#EPCIndustries

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Sharda Cropchem Ltd- Generic Growth

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. EPC Industries Ltd- Bringing prosperity to farmers… 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’ Read the full article

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Beneficiaries of a normal monsoon…

The Indian economy is heavily dependent on monsoon rain. A normal and well-distributed monsoon usually results in an uptick in farmers' income, which leads to an increase in the demand for consumer and automotive products in the rural market. There is a very strong correlation between the monsoon and the performance of the Indian economy & the stock market. The Indian Meteorological Department (IMD), in its first stage of forecast, sees a 'normal' monsoon this year, likely around 97% of the long period average. In 2017, the southwest monsoon was near-normal at 95% of the long period average, but patchy. Sectors such as agro chemicals, FMCG, automobile, rural-focused non-banking financial services companies (NBFCs) are likely to benefit greatly from a normal monsoon. While some companies are directly dealing in the agriculture market like seeds, agrochemicals, fertilizers, tractors, irrigation etc. certain other companies are indirectly benefited from a robust rural economy like FMCG and auto. A robust monsoon and expected hikes in the minimum support rates are likely to usher improved expectations for the farm income. Higher acreage and yield on the back of improved farmer sentiments coupled with a recovery in farm income are likely to bolster agrochemicals & irrigation business growth in FY19. Companies like EPC Industries, Rallis India, UPL, Dhanuka Agritech, Deepak Fertilizers, GSFC etc. are expected to benefit. The central government has time and again reiterated its aim to double farm income by 2022 through better productivity and enhanced farm realizations.  Agricultural credit was increased by 10% and fixed at a record level of 11 lakh cr in the last budget, which is expected to drive demand for tractors, tillers, tractor engines & farm equipment. Companies like Escorts, Swaraj Engines, M&M, VST Tillers Tractors etc. are expected to benefit. Strong growth in the rural economy usually results in expansion of credit and also facilitates consistency of repayments. We expect this to benefit companies like Manappuram Finance, STFCL, M&M Financial Services Ltd, Muthoot Finance, Bajaj Finance etc. Lastly a vibrant rural economy is likely to boost FMCG & automotive sales. In the FMCG space we expect companies like Jyothy Labs, ITC Ltd, HUL, Britannia, Asian Paints, Godrej Cons. etc. to benefit from increased demand given their distribution reach. Among automotive stocks M&M (present in different segments), Hero Moto Corp & Maruti are expected to be the biggest beneficiaries. Hero Moto is the largest two-wheeler manufacture in India having a market share of 38% in which 50% market share in the motorcycle category with a low cc engine. Rural sales account for about half of the total sales volume. Even for Maruti their sales beyond the top tier cities have been growing at a faster pace & it is by far the favorite four-wheeler brand in rural areas. To sum up, an indication of how critical monsoons are, financials, FMCG, and the automobile sector make up more than half the Nifty's weight. So any change in the expectation of earnings of these sectors on the basis of the monsoon rains is positive not only for these stocks but to the index as a whole. Greaves Cotton Ltd – Re-aligning growth strategies Sharda Cropchem Ltd- Generic Growth 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’ Read the full article