PL Stock Report - Sharda Cropchem (SHCR IN) - Q1FY23 Result Update - Subdued results; near term outlook bleak.!! - Downgrade to 'ACCUMULATE'

Sharda Cropchem (SHCR IN) - Himanshu Binani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs481 | TP: Rs540

Q1FY23 Result Update - Subdued results; near term outlook bleak.!!

Quick Pointers:

♦ Volume/Price decline of 11%/18% YoY; FX up 6.5% YoY in 1QFY24.

♦ Management downward revised its FY24E revenue growth guidance to 8-10% YoY (earlier ~15% YoY).

We trim our FY24/25E estimates by 27%/16% and downgrade the rating to ‘Accumulate’ (Earlier Buy) citing near term pressure on both revenues and margins, led by adverse weather conditions in key geographies and high inventory concerns both at manufacturer and distributor levels which in turn exerts pressure on revenue growth and margins.

Sharda Cropchem (SHCR) reported subdued set of results with revenue decline of 23% YoY to Rs6.3bn (PLe Rs8.0bn), led by volume/price de-growth of 11%/18%YoY partially aided by positive FX variance of 6.5% YoY. Gross margins (GM) contracted 1670bps YoY to 8.7% (lowest in the last 10 years), largely led by a) high cost inventory provisions of Rs710mn; b) higher sales return of Rs1.35bn; and c) acute pressure on price realizations particularly in the NAFTA region. Lower GM coupled with higher opex up 530bps YoY has resulted into an EBITDA loss of Rs688mn (incl. IU&AD write-off of Rs27mn in 1QFY24 V/s Rs29mn in 1QFY23). Citing cautious near term growth outlook, management has revised downward their FY24E revenue growth guidance to 8-10% (earlier ~15%) thereby putting pressure on margins (EBITDA margins guided earlier at 18-20% for FY24E). Accordingly, we downgrade our rating to ‘ACCUMULATE’ from Buy earlier with revised TP of Rs540 (earlier Rs640) based on 14XFY25 EPS.

♦ Global Agrochemical Industry reeling under immense pressure: SCHR posted revenue decline of 23% YoY to Rs6.4bn (PLe Rs8.0bn) primarily led by subdued performance across business segments. Agrochemicals/Non-agrochemicals revenues declined by 23% YoY each to Rs4.7bn/Rs1.6bn. Subdued performance in agrochemicals segment was largely on the back of a) lower volumes in Europe and LATAM markets due to high inflation, b) ongoing recession and c) adverse weather conditions. While, on the non-agrochemicals segment every geography barring RoW (up 96% YoY) declined by 63%/26%/15% YoY in Europe/ NAFTA/LATAM respectively.

♦ High inventory provision & sales return led to gross margin contraction: Gross margins contracted by 1670bps YoY to 8.7% largely led by immense pressure on price realizations (particularly in the NAFTA region) coupled with provisioning of high cost inventory (Rs710mn impact) and higher sales return of Rs1.35bn in 1QFY24. Lower gross profit coupled with higher other expenses (up 540bps YoY) (incl. IU&AD write-off of Rs27mn in 1QFY24 vs Rs29mn in 1QFY23) resulted in EBITDA loss of Rs688mn. PAT loss stood at Rs886mn.

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