Sharekhan Bullish On This 2020-Listed Multibagger Chemical Stock, Buy For Robust Gains

Stock Outlook & Returns

The SCIL stock current market price (CMP) is Rs. 477 per share, trading 1.38% up from its previous close. It opened at Rs 470 per share. The stock hit its fresh 52 week high on 27 October 2022 at Rs 540.80. Its 52-week low level is Rs 344.25 recorded on 29 November 2021.

The stock surged by 6.98% in the past 1 week. Whereas, it fell by 1.19% in the past 3 months. , and 15.92% in 3 months. It gave 30.21% positive returns in the past 1 year. The stock since its lisiting on 27 January 20220 has given a multibagger return of Rs 137.69%.

 

Worst case of Glyphosate impact priced in; High Court stay on government notification a near-term relief

Recently, a government notification has restricted the way for use of glyphosate by farmers through Pest Control Operators (PCO). Glyphosate is a key product for SCIL, and it holds a 35-40% market share in Rs. 1,200 crore of domestic Glyphosate market size. This implies Rs. 420-480 crore (12-14% of FY23E revenues of Rs. 3,474 crore) of revenues from sales of glyphosate in India by SCIL and with gross margin of ~27%, we arrive at negative impact of Rs. 0.7/share or 6%/5% on our FY23E/FY24E EPS. At our target PE of 40x, the negative effect on valuations would be Rs. 27/share for SCIL, which is largely priced in a sharp 11% (or Rs. 60/share) correction in the stock price since the government notification on restrictive use of glyphosate by farmers through PCOs. Moreover, a stay order for three months by Delhi High Court on government notification also provides short-term relief for SCIL and government would review its notification post meeting with the industry stakeholders. Additionally, SCIL is also taking initiatives to develop PCO infrastructure (expected to take 3-6 months' time) for glyphosate sprays and looking to provide innovative/value-add solutions to the farmers, which would help in market share gain from unorganized players in the long-term.

Massive CRAMS opportunity to drive export growth

SCIL is on firm footing to tap the contract manufacturing opportunities from its parent Sumitomo Chemical Company (SCC Japan, a leading global chemical company) and we see massive revenue opportunity from potential shift of technical products manufacturing to India. Our optimism stems from the fact that SCC Japan's revenues from Health & Crop Sciences Sector stands at ~$3.8 bn and has strong product pipeline in Agri-Solutions/Environmental Health products with revenue potential of $1.4-1.8 billion. Moreover, out of the five proprietary products for the parent company, SCIL has also started commercial production for one product at Bhavnagar plant while other project (multiple products) at the Tarapur site is expected to started commercial production in Q1FY24. All five products combined have revenue potential of Rs. 200-250 crore with potential to expand capacities for these products. Moreover, acquisition of Nufram's distribution in Latin America by SCC Japan provides huge revenue growth opportunity (SCIL can supply 8-10 technical with overall opportunity size of $1 billion). Overall, contract manufacturing opportunity provides a long runway for growth in export revenues (grew by 50%/58% in FY22/H1FY23).

Expect robust PAT CAGR of 22% over FY22-25E

Strong CRAMS opportunity from parent, dominant position in Indian market and a target to reinvest 15% of EBITDA on capex makes SCIL well positioned to grow its revenues/BITDA/ PAT at 14%/23%/22% CAGR over FY2022-FY2025E along high RoE of 24-25%.

Valuation – Maintain Buy on SCIL with an unchanged PT of Rs. 570

Sharekhan said, "We believe SCIL would continue to enjoy premium valuations versus domestic peers, given its superior earnings growth outlook (growth could accelerate future growth, given a massive revenue opportunity from contract manufacturing), its strong parental advantage (robust R&D capabilities, global distribution, and financial strength), and a robust balance sheet (Rs. 800 crore of cash & cash equivalents as on September 30, 2022). Hence, we maintain our Buy rating on SCIL with an unchanged PT of Rs. 570. At the CMP, SCIL is trading at 35.8x its FY2024E EPS and 30.4x its FY2025E EPS."

Key Risks

According to the brokerage, Ban/restriction on use of products such as Glyphosate (that fetch 12-14% of revenue) could impact earnings outlook. Delay in raw-material supply from China could affect margins. Adverse weather conditions could affect demand for agri-inputs and affect earnings outlook.

Disclaimer

The stock has been picked from the brokerage report of SHarekhan. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.