Multiple growth avenues may give a fillip to Sumitomo Chemical stock

The stock has recovered some lost ground since November, as the Glyphosate herbicide overhang is behind for now

After falling 16 per cent since the government order on sales of herbicide Glyphosate in October this year, the stock of Sumitomo Chemical India recovered a bit since the fourth week of November.

The gains came on brokerage upgrades, given the stay on government order for a period of three months and the favourable risk reward.

In addition to opportunities in India’s generics and specialty products, exports are a major growth driver for the company. The immediate trigger for the stock has been easing of the Glyphosate overhang on the company.

The Centre — through a notification in October — had restricted the use of Glyphosate only through pest-control operators (PCOs). It is to check its usage, especially in the illegal genetically-modified cotton. This was done as the rampant use of the herbicide involved health hazards and risks to human beings and animals.

Size of the Glyphosate market is about Rs1,200 crore and Sumitomo’s share in it is estimated around 35-40 per cent.

On the business front, Dalal & Broacha’s Bhavya Gandhi believes there are four legs of growth that provide revenue visibility to the firm.

These include the exclusive supply to parent Sumitomo Chemical (SCC), Japan, with an opportunity size of Rs2,625 crore.

The acquisition of Nufarm’s distribution in Latin America by SCC will lead to enhanced supply by the India arm to Nufarm with annual growth pegged at 30 per cent.

The brokerage also expects the company’s specialty portfolio to grow at 15 per cent annually on the back of new product launches. The segment accounted for 30 per cent of overall sales in the first half of FY23.

Finally, the premium generics and off-patent generics market is another growth area. This is given that $4.1 billion worth of molecules are expected to go off patent by 2026.

The generics portfolio of the company has doubled over the last five years to Rs2,000 crore.

Nirmal Bang Research, which has upgraded the stock, has built in healthy earnings growth.

It incorporated a positive outlook for the Indian crop protection chemicals sector, aided by healthy crop prices/farm incomes. Moreover, the company’s pricing power should support margin expansion of 190 basis points (bps) and 110 bps in FY24 and FY25, respectively, said the brokerage.

The target prices for the stock — which is currently at Rs491 on the NSE — ranges from Rs543 to Rs640 per share. While prospects remain sound, investors should await revenue and margin trajectory in the near term, given demand worries and high-cost inventory. The stock is trading at 37 times its FY24 earnings.