rs. 250 crore during FY ’23. Rallis is on track to work commissioning the MPP at Dahej during FY ’23.

Whereas sumichem has a regular Capex Rs. 70-75 crore p.a. Additional Capex Rs. 120 crore over 2 years for 5 products. They have signed and registered agreements to buy 2 additional land parcels and transfer process is expected to be completed soon. 20 acre privately owned land parcel adjoining their existing Bhavnagar site. 50 acre privately owned land parcel at a prime location at Dahej within PCPIR Zone. Capex plan progressing as per schedule commercial production is expected to start in Q1FY22-23 for one product & during Q1FY24 for second project involving multiple products.

According to the analysis SUMICHEM is in better phase to grow from here. They have the opportunity of technicals manufacturing for Nufarm to improve export share meaningfully. Company’s Allocation of incremental FCF towards organic/inorganic growth likely to expand return ratios further.

Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.