Sumitomo reported strong revenue growth of 23.2% YoY in Q2FY23, driven by price-led domestic growth and volume-led growth in exports.

Gross margin contracted 110bps due to presence of high-cost inventory, but lower ‘other expenses’ led to 121bps YoY expansion in EBITDA margin. Company continued to gain market share from smaller players in India agrochemical sector, which is DCF-accretive.

ICICI Securities believes, restrictions on the mode of application of glyphosates could hit volume sales in the near term, but it also offers an opportunity to supply value-added solutions to farmers. This would potentially result in market share gain for organised players. We revise our earnings estimates to factor-in potential loss of glyphosate sales in the near term.

Q2FY23 result: Sumitomo reported strong revenue growth of 23.2% YoY during Q2FY23. EBITDA and adjusted-PAT growth was at 29.5% and 30.6% YoY, respectively. While gross margin contracted 110bps YoY due to high-cost inventory, EBITDA margin was up 121bps due to 215bps reduction in ‘other expenses’.

Exports – a key growth driver: Sumitomo India is on track to supply two (out of five planned) proprietary products to SCC Japan and its global affiliates in H2FY23 and Q1FY24, respectively. It also registered 451% YoY volume growth in glyphosate exports in H1FY23. Further, it is investing in R&D to develop and supply several off-patent products to Latin America and Africa. We believe exports will likely continue to drive strong volume growth for the company.

Glyphosate sales to be impacted in near term: With restrictions of usage on glyphosate, Sumitomo’s earnings are likely to be impacted in near term. While we expect the industry and the company to invest in training of operators to use glyphosate, we model there will be impact on earnings in next 2-3 quarters.

Erratic monsoon hits domestic sales: Agrochemical sales in Indian market were subdued during the kharif season due to delayed monsoon in some parts of the India. However, due to improved reservoir levels, we expect higher domestic demand in rabi season in H2FY23.