Recommendation from Chemicals Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year 

Sumitomo Chemical India Ltd: PROFITABLE STRATEGY IN PLACE

HERE IS WHY
✓Well-diversified portfolio
✓Increasing production capacity
✓Positive future outlook

Sumitomo Chemical Corporation (SCC) is the parent company of Sumitomo Chemical India Ltd. (SCIL). SCC is involved in a variety of chemical-related businesses while SCIL is a strong player in the Indian agrochemicals space. The company has a portfolio that is both diversified and de-risked across the whole agrochemical value chain. It has five manufacturing facilities in India’s agrochemical industry, with more than 60 depots and 16,000 direct distributors. In FY22, insecticides made up 43 per cent of the portfolio, followed by herbicides with 21 per cent, PGR and metal phosphides 9 per cent, and fungicides 11 per cent. 

The company has one of the largest proportions of environment-friendly products compared to other competitors in the market. The fact that the top 10 products provide less than 45 per cent of the entire revenue is another advantage that the company derives from its product diversification strategy. In addition, no single product or molecule contributes more than 16 per cent to the company’s total revenue. The primary revenue of the company comes from sales of generic chemicals at 75 per cent. The sales of specialty chemicals at 25 per cent make up the remaining revenue.

Domestic sales account for approximately 78 per cent of the total revenue while global sales provide 22 per cent of the total revenue. South American countries account for approximately 45 per cent of the total export revenue, followed by Japan at 18 per cent and Africa at 17 per cent. Over the course of more than two years, the company has invested ₹120 crore in capital expenditure for five products which are scheduled to go on the market in FY24. The potential annual revenue for these five goods ranges between ₹200 crore and ₹250 crore per annum. 

The second quarter of FY23 will mark the beginning of commercialisation efforts for one of their products. The company has determined that one of its strategies for growth is to invest roughly 15 per cent of its consolidated EBITDA each year in the modernisation and expansion of its production capacities as well as manufacturing facilities. The company’s sales have experienced growth equivalent to 13 times the original size as a result of both organic and inorganic expansion, which works out to a CAGR of 11 per cent over the past decade of FY11-22. 

The company has a strong balance-sheet and is debt-free with healthy return ratios. The ROE and ROCE for the latest financial year is 33.7 per cent and 25.1 per cent, respectively. The revenue is expected to grow at a CAGR of 31 per cent during the next five years. The trailing 12-month sales have reached ₹3,268 crore. The top-line for Q1FY23 saw growth of 26 per cent year over year and of 48.2 per cent quarter over quarter sequentially. The operating margin increased to 19.1 per cent in the first quarter of FY23 from 16.4 per cent in the previous quarter. Rainfall in the June quarter was lower than projected, which caused sales to fall in the second quarter of FY23 due to which strong quarterly performance is expected in Q2FY23. The stock is now being traded at a PE ratio of 51 times. Due to strong financial numbers, capacity expansion and positive future outlook, we recommend investors to BUY this scrip in order to derive both short-term and long-term gains.