Sharda Cropchem Ltd (SCL) is a generics agrochemical company, marketing and distributing a wide range of formulations and active ingredients (crop protection chemical) globally. It follows a differentiated asset-light business model focusing on product registrations and outsourced manufacturing. It operates in formulations and active ingredients solely based on generic (off-patent) molecules. This differentiates it from an innovator company which expends capital, time and resources primarily towards R&D. It also procures and supplies belts, general chemicals, dyes and dye intermediates. Agrochemicals contributed 86% of sales in FY17.
SCL’s product registrations stood at 2,133 as on 31st Dec 2017 as compared to 2,061 as on 31st Dec 2016. The Company has further 852 registrations in the pipeline across geographies. Revenue contribution from the top 10 molecules reduced to 50.3% in 9MFY18 from 56.0% in 9MFY17.
Agrochemical formulations & active ingredients require high capital deployment and long gestation period to get the registrations and dossiers done. Time delay and funds tied for a long period makes this an unattractive opportunity for new generic agrochemical players. The capital investment required for registrations is usually €3-5 mn while the time required for receiving one approval ranges from 3-5 years depending on the type of registration and the region in which it is applied for.
SCL has a minuscule market share in individual products category. The Company has been aggressively filing registrations across geographies. In its top 10 products, SCL’s market share is in the 0.5-7.0% range. According to the Company, these products have market potential of Rs.35,000 cr (~10% of global agrochemical market). The Company has an established track of securing registrations in the ‘toughest’ markets such as Europe.
Robust 40% CAGR (FY10‐17) in registration in stringent regulation geographies coupled with strong sourcing capabilities reinforce SCL’s execution credentials. Moreover, SCL is on cusp of exponential surge riding multiple triggers—rising wallet share in existing products and new launches further bolstered by expansion of in-house sales team. I perceive re‐rating potential in light of strong product registration‐led growth, net cash balance sheet and return ratios.
SCL operates in a highly regulated sector; Potential risks for the Company could be if it fails to comply with regulations prescribed by authorities. Any negative regulatory changes could adversely impact the industry as well as SCL. Currently there is increased cost pressure from China which the management believes will persist in the coming quarters.
Management remains confident of achieving revenue growth of 15-17% over next few years. Higher registration in NAFTA is likely to drive volume growth in this region. The Company also expects to witness good demand in upcoming season in Europe. Favorable change in product mix could lead to marginal improvement in gross margins.
With a strong balance sheet, good return ratios, good product pipeline & potential to increase existing product market share I am positive on the prospects of SCL.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’