Sumitomo Chemical India Limited — Q2 FY24 earnings call

Call held 30 Oct 2023

Management summary

Sumitomo Chemical India faced a challenging Q2 characterized by erratic monsoons and global destocking, particularly in Latin America. While revenue and margins declined YoY, the company successfully liquidated high-cost inventory by July and saw a sequential recovery in gross margins to 38.4%. Management remains optimistic about H2 recovery and long-term growth driven by new product launches and the strategic acquisition of Barrix for green technology.

Highlights

  • Revenue for Q2 FY24 stood at ₹903 crores, a decline of 19.4% YoY from ₹1,121 crores.

  • EBITDA margin for the quarter was 20.8%, down from 24.8% in Q2 FY23 due to lower operating leverage.

  • PAT for Q2 FY24 was ₹143 crores, down 28.9% YoY from ₹201 crores.

  • High-cost inventory carried from March 2023 was fully exhausted by July, leading to normalized margins from August onwards.

  • Net working capital cycle improved significantly to 70 days, a reduction of 24 days compared to June 2023.

  • Export revenue share dropped to 11% in H1 FY24 from 19% in H1 FY23 due to global destocking and pricing pressure.

  • Glyphosate volumes grew 5% YoY in H1 FY24 despite a 23-25% drop in realization prices.

  • Capex of ₹120 crores for 5 proprietary products completed; commercial production started at Bhavnagar and Tarapur.

Concerns

  • Erratic Monsoon and El Nino

Key financials

  1. Revenue ₹903 Cr -19.4%YoY
  2. EBITDA ₹188 Cr -32.4%YoY
  3. EBITDA Margin 20.8%
  4. PAT ₹143 Cr -28.9%YoY
  5. Gross Margin 38.4%
  6. Net Working Capital 70 days

What they filed

Q1 FY27: revenue up 0.6%, net profit up 20.8% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue988 642 679 1,057 930 −6%568 −12%684 +1%1,063 +1%
EBITDA245 106 120 219 218 −11%99 −7%134 +12%233 +6%
Net profit193 87 100 178 178 −8%76 −13%111 +11%215 +21%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

SegmentRevenue ShareRevenue GrowthVolume GrowthPrice Realization Change
Domestic Agrochemicals (H1 FY24)89%-15%-3%-12%
Exports (H1 FY24)11%-45%-25%-20%

Guidance & targets

Capex

  • Normalized Capex Capex · FY24 · High confidence 15%
    right now I think we would stick to the normalized capex, which we say about 15% of EBITDA.

    — Kunal Mittal, Senior Vice President

  • Dahej Site Initial Capex Capex · next 2-3 years · Medium confidence ₹300 crores
    We are talking about around INR300 crores... Over next two years to three years to be spent.

    — Chetan Shah, Managing Director

Capacity

  • Utilization of 5 new molecules Capacity · FY25 · Medium confidence 80-100%
    At least we will try to be between 80% to 100% of the potential in the next year.

    — Kunal Mittal, Senior Vice President

Market Share

  • Barrix Pheromone Segment Market Size Market Share · next 4-5 years · Medium confidence 2x-3x growth

    From ₹400-500 crores today

    And that segment is also expected to grow to, say, double or triple in next four years to five years as per our estimates.

    — Kunal Mittal, Senior Vice President

Volume

  • New Product Revenue Contribution Volume · FY25 · Medium confidence 1-2%
    But for sure, it may be 1% or 2% in the first year. And then over a period of time, it will pick up.

    — Suresh Ramachandran, Whole Time Director

Risks & concerns

  • Erratic Monsoon and El Nino

    high

    Dry spells in August significantly reduced pest and fungal infestations, lowering demand for agrochemicals.

    Management acknowledged

  • China Overcapacity and Dumping

    medium

    Increased supplies of low-priced products from China led to global pricing pressure and destocking by Indian exporters.

    Both acknowledged

  • Glyphosate Regulatory Uncertainty

    medium

    Upcoming hearing on Dec 7th regarding Glyphosate restrictions; management believes the proposal is difficult to implement and cites positive global renewals.

    Analyst downplayed

  • Wage Inflation in Gujarat

    medium

    Drastic revision of wages by the Gujarat government led to a 25% increase in wage costs for four of the company's plants.

    Management acknowledged

Areas of evasion (1)

  • Specific revenue targets for the 5 new molecules were avoided, citing 'potential' instead of hard numbers.

Q&A highlights

2 direct
Scale-up of new product launches Partial
I blame everything on the weather conditions, on the market conditions in this year. But it is a slight awkward comparison of any of the successes of these products to the current year.

Investors are concerned that despite 25-30 new launches, revenue contribution hasn't scaled as expected; management attributes this to external factors rather than execution.

Asked by Viraj K, SiMPL

Export decline drivers and recovery Direct
The total decline in export is approximately 45%, 50%. And roughly equal amount -- I think about 25%, 30% in volumes and 25%, 30% in pricing.

Clarifies that the export slump is a mix of severe volume drops due to global destocking and significant price erosion, particularly in LatAm.

Asked by Anandha Padmanabhan, PGIM India

Impact of high-cost inventory on margins Direct
In the first quarter, I think, due to high-cost inventory we lost out the profit margin of almost 12% to 15%, which came down in the month of July to around 8%, which came down in August to almost around 5%. And at the end of September, it is only around 1.5%.

Provides a granular timeline of how inventory losses hit the P&L and confirms that the worst of the margin compression is over.

Asked by Manish Mahawar, Antique Stock Broking

2 min read 5 chapters

Detailed narrative

Inventory Overhang and Margin Recovery

The company navigated a severe margin squeeze in H1 FY24 due to high-cost inventory accumulated in late 2022. Management quantified the impact, noting a 12-15% profit margin loss in Q1, which tapered down to just 1.5% by September. With this inventory now fully exhausted as of July, the company reported a sequential gross margin improvement to 38.4% in Q2. They expect to maintain or improve these margins going forward as input prices have stabilized.

Export Headwinds and Global Destocking

Exports saw a sharp decline of 45-50% in H1 FY24, driven by a combination of 25-30% volume drops and 25-30% price erosion. This was primarily due to massive destocking in Latin America and oversupply from China. While management sees positive indications for H2, they remain cautious, noting that a return to FY23 export volumes is unlikely until the next financial year.

Strategic Capex and 'Make in India' Progress

Sumitomo completed its ₹120 crore investment in five proprietary products for its Japanese parent company. Commercial production has commenced at Bhavnagar and Tarapur, with revenue expected to start in H2 FY24 and a major ramp-up to 80-100% utilization targeted for FY25. Additionally, the company announced a ₹300 crore initial capex for its new Dahej site, with environmental clearances expected in 2024.

Glyphosate Dynamics

Glyphosate remains a critical but volatile part of the portfolio, contributing 20-22% of H1 revenue. Despite a 23-25% crash in realization prices, SCIL managed to grow volumes by 5% YoY. Management expressed confidence regarding the upcoming regulatory hearing in December, citing the lack of infrastructure for proposed restrictions and positive renewal trends in the EU and Australia.

Acquisition of Barrix and Green Tech Pivot

The acquisition of Barrix marks a strategic entry into the 'green technology' and pheromone segment. While currently small, management estimates the addressable market at ₹400-500 crores and expects it to double or triple in the next 4-5 years. The parent company, SCC Japan, is reportedly very interested in scaling this technology globally, viewing it as a high-priority niche segment.

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