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Moneycontrol Bureau

The Rs 352-crore public offer of Sharda Cropchem, the Mumbai-based crop


protection chemical company, has opened for subscription and will close on
September 9.
The issue price is fixed at Rs 145-156 a share. The company wont get money raised
through this issue as purpose of the public issue is to carry out sale of 2,25,55,124
equity shares by selling shareholders (HEP Mauritius, Ramprakash V Bubna and
Sharda R Bubna) and achieve the benefits of listing equity shares on exchanges -
BSE and NSE.
Bubna family, the promoter and promoter group, will reduce their stake in the
company from 84.13 percent currently to 75 percent and non-institutional investor
HEP Mauritius will offload its entire stake of 15.87 percent.
Sharda Cropchem is a crop protection chemical company engaged in the marketing
and distribution of a wide range of formulations and generic active ingredients
globally. It is also involved in order based procurement and supply of belts, general
chemicals, dyes and dye intermediates.

So, should you subscribe?
Brokerages advise subscribing the issue, citing reasonable valuations, asset-light
business model with core competence in registration of ingredients and healthy
balance sheet.
The company with its asset light business model, core competency in seeking
registrations, global distribution network and diversified portfolio is looking
attractive investment opportunity, said Hem Securities.
Why should you subscribe?
Asset-light business model, core competency, global distribution network
Sharda has an asset-light business model whereby it focuses on identifying generic
molecules, preparing dossiers, seeking registrations, marketing and distributing
formulations or generic active ingredients in fungicide, herbicide and insecticide
segments through third-party distributors or its own sales force.


The company as of FY14 holds around 1200 registrations of which the European
Union constitutes around 45 percent (534 registrations), Latin America around 26
percent (312 registrations), NAFTA around 6 percent while the rest of world (RoW)
comprises the remaining around 23 percent.
As of August 5, 2014, SCL has filed over 500 applications for registrations globally
which are pending at different stages.
With an objective to increase its presence in the agrochemical value chain, the
company has set up its own sales force in various countries in Europe as well as in
Mexico, Colombia, South Africa and India. As of date it has over 440 third-party
distributors and over 100 personnel in its own sales force.
According to WealthRays, pending registrations and its expansion in sales force to
reduce dependency on third party are keys on sustaining and strengthening its strong
financials. Recent entry into biocide segment is also positive for the company, it
added.
The company has recently entered into the biocide segment and has acquired several
registrations from the existing registration holders, primarily, in Europe.
Strong sourcing capabilities, strong geographic spread and diversified portfolio
The availability of multiple manufacturers and formulators in the agrochemical
industry helps the company in not being dependent on a single or limited number of
manufacturers or formulators.
Agrochemical business operations of the company are spread in over 60 countries
across Europe, NAFTA, Latin America and Rest of the World.
Financial strength
SCL has a strong balance sheet with healthy return ratios. It has maintained a focus
on capital efficiency and maintained a conservative debt policy. It has a short term
borrowings of Rs 40 crore as against cash and cash equivalent of Rs 215 crore as of
FY14. It also has good reserves of Rs 465.52 crore in FY14.


We are comfortable with Sharda's lean balance sheet structure with FY14 debt-
equity of 0.1x, said ICICIdirect.
The company has demonstrated a consistent track record of profitability over the last
three years. It had reported a 25 percent compounded annual growth in the net
income over FY2012-14. It has strong return on capital employed (RoCE) of 25
percent and return on equity (RoE) of close to 20 percent.
"The net working capital days have also improved over the last four years and at the
end of FY2014 the net working capital days stood at 99 days as compared with 143
days in FY2010, said Sharekhan.
In FY14, the company clocked a consolidated topline of Rs 782 crore (up 0.54
percent over FY13) with around 82.5 percent being contributed by the agrochemical
business (Rs 645 crore), Rs 15.8 percent being contributed by the conveyor belt
business (Rs 123 crore) and around 1.7 percent being contributed by other business
(dyes). Net profit of the company in FY14 grew by 26.8 percent year-on-year to Rs
106.9 crore compared to previous financial year supported by other income and lower
depreciation.
Mehta Equities said considering the above rationale and valuation parse this issue is
reasonable priced when compared with other listed entities which are trading in the
higher PEx range (25x-30x).
On overall valuations at the upper band of the price Rs 156, the stock trades at 13x
which is almost 50 percent lower as compared to its peers domestically like PI
Industries and Rallis India .
Mehta Equities believes with healthy growth in the agrochemical industry globally,
Sharda is well placed to tap the opportunity.
However, according to brokerages, the key risks are:
>Any further deterioration of working capital cycle may put pressure on the
companys financials;
>Growth of genetically manufactured crops may limit growth of agro chemicals;
>Any change in rules and regulations governing agro chemicals in countries (where it
operates) may impact product sales;


>Any volatility in the local currency may affect the earnings (as majorly deals in
USD and Euro);
>Registration failure or delay may adversely affect its performance;
>Heavy dependency on top customers (top ten agrochemical contributes heavily in
revenue of the company); and
>Pproduct concentration (top five products constitute 36.3 percent of consolidated
topline in FY14).
WealthRays said stable CAGR can be expected for the company as it has many
registrations pending in pipeline and plans to make strategic acquisitions. Financials
of the company are strong but focus should be on further addition of registrations and
how the company mitigates currency risks and increases its presence in other
segments like biocide, it added.
Edelweiss Financial Services Limited and IDFC Capital Limited are book running
lead managers to the issue while Karvy Computershare Private Limited is the
registrar.

Sharda Cropchem (SCL) is a crop protection chemical company engaged in the
marketing and distribution of a wide range of formulations and generic active
ingredients globally. It is also involved in order based procurement and supply of
Belts, general chemicals, dyes and dye intermediates.
Sharda Cropchem is a cash rich company (Rs 190 crore in FY14). It is coming out
with IPO to provide an exit option to its PE investors, HEP Mauritius, who invested
Rs 100 crore in March14 for 15.87 percent stake. Also, to comply with SEBI
guidelines of 75 percent, promoter is also offering shares in the IPO. Hence, there is
no new issue of shares and equity would remain same post issue.

Investment rationales are its core competency in registration, geographical spread
with strong distribution network and strong balance sheet.
However, key concerns are high working capital cycle, high investment in
registrations and currency risk.
Valuation and Recommendation


Between FY10-14 SCLs revenues grew at CAGR of 22 percent while EBIDTA grew
at a CAGR of 23.9 percent and PAT by 38.6 percent. We expect it to maintain 20-25
percent growth going forward.
On the valuation front, at the given price band of Rs 145-Rs 156, SCL is
commanding at PE of 12.2x 13.2x its FY14 EPS of Rs 11.8/sh and EV/EBIDTA of
8.6-7.9x. Considering the healthy balance sheet, strong double digit growth and
cushion in valuations we recommend subscribing the issue for both short term and
long term gains.