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Sharda Cropchem Focused on registering generic formulations Outsources manufacturing and even large part of distribution
Sharda Cropchem is a crop protection chemical company marketing and distributing a wide range of formulations and generic active ingredients globally. While more than 90% of the sales comprising formulations, the company is also in order-based procurement and supply of belts, generic chemicals, dyes and dye intermediates. The company's core strength lies in identifying generic molecules, preparing dossiers, seeking registrations, marketing and distributing formulations in fungicide, herbicide and insecticide segments. As on July 2014, the company owned more than 1,040 registrations for formulations and over 155 registrations for generic active ingredients across Europe, Nafta, Latin America and rest of the world market. It has filed over more than 500 applications for seeking registrations for various formulations. There are more than 440 third-party distributors and over 100 personnel of own sales force in over 60 countries. Over the past six years, about Rs 383 crore was invested in registrations and about Rs 250 crore was capitalized till March 2014. Capital work in progress is around Rs 133 crore. Registration expenses are amortised over five years from the date of issue of registration. Object of the Issue The public issue is an offer for sale to achieve the benefits of listing the equity shares on the BSE and the NSE. It comprises offer of 2.25 crore of equity shares of Rs 10 each by selling shareholders consisting of HEP Mauritius and promoters Sharda Bubna and Ramprakash Bubna. HEP Mauritius had acquired 15.87% share capital for Rs 100 crore in FY 2009. Post IPO, HEP Mauritius share holding will be nil and that of promoters 75% from the current 84.13%. Strengths There is consistent track record of earning growth in the past. Since inception, profit was lower only in two years: in 2002 and in 2010 due to global economic meltdown. The company follows an asset light model, investing time and capital on seeking registrations across the globe. About 90% of the manufacturing is done through dedicated vendors in China and rest through dedicated vendors in India. Thus, demand for crop protection of a wide range of crops grown in varied soil and weather conditions across different geographies can be catered. Presence has been increased in developed markets, particularly EU, where the margin and the entry barrier are high. It will continue to focus on the developed markets going forward. The business is flexible and is not dependent on any product, market or any segment of the industry. Due to presence across segments including fungicide, herbicide and insecticide, business is unaffected by change in growth rates of any particular segment because of weather conditions or otherwise in a particular year. There was cash and cash equivalent of more than Rs 190 crore and no debt end March 2014. Surplus cash and absence of leverage give an opportunity to grow inorganically and accelerate the pace of growth. Weaknesses In the event of a global meltdown, operations can be significantly affected. About 35% of the revenue end March 2014 was from five molecules comprising ebuconazole, imidacloprid, quizalofop, chlorpyriphos and 2,4-D ccid. End March 2014, EU accounted for about 61% of total sales, Latin America and Nafta (North American Free Trade Agreement) about 25% and rest of the world about 10%. India comprised only 2% of total sales. Revenues, thus, is dependent on few products and geographies. About 98% of the input requirement is sourced in US $ currency. About 61% sale are in euro and rest in US $. Any adverse movements in euro and US $ can affect the profit margin. Valuation Consolidated net sales were Rs 781.91 crore and PAT Rs 106.91 crore in FY 2014. On an equity share capital of Rs 90.22 crore of face value of Rs 10 each, this gives an EPS of Rs 11.8. At the lower price band of Rs 145, the scrip gets P/E of 12.2 times and at the higher price band of Rs 156, P/E works out to 13.2 times. Considering that it is mainly a trading company, it will not attract good P/E. The business model is similar to UPL's. UPL currently trades at 14 times FY 2014 consolidated EPS. However revenue-wise UPL is almost 14 times larger than Sharda.
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