Sharda Cropchem: volume slowdown leads to earnings cuts

Negative currency movements hit the firm's revenue growth in the March quarter too, but what is stark in the last quarter is the deceleration in volumes

The belief that its presence across many regions will cushion Sharda Cropchem Ltd from the vagaries of operating in one country took a beating after the firm reported weak performance for the June quarter. Revenues increased by a tepid 3% from the year-ago quarter. That’s in contrast to the March quarter, when they were up almost 18%.

The performance is sharply lower than the Street estimates of double-digit revenue growth. Operating profit, or Ebitda (earnings before interest, taxes, depreciation and amortization) fell 15.5%, as margins contracted by a huge four percentage points. Net profit is down 16%. Adverse currency movement and a high base weighed on the performance.

Negative currency movements hit Sharda Cropchem’s revenue growth in the March quarter also. But what is stark in the last quarter is the deceleration in volumes. From the March quarter, volume growth more than halved to 14%, according to Emkay Global Financial Services Ltd. Depreciation of currencies, especially in Europe and Latin America, increased the cost of imports, hurting volumes. Also, as the cost advantages of imports reduce, some markets are turning to local production.

Tracking the changes in business environment, the management reduced the lower end of the volume growth guidance for the current fiscal year to 15% from 18-20% earlier, said analysts. If indeed the volumes grow at the guided pace, it will be a huge climbdown from the previous fiscal year, when they are estimated to have grown 31%.

Following the weak commentary, analysts reduced their earnings per share (EPS) estimates. “We have revised our estimates downward by 11%/7% for FY16E/17E and revised EPS stands at 15.3/20.2," brokerage firm Batlivala and Karani Securities India Pvt. Ltd said in a note.

The stock fell sharply after the results, although it recovered a bit in the last two sessions. The volume growth guidance of 15% still looks encouraging for investors who are worried about lack of growth opportunities in the domestic agrochemical industry. But it is pertinent to note that the rest of the fiscal year can be equally challenging for Sharda Cropchem. The company is seeing pressure on volumes and sales in Europe, its most profitable region. It derives around half of its revenues from Europe.

Analysts expected the business in other countries to make up for the loss of revenues in Europe. But that can bring limited benefits as apart from margins, these regions (Latin America, rest of the world, excluding the US) also score poorly on other financial parameters.

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