Sumitomo India promoters launch OFS

Sumitomo Chemical India promoter, Sumitomo Chemical Company proposes to sell up to 49.91 lakh shares, nearly 1% of the total paid-up equity share capital of the company on Friday (for institutional investors) and on Monday (for retail investors) through offer-for-sale (OFS) mechanism.
The OFS has an option to additionally sell up to 49.91 lakh shares in case of oversubscription. The floor price for the sale has been fixed as Rs 265.
Currently, Sumitomo Chemical holds 80.3% stake in Sumitomo India. Sumitomo India is the demerged entity from Excel Crop Care and sold to Sumitomo Chemical.

The company is expected to do well in the near future. In fact, even as the majority of sectors in the domestic market were impacted due to lockdown along with demand/supply side challenges, only the agricultural sector remained immune during this turbulent phase. This is evident from the fact of highest ever fertiliser sales ahead of Kharif season.

This should also bolster the growth outlook for agrochemicals. Further, locust impact during Q1 should also improve the growth outlook for some agrochem companies such as Sumitomo given its strong presence in a few molecules for the insecticide segment.
The first half (H1) has around 65% share in overall revenue of the company. The better monsoon estimates from IMD along with locust impact during the May, should potentially improve revenue visibility for Sumitomo Chemicals in the coming quarters.

It is expected that the animal nutrition business along with CRAMS opportunity to change business mix in the medium to long term. This, in turn, could translate into improvement in the operational performance.
Further, ECC’s expertise into active manufacturing should likely benefit SCI given that later largely depends on imports of key molecules. Thus, according to the brokerage, reduction in import and likely improvement in captive consumption should aid gross margins and thereby OPM. Given no major capex is lined up in the coming future, the company should likely generate decent FCF in the years to come.

SCI’s parent Sumitomo Corporation spent 8-9% of sales on R&D activity every year, which helps the Indian unit to launch proprietary products in the domestic market. Going ahead, SCC Japan plans to launch two-fungicide product in the next year or two while planning to expand its presence in next generation herbicide portfolio and plant growth regulators.
The company generated FCF to the tune of Rs 103 crs & it is debt free now with liquid cash & investment at around Rs 180 crs.

We expect growth momentum to continue in FY21 as well with new launches, cross selling opportunities and turnaround in the domestic agchem industry. Meanwhile the institutional component of the OFS made today has been finalised at
Rs 282.65 while the Retail portion will open on 29th June 2020.

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