Three highlights from Sumitomo’s Q4FY20 performance: (i) The company reported strong revenue growth of 5.7% in spite of lockdown and plans to launch multiple products in FY21; (ii) with lower input prices and launch of differentiated products, Ebitda margin improved 170bps in FY20; and (iii) reduction in net working capital days to 112 in FY20 from 121 in FY19.
We also believe the company is on track to gain market share in FY21 from smaller players. It will also benefit from financial discipline, i.e. net cash balance sheet, reduction in working capital days and capex of ~2% of net sales. Maintain Buy with DCF-based TP of Rs 317 (implied target P/E 47x FY22e; earlier TP Rs 263).
Strong revenue growth: The company reported 5.7% revenue growth in spite of lockdown for nine days. Though it has hiked prices of some SKUs, the revenue growth was largely volume led. While the production and logistics was impacted in lockdown-1, the company has managed to reach 70%+ production levels now. We model the company to report 1.5% revenue decline in FY21.
Better Ebitda margins due to lower input prices: With correction in raw material prices, gross and Ebitda margins were up 270bps and 280bps, respectively. The PBT was up 58.1% y-o-y. Sumitomo reported strong FY20 with revenue and PAT growth of 9.6% and 42.1%, respectively y-o-y. Ebitda margin improved 170bps to 13.7% in FY20 due to cost rationalisation measures and some synergy benefits.
Expect market share gains in FY21: We note smaller agrochemical companies are relatively more impacted than larger companies such as Sumitomo due to Covid-19. The smaller companies account for ~30% of the agrochemical industry. We expect Sumitomo to gain market share in FY21 from these smaller players.
Net cash balance sheet and strong FCF generation: With five manufacturing units, the company does not require any major investments in FY21-22. We also note the company is able to reduce the net working capital days with improving distribution network and launch of differentiated products. We expect its net working capital days to reduce to 106 in FY22 from 112 in FY20. With net cash balance sheet at end of FY20, we expect the company to pass through these tough times without any material impact on the balance sheet.
Maintain Buy: We model the company to report revenue and PAT CAGRs of 9.5% and 19%, respectively, over FY20-FY22. We value the stock at a DCF-based target price of Rs 317, implying a target P/E of 47x FY22e.