Sumitomo Chemical: Stock gets capex boost
Revenue growth, higher share of specialty products to aid margins
The Sumitomo Chemical India stock gained about 14 per cent on Wednesday after brokerages upgraded it on the back of new order wins, product launches, and focus on higher margin segments that are expected to drive revenue and earnings.
The strong March quarter performance also boosted sentiment, with some brokerages revising their earnings estimates for financial year 2021-22 (FY22) and FY23 by 10-15 per cent.
The key trigger for the stock is the capex plan, which will entail setting up toll manufacturing capacities with investment of up to ~220 crore over the next couple of years. This is in addition to its regular capex of ~70-75 crore per annum.
The company will manufacture five proprietary technical grade active ingredients for the parent Sumitomo Chemical Corporation and its affiliates. The revenue potential of these products are in the ~200-250 crore range on an annual basis (9 per cent of FY21 revenues) with gross margins of 3738 per cent, which is in line with the company average.
Given that the products are in demand globally, there is a possibility that additional capacities and new products could be added in the medium to long term. This contract manufacturing adds an additional revenue stream and offers revenue visibility over the medium to long term.
Rising exports to Latin American (Latam) are also expected to drive revenue growth. Revenues from this market grew 68 per cent in FY21, with the Latam revenue share doubling to 4 per cent of overall revenue. This was aided by the ramping up of existing products and new product registrations. The acquisition of Australian agrichem major Nufarm’s operations in Latin America by Sumitomo Japan gave the latter the leadership position in the Latam generic market.
Analysts at ICICI Direct Research say the increased capacity of the fungicide tebuconazole, along with supply of other molecules, will likely aid Latam growth. The company is planning to nearly double the capacity of tebuconazole from 750 to 1,350 tonnes per annum, which coupled with the order from the parent company, was the key reason for Nirmal Bang Research raising its earnings estimates.
While its revenue outperformance in March quarter (up 20 per cent year-on-year) was driven by strong growth across categories, margins expanded about 400 basis points to 13.4 per cent. Margin expansion, according to Sharekhan, was supported by operating leverage (volume growth across products), improved price for some products (gross margin up by 106 bps sequentially), and synergies from the Excel Crop Care merger.
Margins are expected to improve on the back of specialty product focus, with these products’ share rising 300 bps in FY21 to 32 per cent. Analysts at Antique Stock Broking expect the company to post strong growth and outperform the Indian agrochemical market, given its distribution strength, rising share of exports, innovative product launches and gains from the parent’s R&D portfolio.
Given the growth prospects and balance sheet strength (cash of ~532 crore), brokerages believe the stock should trade at a premium to its peers. After the surge in Sumitomo’s stock price, it is trading at 20-30 per cent premium to peers such as Bayer Cropscience and BASF India. Investors can consider the stock on dips.