Sumitomo Chemical India Ltd made an impressive debut on the stock exchanges. Its shares rose 5% for the second consecutive day.

The Indian arm of Japan’s Sumitomo Chemical Co. Ltd had acquired Excel Crop Care Ltd in 2016. Sumitomo had then merged its India unit with Excel Crop Care by issuing shares of Sumitomo Chemical India to Excel’s minority shareholders.

The merger was value accretive for the erstwhile Excel Crop Care, which was a pure generic agrochemicals producer and seller, while a large part of Sumitomo Chemical India’s revenue came from specialty products. Post the merger, more than one-fourth of the company’s revenue was projected to come from specialty products.

The combined entity is one of the largest agrochemical firms in India now. The size (scale) will help the Japanese company derive better synergies.

Sumitomo Chemical Co. can also commercialize its innovative products better, deepening its Indian unit’s competitive advantage. “It (Sumitomo Chemical India) plans to launch one proprietary product from the parent every year in addition to its own developed combination products/pre-mixtures," Prabhudas Lilladher Pvt. Ltd said in a note.

Further, the Japanese chemical firm can better leverage the local unit’s manufacturing capabilities by sourcing more products from India. Post last year’s raw material supply disruption from China, global chemical firms have diversified their agrochemical procurements. This is opening up opportunities for India. “(The parent company’s) strong product pipeline with opportunities worth $1.4-1.8 billion will support India operations," analysts at PhillipCapital (India) Pvt. Ltd said in a note.

The stock is reflecting the expectations. Based on Prabhudas Lilladher’s estimates, the stock is trading at 24 times FY21 earnings estimates.

Due to their strong parentage and access to innovative products, local units of multinational corporations (MNCs) generally trade at a premium. Bayer CropScience Ltd, for instance, is trading at 32 times FY21 earnings estimates.

But Sumitomo Chemical India’s margins are relatively lower. Bayer, for instance, is estimated to have an operating profit margin of 19% in FY21 (post the merger synergies with Monsanto India Ltd). In comparison, margins of Sumitomo Chemical India are estimated to improve from 12% in FY20 to 13% in FY21.

This is more or less similar to the 14% operating profit margin peer Rallis India Ltd is estimated to clock in FY21. However, Rallis India trades at 18 times FY21 earnings estimates.

The relatively low margin is making some analysts wary. “There is a margin disconnect, which is not great. The company has to demonstrate over the next one-two years on execution and product scale-up," said an analyst, requesting anonymity.


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