Skip to content

    Sumitomo Chemi.

    SUMICHEMMixed
    Chemicals·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

    8

    • 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

    1

    • Erratic Monsoon and El Nino

    Key financials

    Single quarter

    06 metrics
    1. 01Revenue₹903 Cr-19.4%YoY
    2. 02EBITDA₹188 Cr-32.4%YoY
    3. 03EBITDA Margin20.8%
    4. 04PAT₹143 Cr-28.9%YoY
    5. 05Gross Margin38.4%

    Segment breakdown

    Revenue ShareRevenue GrowthVolume GrowthPrice Realization Change
    Domestic Agrochemicals (H1 FY24)89%-15%-3%-12%
    Exports (H1 FY24)11%-45%-25%-20%
    Heatmap· 4 shared metrics

    Guidance & targets

    5
    CategoryTargetPriority
    Capex
    Normalized Capex
    15%
    		High
    Capex
    Dahej Site Initial Capex
    ₹300 crores
    		Medium
    Capacity
    Utilization of 5 new molecules
    80-100%
    		Medium
    Market Share
    Barrix Pheromone Segment Market Size
    2x-3x growth
    		Medium
    Volume
    New Product Revenue Contribution
    1-2%
    		Medium

    Risks & concerns

    5
    RiskSeverity

    Erratic Monsoon and El Nino

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

    high

    China Overcapacity and Dumping

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

    medium

    Glyphosate Regulatory Uncertainty

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

    medium

    Wage Inflation in Gujarat

    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

    medium

    Areas of Evasion(1)

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

    Q&A highlights

    3

    “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

    2 min read5 chapters

    Detailed Narrative

    01

    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.

    02

    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.

    03

    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.

    04

    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.

    05

    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.

    This is an AI-generated summary of a publicly available earnings call transcript. It is for informational purposes only and does not constitute investment advice, a recommendation, or an endorsement. inve.money is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making any investment decisions.