Amid widespread distress in the agrochemical sector, the Sumitomo share has shot up and settled at a level above where it had crashed to when the glyphosate controversy first erupted more than 18 months ago. Q4 results were good, margins were among the highest in recent years, sales growth returned after 4 quarters of decline and operating profits were sharply higher by 74 % YoY after 5 quarters of degrowth. Cash flows were very strong and dividend payout has jumped due to a special dividend declared in February this year. More importantly, the concall revealed even bigger surprises which seem to have excited the market.
Some highlights from the Q4 FY24 concall:
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Q4 & full year FY24 performance: The decline in domestic revenue during the year was caused by mix of both price and volume reductions. Pricing decline of 25 % to 30 % was seen in FY '24 across. The decline was mainly in generic molecules, decline in specialty was only around 2 % or so, but here volumes have degrown by around 8 to 9 %. The decline in prices of key active ingredients has now stalled to a large extent. The company did not pass on that entire cost benefit in the market. It launched 6 new products - 3 herbicides, 1 insecticide and 2 fungicides in FY '24.
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Two projects with around Rs.120 crore capex initiated in 2021: Both these projects have started commercial level production. In the first project, 40 to 60 % commercialization was achieved last year and it will be ramped up to 100 % this year. In the second project, some revenues will come in the current year and ramped up in the next year.
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Bhavnagar plant: Current year, 100 % of the production capacity Is expected to be exported out
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Tarapur plant: New plant is ready for commercial production. It is only for exports to affiliate companies. Those molecules are not sold to any other third party.
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Dahej plant: The application for environment clearance has already been submitted. It will have at least 2 brand-new products from SCC Japan. However, it will have a gestation period of at least 18 to 24 months after the EC is received, before supplies for the next set of molecules start. But the product which will be picked up will have a very long strong competitive situation for at least next 10 years plus, either in terms of patent protection or in terms of SCIL’s leadership in those products all over the world. They will not be commodity products.
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Barrix: The acquisition helps in expanding the product segments in environmentally friendly technologies. Barrix was acquired on 15th December 23. In terms of the sales, about INR 10 crores to INR 12 crores has been consolidated in the books for this 100-day period.
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Parent’s commitment: The management said the parent company in its various presentations and investor interactions has emphasized the importance of India as a market and as a manufacturing footprint indicating future growth potential for India and SCIL. India is a priority for them. The top management of SCC want India to be a big manufacturing hub in times to come. (My observation is that parent’s commitment to Indian subsidiary is the most important driver of valuation in case of MNCs, and this must have sounded like music to analyst’s ears)
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Electronic Chemicals: The management said the parent company is quite strong in electronic chemicals. Some of these technologies used in the display devices such as chemicals used in LCD, LED, QLED - Sumitomo has been one of the leading companies in the world. In addition to that, some of the products that go into semiconductor for the 5G mobile tower and mobile stations, in those applications also Sumitomo has a very strong presence globally. In India also, there is this whole ecosystem gradually being set up. We are now seeing a bit of scope of doing this. We have just got the preliminary inquiry from Japan, they have asked certain very high-level questions. What will be the final decision or outcome of it, we are unable to say. But for sure, it is starting now. And it (i.e. the foray into electronic chemicals) will be through Sumitomo Chemicals India Ltd only and not through any other company. (This again is very good news, and though actual action is still several years away, is more than enough to excite the investor community in the current environment).
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FY 25 and beyond: The management said they are concentrating on increasing the volumes of their products first. The purchasing in Q4 for the coming quarters has been at a very good level, very good pricing. So the current margins will remain at least for another few quarters. As of today, they feel that pricing is quite stable and they don’t see any risk of reducing the prices in coming months. Because of the (good) rain forecast, the domestic market will revive very quickly. As it revives, SCIL will revive further. International business revival may take some more time. But there is stability in order positions. About 8 % to 10 % contribution may come from new products. There will be at least 3 new product launches in FY25. These are 9(3) proprietary products, which will be coming into the market in the next few weeks targeting the Kharif season. And there are 1 or 2 more products, that depends on the regulatory approvals. Overall, they are looking at 12 to 15 % volume growth in the domestic market.
To conclude, those who held on to the stock amidst the more than a year-long distress seems to have been vindicated.
(Disc.: Invested)