ambit sharda cropchem (not rated) errgrp effectively capturing the global wave

8/10/2019 Ambit Sharda Cropchem (NOT RATED) ERrgrp Effectively Capturing the Global Wave

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Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capitalmay have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

VISIT NOTE SHCR IN EQUITY January 16, 2015

Sharda CropchemNOT RATED

Analyst Details

Ritesh Gupta, CFA

+91 22 3043 [email protected]

Key financials

In mn FY10 FY11 FY12 FY13 FY14

Net Sales 3,518 4,418 6,135 7,777 7,819

EBITDA 619 806 1,225 1,400 1,458

EBITDA (%) 17.6% 18.2% 20.0% 18.0% 18.6%

EPS 3.2 4.6 7.6 9.4 11.9

RoCE (%, post tax) 10.3% 13.8% 19.1% 18.6% 19.5%

P/E (x) 80.0 56.0 33.8 27.5 21.7

Source: Company, Ambit Capital research

Agri Inputs

RecommendationMcap (bn): `23/US$0.4

3M ADV (mn): `162/US$2.6

CMP: `257

Catalysts

Registration gains for large valuemolecules such as Azoxystrobin andCyproconazole in Europe

Sales growth delivery of above 20%

in 2HFY15

Performance

Source: Bloomberg, Ambit Capital research

0.81.01.21.41.61.82.0

Sep-14

Oct-14

Oct-14

Nov-14

Nov-14

Dec-14

Dec-14

Dec-14

Sharda Sensex

Effectively capturing the global waveSharda Cropchem is an emerging play on the growing shift towards

generic agrochemicals worldwide. The company has leveraged its low-cost sourcing base in China to build a fast-growing franchise in largeagrochemical markets such as Europe, NAFTA and LatAm. Its strongbase of registrations under difficult regulatory regimes such asEurope/US is its key advantage. Thus, it has delivered 22%/38%revenue/PAT CAGR over the last four years along with RoCEs of >20%and pre-tax CFO-to-EBITDA of 90%. Given a low market share base,strong cost controls and growing generics share, Shardas managementcould achieve its stated revenue growth target of >20% at ~20% EBITDAmargins. The stock is trading at 13x FY16E consensus EPS, a 30%discount to its peers with similar RoCE/RoEs.

Competitive position: MODERATE Changes to this position: UNCHANGED

Quality execution on acquiring registrationsSharda has 1,089 and 166 registrations for formulations and AIs, respectivelyand 575 in the pipeline. It has built sourcing capabilities for 60-plus moleculesin China through time tested (decade-old) quality suppliers; alongside, it hasalso built global distribution capabilities with over 440 third-partydistributors/100-plus direct sales personnel in over 60 countries. It has a smallmarket share (


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Sharda Cropchem

January 16, 2015 Ambit CapitalPvt. Ltd. Page 2

Company background

Business description - A unique company

Sharda Cropchem Limited is a fast-growing Indian agrochemical company, with mostof its revenues coming from Europe, NAFTA and Latin America across fungicides,herbicides and insecticides. Shardas core competence lies in identifying fast-growing

generic molecules that offer attractive margins and then registering the moleculethrough diverse regulatory regimes across Europe, Latin America, and NAFTA. Shardaowns over 1,089 registrations for formulations and 166 registrations for activeingredients (AIs). The company has further filed over 575 applications forregistrations globally, which are pending at different stages.

The company offers a diversified range of formulations and generic AIs in thefungicide, herbicide and insecticide segments for crop protection and the in biocidesegment as disinfectants, catering to a varied market demand.

Sharda also runs a non-agrochemical business comprising order-based procurementand supply of non-agrochemical products including conveyor belts and generalchemicals, dyes and dye intermediates.

Exhibit 1:

Sharda's revenue spread by regions (%)


Exhibit 2:

Sharda's business breakup as of FY14


Exhibit 3:Shardas operations summary

Europe Latin America NAFTA

Technical Third-party manufacturer in China Third-party manufacturer in China Third-party manufacturer in China

FormulationThird-party manufacturer inEurope

Third-party manufacturer in ChinaThird-party manufacturer inUS; rest from China

Conducting tests for registration Third party in respective country Third party in respective country Third party in respective country

Distribution Third party and direct sales Third party and direct sales Third party and direct salesMarketing Distributor Distributor Distributor

Key moleculesTebuconazole, Quizalofop, Diquat,Imidacloprid and Nicosulfuron

2,4-D Acid, Paraquat, Imidacloprid,Chlorimuron and Fomesafen

Paraquat, Chlorpyriphos,Imidacloprid, Propiconazole andFomesafen

Registrations acquired 545 335 68

Registrations pending 239 147 86

Salience 50 21 16

Source: Company

Seasonality: 4Q is the strongest quarter

For Sharda, 4Q brings the highest revenues share, followed by 1Q, 2Q and 3Q. 4Qaccounts for nearly 40% of annual sales.

50

1621

13

49

20 20

12

Europe NAFTA Latin America Others

FY14 1HFY15Agrochemicals, 82%

Non-agrochemicals, 18%


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Evolution of the company

Shardas promoter, Mr. R.V. Bubna, had earlier started with dyes and dyeintermediates through two private entities, Sharda International (1987) and BubnaEnterprises (1989). These two entities merged to form Sharda Worldwide ExportLimited in 2004. The company changed its name to Sharda Cropchem Limited in2013.

Initially the company was predominantly involved in trading; however, later (in 2008)it started acquiring registrations aided by investments from Henderson Equity Partners(HEP). HEP subscribed to 1.7mn equity shares (10% of shareholding) for `600mn inMarch 2008 and 1.1mn equity shares (6% of shareholding) for `400mn in May 2008.The company also acquired a 76% stake in a smaller India-based agrochemcompany, Axis Crop Science, for `5.07mn in Nov11.

The company subsequently did their IPO in September 2014, with Henderson EquityPartners selling its entire 15.87% stake and with the promoters offering a 9.13%stake to comply with SEBIs ruling to keep the promoter holding below 75%; therewas no fresh issuance of shares.

Exhibit 4:

Promoters background

Name Details

Ramprakash V. Bubna, CMD

B.Tech (Chemical Engineering) from IIT Bombay.

45 years of experience in chemicals, agrochemicals and related businesses.

Formerly associated with Zuari Agrochemicals, Coromandel Fertilisers, Tata Oil Mills and others.

Ashish R. Bubna, Executive Director

Elder son of Mr. R.V. Bubna

B.Com from Mumbai University with 22 years of experience

Takes care of agrochemical business. Instrumental in strategising early investment in product registrationsand building dossier library

Manish R. Bubna, Executive Director

Younger son of Mr. R.V. Bubna

B.Tech (Chemical Engineering) from UDCT, Bombay University, with 20 years of experience

Leads Shardas conveyor belt and general chemicals business. Oversees IT, logistics and documentationfunctions for the overall company.

Source: Company

Exhibit 5:

Board of Directors Good quality board

Director Profile

M. S. Sundara Rajan Masters Degree in economics from Madras University , Company Secretary and CAIIB

Former CMD of Indian Bank

Urvashi Saxena

Masters Degree in arts from University of Allahabad

37 years of experience in Income tax department; ex-Chief Commissioner of Income Tax in Delhi and Mumbai

Member, Vice- Chairperson of IT Settlement Commission

Shoban Thakore

BA (Politics) & LLB from University of Bombay

Solicitor at Bombay HC & Supreme Court of England & Wales

Legal advisor various companies in corporate matters Former partner at law firm AZB

Shitin Desai

B.Com from University of Mumbai

Former Executive Vice Chairman of DSP Merrill Lynch; spent 40 years in financial services sector

Member of Bhagwati Committee appointed by SEBI

P. R. Srinivasan

B.Tech (Mechanical Engineering) from Anna University, Chennai, PGDM from IIM, Bengaluru

MD of Exponentia Capital Partners LLP & worked earlier with CVCI

One of the founders of HSBC PE in India

Source: Company


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Geographical breakup - Europe business is thestrongest in its portfolio

Europe business (50% of revenues): On a solid footing driven by registration-related barriers

The Europe business contributed to 52% of the companys revenues in FY14; webelieve the Europe business is the strongest business region for the company. Givenstricter regulatory norms for entry, the number of players in a segment is limited. Theregion also delivers the best margins for the company (300-400bps higher than theoverall average). The growth strategy for the company in the segment is pinned on:(1) entry into biocides, (2) leveraging its GLP dossiers for existing molecules to expandregistrations into new crops and new countries, and (3) entry into new molecules. Thetop countries contributing to this business are Spain, Germany, Italy, Poland, andHungary. The business grew by 15% (in USD terms) in FY14 and 43% in 1HFY15. TheCompany has 20 approved molecules so far in EU and expects this number to beover 30 Molecules over the next 2-3 years. New molecules have a current market sizeof more than US$1.1bn.

LatAm business (21% of revenues) - Relatively easy to enter, but cost is thekey advantage

Sharda has been trying to build its business in Latin American countries such asUruguay, Argentina, and Peru. The company has not been able to get manyregistrations in Brazil so far partly due to the longer registration process. Brazil is abigger market (US$12bn) and the company is looking to organically build itspresence here. The process for expansion in Latin America is also driven by theaddition of a direct sales force targeting bigger B2C clients. The managementbelieves that currently it has a smaller share of the overall segment and it is lookingto build on this by getting more registrations and building a direct field force.

NAFTA business (16% of revenues) Trying to get a foot in the door

The NAFTA business is growing driven by the companys entry into the Canada and

US markets. In the US, the company has shifted its strategy from targeting the off-patented or high-value segment to the more generic segment of high-volume low-value markets. Sharda had a good momentum in Canada with the launch of theherbicide product, Diquat. The company has 12 registrations now in the US primarilyin cereals and soybean.

ROW (13% of revenues) Many potential opportunities

ROW covers various countries in Asia, Africa, and the Middle East. The companystarted with its first registration in Algeria. Now Sharda has a presence in over 20countries in key markets including India, Morocco, the Philippines, South Africa andTaiwan.

Its key generic molecules in ROW are Chlorpyriphos, Imidacloprid, Hexaconazole,

Azoxystrobin and Glufosinate Ammonium. The company is also focusing on the Indiaopportunity through: (1) new registration of larger molecules by leveraging its globalsupply chain and (2) expansion of its direct distribution.

Exhibit 6:SWOT analysisStrengths Weaknesses

Strong portfolio of over 1,200 registrations across key markets of

Europe, NAFTA, and Latin America

Tight control over costs and capital allocation discipline driving best-in-

class EBITDA margins and return ratios

Strong execution capabilities demonstrated by the management

Limited development capabilities hinder product innovation on

formulation and combination product development

Lack of direct marketing to farmers may impact brand building in the

long run

Long working capital cycle

Opportunities Threats

Share of generics is on a rise globally; low-cost generic players aregaining market share

Expansion into Brazil and Latin American markets

Adverse forex movements given high amount of receivables Cost advantage due to sourcing from China may fade away with rising

labour and environmental costs and appreciating currency


Top-five molecules comprising,

Tebuconazole, Imidacloprid,Quizalofop, Chlorpyriphos and2,4-D Acid, contribute 13.3%,7.5%, 5.6%, 6.2% and 3.9% ofconsolidated revenues


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Primary checks Clean chitDuring our discussions with suppliers and certain peers, we received fairly positivefeedback about both the key promoters: Mr. R. V. Bubna, and Mr. Ashish Bubna. Mostof them find the promoters very hard-working, with a good business acumen and acost efficiency driven mindset. One of Mr. R.V. Bubnas peers who has worked withhim in his corporate professional days finds him to be fairly strong on integrity.

Mid-level manager with a large competitor

Their cost management is a clear marvel for them. We checked and found theirstated numbers to be correct. They have been able to amass a significant number ofregistrations in a very small period of time. Their cost control is something to learnfrom. We believe they can grow really well from here on

CXO with a medium-sized competitor

I have worked earlier with the promoter before he started his entrepreneurialjourney. I find him to be quite clean and good integrity-wise. He has built a businessmodel which is sustainable.

A domestic competitor with significant sourcing from China

Shardas business model is clearly quite sustainable. There are all kinds of suppliersin China. Sharda carefully picks its suppliers and has a very good sourcing fromChina.


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Global agrochemical market growing at afast paceThe demand for crop protection products is on a surge driven by limited availability ofarable land and changing food preferences. According to agribusiness consultantPhillips McDougall, the agrochemical market has delivered a CAGR of 6.8% between

2003 and 2013. During the same period, the off-patent agrochemical category(including non-crop applications), which includes proprietary off-patent products, hasdelivered a CAGR of 7% whilst the patented category (including non-cropapplications) recorded a CAGR of 5%.

Exhibit 7:

Geography-wise revenue breakup

Source: Phillips McDougall, Company

Exhibit 8:

World crop protection market (US$ bn)

Source: Phillips McDougall, Company

Global generics market expandingThe generics market in pesticides has been growing as a percentage of the overallmarket. Industry statistics suggest that the market has grown from 33% in 2000 to52% in 2013. In addition, products with a market size of ~US$6bn are going off-patent over 2014-2020. With more products going off-patent, there is an increasinglikelihood for this market to grow further at a rapid pace.

Exhibit 9:

Value of agro-chemicals going off-patent over 2014-2020 (US$ bn)

Source: Industry, Ambit Capital research

NAFTA,18.5%

LATAM,25.9%

ROW,30.5%

Europe,25.1%

4340 41

4750

54

0

10

20

30

40

50

60

2008 2009 2010 2011 2012 2013

1.3

0.9

1.2

1.6

0.4

0.7

0.2

2014 2015 2016 2017 2018 2019 2020


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Sharda Cropchem


Exhibit 10:

Global pesticides market breakup (2000)


Exhibit 11:

Global pesticides market breakup (2013)


GenericProduct,

33%

PatentedProduct,

30%

Off-PatentProprietary

Product,

37%

GenericProduct,

52%

PatentedProduct,

22%

Off-PatentPropreitary

Product,26%


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Sharda Cropchem


Registration a key entry barrier for genericagrochemicalsRegistration a key entry barrier

Agrochemicals are highly regulated across markets. Before any AI or a formulatedproduct can be sold in a country, it must receive approval from the relevant

authorities to verify its efficacy, safety, and environmental impact for each specificcrop application. These processes are expensive and time-consuming and requirespecific knowledge of the local regulatory frameworks across regions, countries, andlocal jurisdictions.

Registrations in particular take a long time in difficult regulatory regimes such asEurope and the US which have strict norms on product and environmental safety. Inaddition, every EU country requires specific registration for each formulation. Recentregulatory pressures have also led to increasingly stringent efficacy, safety, and datarequirements, leading to increased costs of field trials and risks of commercialisationfailure.

Sharda has a strong team of regulatory experts focused on obtaining and

maintaining registrations for their products swiftly and effectively, which provides asignificant advantage in the time and cost to bring a new product to market.

Exhibit 12:

Testing process for registration

Source: Company

Exhibit 13:

Process for registration application

Source: Company

European registrations Turning more and more stringent

Sharda derives nearly 50% of its revenues from the Europe business. With risingstringency on agrochemicals, it is incrementally becoming difficult for new players toenter the market. Any new registration requires an investment of Eur5mn and alsotakes 4-6 years to get a new registration. We believe once 2-3 players have enteredthe market, it gets difficult for new players to enter due to the less lucrative marginprofile and a long payback period to recover registration costs.

Registration requirements make a

new entry into markets moredifficult, regardless of whether the

products are patented or not; inaddition to be relevant to themarket, one needs to haveregistrations of 30-40 molecules


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Exhibit 14:

Significant decline in the number of molecules registered in Europe post new registration norms

ListNo. of

productsProducts of

Commercial Significance*Accepted into

Annex 1Re- registration

pending/ resubmittedNot Accepted/ Not

Supported

Existing Products

1 90 90 56 0 34

2 148 114 34 0 80

3 389 262 109 0 1534 204 12 4 0 8

Biologicals 21 21 15 0 6

Total 831 499 218 0 281

New Active Ingredients 86 49 8

New Biologicals 14 12 1

Total New AIs 100 61 9

Total Exiting + New AIs 318 61 290

Source: Company

Exhibit 15:

Europe accounts for the largest chunk ofexisting registrations


Exhibit 16:

Sharda has a strong pipeline of 575registrations


Given that the company has amassed a total of 1,255 registrations across variouscountries and crops, it is well placed to that extent.

Latin America too is turning difficult

Latin America has significant regulatory complexity which requires carefulmanagement at the local level. In the rest of the Latin American region, regulatory

requirements in each country are increasing, especially as the needs of the majorexport markets have to be met.

In Brazil, the registration data requirements are broadly equivalent to those anywhereelse in the world, but there are three separate Ministries involved in the review andapproval of crop protection products (Health, Environment, and Agriculture) and eachhas an independent decision-making process, which adds time and complexity. Inmost cases, a new registration takes a minimum of four years in Brazil and althoughthe authorities are influenced by decisions in other countries, they often reach adifferent conclusion. New legislation is anticipated soon in Brazil which is likely toinclude improved risk assessment and criteria for registration decision-making. Theimpact of these changes is not known at this time.

RoW, 307,25%

LatinAmerica,335, 27%

NAFTA,68, 5%

Europe,545, 43%

RoW, 103,18%

LatinAmerica,147, 25%

NAFTA, 86,15%

Europe,239, 42%


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Sharda Cropchem


Exhibit 17:

Registrations breakup - Formulation and Active Ingredients

Source: Company

Aggressive investments on acquiring new registrations

The company has been aggressively investing in getting new registrations to grow itstarget market size. The management stated that whilst many of the existing genericplayers are slowing down on registrations due to internal issues, Sharda isaggressively growing its registration base to drive superior growth.

Exhibit 18:

Fixed assets are minimal but intangibles are key to the company (

mn)

FY10 FY11 FY12 FY13 FY14

Tangible assets 11 13 14 14 19

Intangible assets 1,059 863 567 628 619

Intangible assets underdevelopment

181 335 631 884 1,335

Fixed Assets 1,251 1,211 1,211 1,526 1,975

Source: Company

166

1089

99

476

0 200 400 600 800 1000 1200

Active Ingredient

Formulation

Pipeline Current


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Strong track record on execution22% revenue CAGR and 39% PAT CAGR over last four years

Sharda has been able to deliver strong 22% revenue CAGR over the last four years to`7.8bn. Whilst revenue growth in FY14 was muted at 1%, the company registeredrevenue growth of 50% in 1HFY15. The management is guiding for a 20% growth

over the next few years. We believe this should be achievable given the significantlylower base and aggressive pipeline of registration.

Sales growth in FY14 was at just 1% due to the one-time large order of Acephatefrom a customer in Brazil in FY13 and the absence of a similar order in FY14.

Exhibit 19:

Shardas revenues have grown at a 22% CAGRover the last four years

Source: Company. Note: Revenue (Rs mn) on LHS and growth rates (%) on RHS

Exhibit 20:

EBITDA margin trend likely to be above 18%

Source: Company

Shardas EBITDA margins have been healthy at 18-20% (19-23% including otherincome). The management believes that it should be able to sustain EBITDA marginsof 18-22% (including other income) in the future.

Strong control on overheads

The management has been able to maintain a good control on its cost overheads.The promoters have been cautious towards adding unnecessary costs and havealways been looking to keep those minimal. In terms of salary structure, themanagement keeps a significant proportion of salaries as variable. Other expenses inFY14 increased on account of higher consultancy charges and higher sales costs fromincreased number of third-party distributors/own sales force.

Exhibit 21:

Operating expenses fairly well controlled

Source: Company. Note: Other expenses in FY14 also included forex impact.

Exhibit 22:

Gross margin relatively lower given tradingbusiness model

Source: Company

26%

39%

27%

1%

50%

0%

10%

20%

30%

40%

50%

60%

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY10 FY11 FY12 FY13 FY14 1HFY15

17.6%18.2%

20.0%

18.0%18.6%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%


11.3%9.8% 9.9% 10.3%

13.3%

1.5% 1.9% 1.8% 1.7%2.3%

0%

2%

4%

6%

8%

10%

12%

14%


Other expenses (%, LHS) Employee expenses (%)

30.3% 30.0%31.7%

30.0%34.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%



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Sharda Cropchem


What are the sustainable competitiveadvantages for Shardas business?Cost-efficient player

Sharda does not focus much on the resource-intensive part of the agrochemical valuechain such as product research and manufacturing. However, it acts as an aggregatorof various parts of the value chain and actively works on the biggest entry barrier,registrations. In addition, it has the one of the most cost competitive sourcing fromChina whilst maintaining a certain quality standards.

Multiple combinations of a matrix of many molecules, geographies, and cropscombined with a matrix of manufacturing suppliers, distribution dealers, andregistration consultants makes it a very complex business to manage in a profitablemanner. If we take a look at its peers, Sharda has the best profitability and returnratios as compared to other generic peers.

We believe Shardas capability lies in the most cost-effective execution of managingvarious moving parts of the business. Sharda has been able to perfect this modelthrough years of experience.

Manufacturing strong sourcing base in China

The company relies mostly on third-party China-based suppliers for manufacturing.However, the company takes care of quality control through its own employees basedin China.

It also de-risks itself by focusing on developing multiple vendors for the samemolecule. The company usually has 1 or multiple vendors for each molecule. All theactive ingredients are sourced from its suppliers in China. For Europe and the US, thecompany does formulation in the respective region/country itself whilst for othercountries formulation is directly done from China.

Exhibit 24:Agrochemical value chain Red color denotes areas where Sharda is present

Source: Company

Arysta (similar business model to Sharda) prospectus on US SEC website:

During the last decade, China has developed a chemicals industry that the Companyestimates to be the largest in the world. Within this industry, the agrochemicals industryhas also developed, including thousands of players who invested in manufacturinginfrastructure, of which half of their production capacity is presently directed to exports,

intended for sale through small and large companies, including the Company and itscompetitors. The growth in production capacity, on one hand, and the price levels andcompetitiveness of the products produced in China on the other hand, affect thestructure of competition in the entire industry.

Sourcing model dependent on Chinese suppliers

The company procures formulations and generic active ingredients in their finishedform from third-party manufacturers for onward sale. The company also procuresgeneric active ingredients for preparation and sale of formulations wherein itoutsources the process of preparation of formulations to third-party formulators forthe US and Europe.

Forward integration through addition of direct sales force

Historically, the company was dependent on third-party distributors based in Europe,NAFTA, Latin America and Rest of the World for distribution. The company is settingup its own sales force in various countries in Europe as well as Mexico, Colombia,


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Sharda Cropchem


South Africa and India in addition to third-party distributors. Since 2010, thecompany has increased its own sales force to over 100 personnel globally includingIndia. It continues to focus on increasing its own sales force in addition to third-partydistributors. The management believes continuous interactions with its sales force anddistributors help it identify new molecules to seek registrations for.

Distribution fairly well entrenched across key markets

Most of the companys distribution is governed by third-party distributors. Thecompany has ~440 distributors globally. It is also building a direct sales network tobuild a direct distribution force.

In the past, the company was undertaking the distribution of its products only throughthird-party distributors based in Europe, NAFTA, Latin America and Rest of the World.With an objective to increase its presence in the agrochemical value chain, thecompany has set up its own sales force in various countries in Europe as well as inMexico, Colombia, South Africa and India and other jurisdictions in addition to third-party distributors.

Registrations turning more and more stringent

Registrations take a long time to get specifically in Europe where there are strict

norms on environmental safety. In addition, every EU country requires specificregistrations. Significant data collection and field trials are required to ascertain theoverall impact of new molecules. Apart from developed countries such as EU and US,registration norms in developing countries too are turning more and more stringent.

But given the operating model, is the businessscalable?

Shardas current capabilities and low market share will allow it to grow at a healthysales CAGR of >20% over the next few years; however, in the long run, buildingstrong capabilities in its direct sales force and building brands and

capabilities in new formulations and combination products will be anecessity.

Note that Sharda has a miniscule share of the global market. We believe thecompanys widening registrations base (a pipeline of 500+ registrations), entry intonew geographical regions or new crops, entry into new molecules, and entry intoadjacencies such as biocides, will drive the growth for the company.

Exhibit 25:

Revenue market shareCompany revenues

(US$ mn)Market size

(US$ bn)Salience

Europe 54 14 0.4%

LATAM 22 14 0.2%

NAFTA 18 10 0.2%ROW 10 16 0.1%

Total 103 54 0.2%

Source: Company


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Sharda Cropchem


Working capital is stretched but improving!

The companys debtor period of six months is balanced by creditor days of threemonths. In addition, inventory days are at ~40 days. Over the last four years, thecash conversion cycle has come down from 145 days to 129 days.

Exhibit 31:

Working capital days Debtor days are significantly higher but inventory days are lowerAverage Debtor

daysAverage Inventory

daysAverage creditor

daysAverage cash conversion

cycle

FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14

Bayer 43 45 40 42 70 78 69 61 59 55 32 28 54 68 78 75

Dhanuka 87 100 95 79 94 97 94 93 35 37 31 23 146 160 158 149

Insecticides India 58 59 61 52 99 115 127 113 97 101 100 97 60 73 87 68

Kaveri Seeds 60 32 25 14 229 229 204 180 203 230 209 178 86 31 20 16

PI Industries 71 72 69 59 62 66 67 64 70 68 75 82 62 71 61 41

Rallis 31 31 34 35 65 73 68 63 101 98 86 77 -5 6 17 22

Median 58 59 61 52 70 78 69 64 70 68 75 77 60 71 78 68

Sharda 191 171 166 182 39 48 46 41 86 87 86 93 145 132 125 129

Source: Company

The companys auditors are E&Y which is a highly reputed firm. However, some of

the entities are audited by local auditors.Exhibit 32:

Dependent and independent directors

Dependent Independent Auditors

Bayer 5 4 Price Waterhouse

Rallis 3 6 Deloitte Haskins & Sells LLP

PI Industries 3 6 SS Kothari Mehta & Co

Dhanuka 5 9 Dinesh Mehta & Co

Insecticides India 3 5 Mohit Parekh & Co

Kaveri Seeds 6 6 P.R.Reddy & Co

Sharda Cropchem 5* 5 S. R. Batliboi (E&Y)

Source: Ambit Capital research. Note: * Includes one nominee director from HEP Mauritius.

Management remuneration as a percentage of PBT is fairly low.

Exhibit 33:

Managerial remuneration as a percentage of PBT - Comparison with peers

Source: Company

Exhibit 34:

Promoter salary (in mn) Conservative and in line with peers

Salary Commission Total

R.V. Bubna 9.8 8.8 18.6

Sharda Bubna 1.9 Nil 1.9

Anish Bubna 7.6 5.9 13.5

Manish Bubna 7.6 5.9 13.5

Total 26.9 20.6 47.5

PBT 1,484 3.2%

Source: Company filings

1.3%2.4%

3.1% 3.2% 3.4%

10.1%

Rallis Bayer InsecticidesIndia

Sharda PI Industries Dhanuka


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Sharda Cropchem


Contingent liabilities

In terms of contingent liabilities, we do not find anything other than service tax of`79mn to be materially alarming.

Exhibit 35:

Contingent liabilities (

mn)

Head Charges

Service Tax 79

Others 3Source: Company

Depreciation policy - Registrations amortised in fiveyears

The company capitalises registration and broadly has registrations in fixed assets. Thecompanys policy is to amortise everything over a period of five years. It had a lot ofmolecules that were capitalised during FY09 and FY10 which have actually beencompletely amortised by FY14. As a result, depreciation charges have been graduallyfalling. They are likely to pick up gradually once a new wave of registration enters

fixed assets.

Exhibit 36:

Depreciation rates (

mn)

Source: Company

0%

10%20%

30%

40%

50%

60%

70%

-

200

400

600

800

1,000

1,200


Depreciation and Amortization Net Assets % of Net Intangible Assets


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Sharda Cropchem


Relative valuations At a significant discount

Sharda is currently trading at 13x, at a 30% discount to the peer median. Werecognise the scalability concerns on Shardas business model. Whilst futureperformance could alleviate these concerns, execution is the key and the same hasbeen good so far. Given a healthy operating performance, strong RoCEs and absenceof any significant accounting and promoter-related issues, we believe these discountscan narrow.

Exhibit 37:

Comparative valuation sheet

CompanyName

MarketCap(USDmn)

ADVT- 6m(USDmn)

P/E P/B EV/EBITDA ROE CAGR (FY14-FY16)

FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Sales EBITDA EPS

Global Agri Majors

Monsanto 56,791 7.2 20.0 17.3 15.0 7.1 6.5 5.2 12.2 11.1 9.9 36.5 41.8 42.6 5.1% 9.3% 9.8%

DowChemicals

51,185 7.7 14.7 13.6 11.4 2.0 1.9 1.8 7.7 7.8 6.9 14.5 16.4 18.2 2.1% 13.4% -2.7%

FMC Corp 7,852 1.3 15.1 13.9 12.2 4.6 3.6 3.0 10.5 9.5 8.8 32.5 28.1 24.7 6.8% 11.4% 30.3%

Syngenta 31,721 1.4 16.1 14.6 13.1 2.8 2.6 2.4 12.5 11.5 10.4 16.9 18.2 19.0 3.6% 6.0% 9.1%

Bayer AG 112,602 3.8 19.3 16.9 14.9 4.4 4.0 3.6 11.7 10.4 9.5 21.8 22.4 23.4 6.0% 5.7% 27.1%

BASF 75,565 3.8 12.8 12.5 11.4 2.3 2.2 2.0 7.7 7.5 7.0 17.9 17.3 17.9 -1.6% 3.9% 5.4%

Domestic Agro Chemical Players

PI Industries 1,154 1.2 27.9 21.5 17.0 8.0 6.2 4.8 19.3 15.0 11.8 30.0 30.4 29.8 20.4% 25.2% 26.8%

Rallis India 687 1.5 24.2 18.4 15.0 5.1 4.3 3.6 14.1 11.1 9.1 22.8 25.8 26.8 15.1% 18.9% 22.9%

BayerCropScience

2,157 1.2 36.0 30.4 23.5 6.4 5.3 4.4 24.2 20.4 16.3 18.7 16.2 10.3 18.1% 23.4% 26.3%

UPL Ltd 2,503 10.0 13.2 11.2 9.8 2.5 2.1 1.8 7.9 7.1 6.4 19.9 19.8 19.3 11.0% 11.1% 17.7%

DhanukaAgritech

422 0.4 24.1 19.3 16.1 6.3 5.1 4.0 18.0 14.2 11.6 28.4 28.4 28.0 19.3% 23.1% 21.6%

InsecticidesIndia

183 0.9 19.0 13.3 9.8 3.7 3.0 2.3 12.7 9.8 7.9 21.8 25.2 26.9 19.4% 30.0% 43.2%

Excel CropCare

203 0.3 12.9 10.9 DNA 3.6 3.0 DNA 8.5 7.3 DNA 27.8 27.4 DNA DNA DNA DNA

Domestic Seeds Players

Kaveri Seeds 859 2.5 17.5 14.1 11.3 7.0 5.0 3.6 16.7 13.6 11.0 46.7 40.5 36.6 21.6% 28.4% 31.3%

MonsantoIndia

898 2.7 36.0 28.2 24.4 11.5 9.0 9.3 31.4 25.0 22.0 37.3 38.6 41.9 15.7% 18.6% 23.0%

Source: Company, Ambit Capital research, Consensus; Note: DNA= Data Not Available


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Exhibit 41:

Global generic agrochemical peers dupont analysis good asset turnover and better margins driving higherROCEs

Company/metricRoE (%) PAT margin (%) Asset turnover (x) Financial leverage (x)

FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14

United Phosphorus(Cons)

15% 18% 19% 7% 8% 9% 1.1 1.1 1.3 1.9 1.9 1.6

Sharda Cropchem 19% 20% 21% 11% 11% 14% 1.7 1.8 1.6 1.0 1.0 1.0

Nufarm -4% 5% 5% -2% 3% 4% 0.7 0.8 0.7 2.1 2.2 2.3Chemtura 12% 10% -17% 5% 5% -8% 0.9 0.7 0.8 2.9 2.8 2.8

Cheminova -1% 6% 14% 0% 2% 4% 1.0 1.0 1.0 3.0 3.2 3.0

Adama 10% 10% 9% 4% 4% 4% 1.2 1.2 1.1 1.8 2.0 2.1

FMC 31% 31% 20% 11% 12% 8% 1.0 0.8 0.8 3.0 3.0 3.2

Arysta DNA -35% -28% DNA -10% -6% DNA 0.7 0.8 DNA 5.0 7.8

Source: Company data, Bloomberg

Exhibit 42:

Given its size, Sharda will grow faster than its peersMcap

(US$ mn)CAGR (FY10-FY14) CAGR (FY14-FY17) P/E

Sales EBITDA PAT Sales EBITDA PAT FY15 FY16 FY17Nufarm 1,043 5% 5% NM 4% 17% 55% 12.7 10.7 9.7

Chemtura 2,151 -3% 32% -12% -2% 11% -278% 30.2 21.0 13.3

Cheminova 1,260 5% 45% NM 8% 17% 30% 23.5 15.7 12.2

FMC 7,592 8% 14% 6% 6% 11% 30% 14.6 13.3 11.8

Adama* IPO Filed 9% 27% 38% DNA DNA DNA DNA DNA DNA

Arysta* IPO Filed 6% 28% NM DNA DNA DNA DNA DNA DNA

UPL 2,250 19% 22% 26% 10.7% 10.6% 17.1% 12.0 10.3 9.1

Sharda Cropchem 378 22% 24% 39% 25% 26% 24% 16.3 13.5 11.2

Source: Company. Adama and Arysta IPO has been filed but listing is pending.


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Key risks

Adverse currency exposure

The company is exposed to various currencies through its operations across LatinAmerica, NAFTA, and Europe. Significant currency depreciation in many of theemerging countries such as Latin America may pose significant risks to the companysreported profits. Imports from China in USD act as a natural hedge for its revenues in

other countries. The significant amount of receivables also poses devaluation risks incase of adverse currency movements. The management noted that it partially takescovers for such forex risks and relies on natural hedge for other exposures.

Challenges of managing expansion

Till now the promoters have been able to exercise significant control over thecompanys operations across various regions. The promoters are one of the keydrivers for significant cost control company commands vs other peers. With itsgrowing size, the company may have to rely on its managers for such controls. Inaddition, expansion into new regions will expose the company to new risks such ascredit risks from new distributors and geopolitical risks.

Manufacturing advantages from China may fade away

The company relies on Chinese manufacturers for most of its sourcing needs. Thereare challenges related to RMB appreciation, rising labour costs, and rising costs ofenvironmental compliance which could significantly impact the competitiveness ofChinese manufacturers. The management believes it is still able to sourcecompetitively from China and most of its suppliers were already facing costs relatedto environmental compliance.

Key litigations as in the DRHP

Most of the key litigations against the company are: (1) direct and indirect tax casesagainst Sharda Cropchem most of these cases have very limited liabilities; (2)cheque dishonour cases against Mr. R V Bubna when he was a director at PiramalFinancial Services `40mn in size.


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History of European registrationWe believe one of the biggest competitive advantages for Sharda has beengenerated from its ability to capitalise on Directive 91/414/EEC over the 2000-2010decade. With the help of in-house consultants and financial investments from privateequity players, Sharda transferred existing registrations with certain dealers to itsname. The company also took fresh registrations during this window period.

Directive 91/414/EEC

Before the 1990s, individual member states were responsible for approving pesticidesin their own countries. Directive 91/414/EEC was implemented in 1993 to harmonisethe approvals process across the EU. Any active substance had to meet specificcriteria on safety and efficacy before it could be placed onto the European market.Prior to Directive 91/414/EEC there were around 1,000 active substances authorisedin at least one Member State. All existing approved substances had to be re-approvedunder the new Directive. This resulted in around only 230 pesticides having approvalin the EU by 2009.

Updated Legislation Regulation EC 1107/2009

This replaces Directive 91/414/EEC and came into force in June 2011. It has morestringent requirements for active substance approval (see below).

Active substances will not be approved (or re-approved) under 1107/2009 if they areclassified as having the following properties:

Mutagenic

Carcinogenic or have reproductive toxicity (unless the exposure is negligible)

Endocrine Disruptors which cause adverse effects (see below for more details)

Persistent Organic Pollutants (PoPs)

Persistent Bio-accumulative and Toxic (PBT)

Very Persistent/very Bio-accumulative (vPvB)

These are known as the cut-off criteria. There is a derogation allowing pesticides tobe approved for five years in exceptional circumstances, even if they fall within theabove criteria, if they are necessary to control a serious danger to plant health thatcannot be contained within other means.


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P&L Summary (

mn)


Income:

Total revenue 3,559 4,494 6,201 7,926 8,147

Gross Profit 1,068 1,325 1,942 2,334 2,679

Gross Profit (%) 30.3% 30.0% 31.7% 30.0% 34.3%

Employee benefits expense 52 84 109 136 181Employee expenses (%) 1.5% 1.9% 1.8% 1.7% 2.3%

Other expenses 396 435 608 799 1,039

Other expenses (%, LHS) 11.3% 9.8% 9.9% 10.3% 13.3%

Total expenses 3,207 3,985 5,339 6,748 6,664

EBITDA 619 806 1,225 1,400 1,458

EBITDA Margin (%) 17.6% 18.2% 20.0% 18.0% 18.6%

Depreciation and amortisation expense 306 371 427 367 289

Finance costs 2 2 1 4 14

Other income 41 76 66 149 328

'Total tax expense 63 94 178 334 415

PAT 289 414 685 843 1,069

Minority Interest - - (3) (0) -

PAT after MI 289 414 687 844 1,069

Source: Company data


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Cash Flow Summary (

mn)

Particulars FY10 FY11 FY12 FY13 FY14

CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES

Profit before taxation (as restated) 353 508 862 1,178 1,484

Non-cash adjustments to reconcile profit before tax to netcash flows

Depreciation and amortisation expense 306 371 427 367 289

Net gain on sale of non- current investments - - - - (10)

Unrealised foreign exchange (gain)/loss (Net) 104 (26) 20 66 94

Finance costs 2 2 1 4 14

Interest income (5) (3) (3) (4) (8)

Dividend income (17) (9) (16) (19) (7)

Operating profit before WC changes 739 838 1,289 1,583 1,786

Movements in Working Capital

long-term loans and advances (21) 0 (53) (58) (67)

trade receivables (212) (310) (662) (657) (79)

inventories (161) (204) (425) 91 233

short-term loans and advances (1) (20) (28) (93) 125other current assets (1) (2) 1 1 (3)

trade payables 214 268 460 219 (147)

other current liabilities 3 (4) 13 48 48

in short-term provisions 21 (2) 46 60 64

in long-term provisions - - 0 (0) 2

Change in working capital (158) (273) (648) (390) 176

Cash flow from operations 581 565 641 1,192 1,963

Direct taxes paid (Net of refunds) (82) (80) (248) (354) (402)

Operating Cash Flows 499 485 393 838 1,560

Cash Flow from Investments

Proceeds from sale of non-current investments - - - - 59

Purchase of fixed assets, including intangible assets (507) (300) (420) (489) (855)

(Purchases)/Proceeds from sale of Current Investments (Net) 198 (70) (41) (565) (696)

Redemption/(investment) in bank deposits 3 63 (2) (72) 29

Net cash generated from/(used in) investing activities (280) (303) (473) (1,125) (1,505)

Cash Flow from Financing Activities

Finance costs paid (2) (2) (1) (4) (14)

Dividend paid on equity shares (90) (90)

Tax on equity dividend paid (15) (15)

short-term borrowings (Net) (115) 2 (3) 426 (100)

Net cash generated from/(used in) financing activities (117) (0) (4) 317 (219)

Exchange Difference arising on conversion debited to ForeignCurrency Translation Reserve

(97) (16) 145 0 28

Net change in cash 6 165 62 30 (135)

Beginning cash 61 67 230 296 325

Effect of exchange differences 0 (1) 4 (1) (1)

Cash and Cash Equivalent taken over on acquisition 0 28

Total Cash and Cash Equivalent at the end of the year 67 230 296 325 216

Source: Company


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Sharda Cropchem


Valuation parameter summary

Source: Company

Ratio analysis

Source: Company


EPS 3.22 4.6 7.63 9.37 11.88

Book Value per share 31.1 35.5 43.7 51.9 61.8

P/E 80.0 56.0 33.8 27.5 21.7

P/BV 8.3 7.3 5.9 5.0 4.2

EV/EBITDA 37.1 28.2 18.5 15.7 14.6EV/EBIT 73.4 52.3 28.3 21.3 18.2

EV/Sales 6.5 5.1 3.7 2.8 2.7


Net Profit margin 8.2% 9.4% 11.2% 10.9% 13.7%

Net Debt to Equity (0.1) (0.1) (0.1) (0.2) (0.3)

ROCE (Post Tax) % 10.3% 13.8% 19.1% 18.6% 19.5%

RoIC (%) 10.0% 13.0% 19.0% 19.2% 20.8%

PBT Margin 8.9% 9.8% 13.0% 13.2% 14.8%


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Institutional Equities TeamSaurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected]

Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]

Aditya Bagul Consumer (022) 30433264 [email protected]

Aditya Khemka Healthcare (022) 30433272 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 [email protected]

Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 [email protected]

Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Krishnan ASV Real Estate (022) 30433205 [email protected]

Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave, CFA Healthcare (022) 30433212 [email protected]

Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 [email protected]

Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Midcaps Chemical / Retail (022) 30433242 [email protected]

Ritesh Vaidya Consumer (022) 30433246 [email protected]

Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected] Gupta Media / Midcaps (022) 30433211 [email protected]

Tanuj Mukhija, CFA E&C / Infra / Industrials (022) 30433203 [email protected]

Utsav Mehta Technology (022) 30433209 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

E&C = Engineering & Construction


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Sharda Cropchem


Sharda Cropchem (SHCR IN, NOT RATED) - Stock price performance

Source: Bloomberg, Ambit Capital research

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Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >5%

SELL

ambit sharda cropchem (not rated) errgrp effectively capturing the global wave

Documents