PL Stock Report: Sumitomo Chemical India (SUMICHEM IN) - Q2FY24 Result Update – Underwhelming results cloud near-term forecast - BUY

Sumitomo Chemical India (SUMICHEM IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs381 | TP: Rs450

Q2FY24 Result Update – Underwhelming results cloud near-term forecast

Quick Pointers:

§ Domestic and exports declined 10% and 62% YoY in 2QFY24.

§ Balance sheet continues to be healthy; collections at Rs20bn in 1HFY24 with cash balance of Rs13.8bn as on Sept’23.

We trim our FY24/25/26E EPS estimates by 17%/16%20%, citing challenging environment both in domestic and exports markets in terms of higher channel inventory and pricing pressures. Sumitomo Chemicals India (SUMICHEM) reported lower than estimated results with Revenue/EBITDA/PAT decline of 20%/32%/29% YoY largely led by subdued demand environment in both domestic and export markets (down 10% and 62% YoY respectively). With provisioning of high cost inventory largely behind, GM’s expanded 50bps YoY to 38.4% as against 37.9% in Q2FY23. However, higher employee costs coupled with higher other expenses up 170bps YoY and 280bps YoY to 6.5% and 11.1% has resulted into EBITDA margin contraction of 400bps YoY to 20.8% during Q2FY24. Going forward, management remained cautious on exports market citing higher channel inventory exerting pressure on revenue growth as well as margins (likely to take couple of quarters to normalize). We expect Revenue/ EBITDA/PAT CAGR of 12%/16%/15% over FY24-26E (FY18-23 CAGR of 13%/25%/28%). Maintain ‘BUY’ with revised TP of Rs450 (Rs500 earlier) based on 40XFY26E EPS.

§ Lackluster demand environment impacted overall growth: Consolidated revenues declined 20% YoY at Rs9.0bn (PLe Rs11.9bn), primarily led by 10% YoY and 62% YoY decline in domestic and exports business. Subdued performance in 2QFY24 was largely led by a) adverse weather conditions in the domestic market led by delayed monsoons this year; b) high carryover inventory from last year; c) opening up of China post COVID-19 restrictions leading to huge demand-supply mismatch for raw materials in the global market resulting into huge pressure on pricing and d) subdued demand environment in key regions like LATAM, Europe and NAFTA. Exports continued to be under pressure, as Europe/NAFTA/Africa/Asia (Excl India)/LATAM declined by 86%/20%/69%/46%/65% YoY respectively. Going forward, we believe export demand is likely to be under check in subsequent quarters as well, because demand recovery (if at all) is expected from 2HFY24.

§ Provisioning of high cost inventory largely behind: Management highlighted that provisioning of high cost inventory is largely done and in Q2FY24 gross margins expanded 40bps YoY at 38.4%. However, higher employee costs coupled with higher other expenses YoY up by 170bps and 280bps YoY to 6.5% and 11.1% have resulted into EBITDA margin contraction of 400bps YoY to 20.8% during Q2FY24. Going forward, management highlighted that with RM prices bottoming out, there can be improvement in margins profile in the subsequent quarters. Also, EBITDA margin profile is likely to go back to 19-20% from FY25E.

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