Riding high on parent’s R&D

SUMITOMO CHEMICAL INDIA

Sumitomo Chemical India (SCI) is the Indian outfit of the giant Japanese Sumitomo Chemical group which operates in various businesses, including chemicals, petrochemicals, plastics, energy, functional materials, IT-related chemicals, health and crop sciences, and pharmaceuticals. The Japanese giant is a research-oriented enterprise and spends 8 to 9 per cent of its sales on R&D activity every year. This helps the Indian subsidiary launch proprietary products in the domestic market.

The Indian company is primarily engaged in the manufacture of agrochemical, animal nutrition and environmental health solutions. The agro solutions division is the largest revenue contributor with 94 per cent, while the rest comes from the other two businesses. The company provides solutions for insecticides, herbicides and plant growth regulators (PGR) under the agro segment. Under animal nutrition, it manufactures methionine for feed additive use which is the essential amino acid for the development and growth of livestock.

Five years ago, SCI acquired Excel Crop Care, which has a 100 per cent generic portfolio in the crop protection market along with backward integration of a few technical solutions. Prospects for the company are highly promising.

Consider:

• A major plus point for SCI is its strong Japanese parentage. The parent company is highly aggressive in its research activity — in keeping with the Japanese tradition — and the Indian company gets all the benefits of this research.
• In fact, even now SCI concentrates more on proprietary products which fetch high margins. Little wonder that the company’s revenues are more tilted towards speciality products which contribute over 63 per cent of revenues, while the remaining 37 per cent comes from the generic portfolio. Going ahead, the parent company plans to launch two fungicide products in the next year or so, while planning to expand its presence in the next-generation herbicide portfolio and plant growth regulators (PGR). The combined opportunity is estimated to be around $ 1.5 billion.
• Excel Crop Care, acquired five years ago, has now been merged with SCI, paving the way for the company to increase its pace of growth. Now, SCI is planning to launch as many as 11 combinations of products (patented + generic molecules) in the domestic market, of which five are already in an advanced stage. Further, it is in negotiation to get one or two molecules under CRAMS (contract research and manufacturing services) from the parent. All these should translate into a higher topline as well as bottomline going ahead. Again, Excel has a strong product portfolio in rice, soybean and cotton, while SCI is strong in wheat, sugarcane and fruits and vegetables. The company is thus in a position to offer end-to-end crop solutions to the domestic market.
• Going ahead, the company plans to enter into nextgeneration herbicides and increase the revenue from plant growth regulation (PGR). These two new portfolios are estimated to provide incremental business opportunities of $ 1.5- 1.9 billion over the next five years or so. This may translate into a CAGR of at least 20 per cent. Further, the company plans to expand its footprint into rice and botanical insecticides.

For nine months ended September 2020, net sales fell 1% to Rs 1,904.99 crore. The company’s operating margins decreased 140 bps to 10.4%. Net profit fell 11% to Rs 90.91 crore. Consequent to the nationwide lockdown, the company’s operations were scaled down in compliance with regulatory orders. Towards the end of April 2020, the company’s operations were scaled up in a phased manner, taking into account directive from various government authorities. This has negatively impacted the company’s revenues and profits for the nine months ended September 2020.

In CY 2021 and CY 2022, we expect the company to register an EPS of Rs 18.6 and Rs 22.7 respectively after an expected EPS of Rs 16.3 in CY20. The scrip trades at Rs. 298. P/ E on the CY 2022 expected EPS works out to around 8.8.

CONSOLIDATED PERFORMANCE INDICATORS (Rs. in crore)

PTC INDIA

Pole player in power trading

PTC India, formerly known as Power Trading Corporation of India, is a leading provider of power trading solutions across borders, as well as power trading and consultancy services. It is a holding company and has subsidiaries like PTC India Financial Services (which provides total financial solutions to the energy value chain) and PTC Energy Ltd (which runs renewable energy projects). It also has operations in Nepal, Bhutan and Bangladesh. It is one of the most profitable PSUs in the country. This is a safe investment bet with ample chances of appreciation.

Just Consider:

• From July 2001, the company has started trading in power on a sustainable basis and has been providing the best value to both buyers and sellers while ensuring optimum utilisation of resources.
• The company has made rapid strides since its inception in 1999. It has emerged as a leading power trading company with a hefty marketshare of 30 per cent in the segment. During the last five years, its sales turnover has steadily expanded from Rs 14,075 crore in fiscal 2017 to Rs 16,963 crore in fiscal 2021, with the profit at net level inching up from Rs 291 crore to Rs 410 crore during this period. Its financial position is very strong, with reserves at the end of March 31, 2021 standing Rs 3,406 crore – over eight times its equity capital of Rs 296 crore. PTC is a debt-free organisation and its interest burden is just Rs 27.81 crore, negligible as compared to sales of Rs 16,963 crore and operating profit of Rs 628 crore.
• The future prospects for the company are highly promising. It has acquired the energy consulting business of IL&FS Energy Development Company. A greater focus on consulting, along with this acquisition, has opened up a new avenue of growth and will give a boost to PTC’s topline as well as bottomline, as the acquired company is involved in core areas of energy consulting like energy efficiency, distribution advisory, waste-to-energy conversion and environment-related efficiency. It has pending revenues (from orders on hand) of Rs 1 billion (Rs 100 crore) over the next 4 years on which it can earn 40 to 50 per cent margins. PTC’s own consultancy income grew 50 per cent yoy in Q4FY21 to Rs 91 million and 20 per cent yoy in fiscal 2021 to Rs 294 million. The order book is at Rs 2 billion. The company aims to diversify into non-regulated businesses and gain synergies from the acquisition, which can help propel its consulting business going ahead.
• The company has decided to sell its non-core businesses. PTC is in talks with potential buyers, and this will further improve its financial condition as well as profitability.
• The company’s foray into renewable energy through PTC Energy has opened an additional avenue of growth for the company as it has entered the solar and wind segments. The company is expected to report robust growth of 14 to 15 per cent CAGR, driven mainly by increasing volumes. Again, the company has set up a 350 MW wind power-cum-solar power project which has been earning more than 16 per cent post-tax return on equity (RoE) as compared to 7 to 8 per cent earned by the company on its regular trading business. Increasing business from the Railways and the Teesta Urja project are some additional triggers.
• The company has devised a pro-shareholder dividend policy to make payouts amounting to 50 per cent of profits. In the last year ended March 2021, the company paid a dividend of Rs 7.5 per piece, which translates into 54 per cent of annual profits

As being an erstwhile bankrupt company, the share price of TSBSL had gone down substantially to just Rs. 15. But with the entry of the Tatas, the share price has started improving. But even now the valuation is very attractive.

PERFORMANCE INDICATORS (Rs. in crore)