Agrochemical (Pesticides)

How to do Business Analysis of Agrochemical
(Pesticide) Companies
 Published: 16-Aug-22
Modified: 21-Aug-22
1. Similarities with Pharmaceutical Industry
2. Key factors influencing the business performance of agrochemical (pesticide)
companies
3. Summary
The current article aims to highlight the key aspects of the business of
agrochemical (pesticide) companies. After reading this article, an investor would
understand the factors that impact the business of pesticide companies and the
characteristics that differentiate a fundamentally strong pesticide company from a
weak one.
Similarities with Pharmaceutical Industry

Agrochemicals/pesticides industry is very similar to the pharmaceutical industry
in its structure. Just like human drugs, pesticides are drugs for crops. Let us
understand the similarities between the two industries, which would help any
investor attempting to analyse any pesticide company for the first time.
1) Classification into technical and formulations segments:
The agrochemicals industry is divided into technical products and formulation

products. Technical products are bulk drugs like active pharmaceutical
ingredients (API) in the pharmaceutical industry. These are concentrated
chemicals, which form the base of pesticides; however, are not yet suited for
direct application to the crops.
Formulation products in the pesticide industry are similar to pharmaceutical

formulations (ready-to-consume drugs), which are made by adding various
solvents etc. called formulants to the technical pesticides to make them ready for
application on crops.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 1:

Pesticides can be manufactured and sold mainly in two forms- Technical and
Formulations. Technical is the first stage of manufacture where
the chemical is concentrated and unsuitable for direct use. This is then
processed with other materials known as formulants to develop the finished
pesticide, known as formulation.
Moreover, as in the case of the Indian pharmaceutical industry, where most
Indian players focus on formulations by importing the APIs from China; similarly,
in the agrochemical industry also, most Indian manufacturers are formulators
who import technical products from China.
In fact, China produces more than 90% of the world’s technical production and
has a very large overcapacity.
India is one of the major producers for pesticide formulations, however, it

still imports technicals to a large extent which serve as the base chemical for the
end-product, viz, formulations. China is the world’s largest producer of
agrochemical raw materials, supplying 90% of the world’s technical raw material
requirements
Further advised reading: How to analyse New Companies in Unknown
Industries?
2) Huge investment of money and time in developing new

pesticides; patents and generics:
Just like pharmaceuticals, pesticides also affect human health because from the
crops they enter the food chain and human body; therefore, companies need to
conduct many studies/trials to ascertain their safety before the products are
approved for commercial use.
As a result, it takes a long period from the identification of any new pesticide to
its commercial use on the farms, which is usually about 10 years.
All these studies take a significant investment of money and other resources.
Therefore, countries grant patents to companies investing in research &
development (R&D) of pesticides, which gives them a period of exclusivity for
selling that particular pesticide to recover their investment in R&D and earn a
profit.
After the patent protection of any successful pesticide is over, then just like in the
pharmaceutical industry, many other companies start producing that pesticide,
which is called a generic version. However, even the generic companies need to
establish the safety of their product by conducting safety trials, which also takes
significant time. As a result, it may take generics companies about 5 years to
register their product.
Rating methodology – agrochemicals by ICRA, June 2022, page 5:
Being a regulated industry, it takes almost 10 years for an entity to bring a new
molecule into the market and almost five years to get a generic product
registered.
Moreover, patented pesticides sell at a higher price and at good profit margins
due to limited competition during the exclusivity period. The prices decline
sharply when numerous generic companies enter the market. As a result, generic
pesticides have lower profit margins. An investor may notice the same dynamics
in the pharmaceutical industry.
Further advised reading: How to do Business Analysis of a Company
3) Requirement of registration with authorities:
Just like the pharmaceutical industry, every pesticide needs to be registered with
govt. authorities before it can be sold in any country. Registrations are country-
specific and a company needs to register its product in every target country.
Just like the pharmaceutical industry, the registrations take time and money. In
the pesticide industry, the registration process of a product in developed markets
like the USA/EU may take about 3-5 years and a cost of about USD 10-15 mn
whereas a registration in India may take about 1-3 years and a relatively lower
cost. The requirement of registrations and the time & cost involved in the same
may act as an entry barrier for new players.
Rating Methodology – Pesticide Companies by CARE, June 2017, pages 3-4:
Registering agrochemical generics in US / EU is a time-consuming

process since it requires various types of studies to be carried out. One product
registration takes about 3-5 years and costs about USD 10-15 mn. Registration
process in India takes roughly 12-36 months. The investments both in terms of
time and money act as effective entry barriers
Such registration requirements act as an entry barrier for newer players because
in certain developed countries getting registration is very difficult with a very high
rejection rate.
An agrochemical company, Sharda Cropchem Ltd faced a lot of difficulties in
getting registration in Germany where the rejection rates are very high.
Conference call by Sharda Cropchem Ltd, July 2017, page 10:
Ramprakash Bubna: in Germany the things are very difficult. Our rate of success
of registrations in Germany is very, very low.
In addition to the low success rate, the registration processes are also very costly
because apparently nowadays, the govt. authorities have started to look at them
as a profit-generating activity.
Conference call by Sharda Cropchem Ltd, October 2020, page 11:
Ramprakash Bubna: The cost of registrations is exponentially high. The

government authorities, the sourcing authorities, who used to charge nominal
fees, they now started at looking some more kind of profits in these regions
because they feel the operators and players in the market are getting profits then
why not the government
Obtaining registrations, especially in developed countries has become a
challenging activity. As a result, the ability to obtain registrations is considered a
key competitive advantage.
CARE views the ability of a company to obtain registrations in different countries

as per their regulatory requirements and higher number of patents, product
registrations and acquisitions in the global market as major strengths for
sustainable growth.
An investor would appreciate that pharmaceutical companies face the same
challenges when attempting to get registrations in different countries.
Further advised reading: Credit Rating Reports: A Complete Guide for Stock

Investors
4) Demand is primarily influenced by local/domestic factors:
In the pharmaceutical industry, the demand for drugs in India or in any country is
primarily driven by the local factors/diseases prevalent in that area and may not
be influenced by global factors. Similarly, in the case of agrochemicals as well,
the demand is influenced by local factors and not global dynamics.
The prospects for domestic pesticide sector depends on multitude of factors like

monsoons, crop yield, incidence of pest attack, etc. and is relatively detached
from the global dynamics.
Looking at all these similarities between the two industries, if an investor has not
analysed the pesticide industry before; however, she has analysed the
pharmaceutical industry, then she can apply her learning of the pharmaceutical
industry here.
An investor may read the following article to understand more about the business
analysis of pharmaceutical companies: How to do business analysis of
pharmaceutical companies
Let us now understand the key characteristics of the business of agrochemical
(pesticide) companies and understand the major factors impacting them, so that
we may understand, which pesticide companies have a stronger business model
than others.
Key factors influencing the business performance of

agrochemical (pesticide) companies
1) Seasonality, uncertainty and wide fluctuations in local

demand:
Consumption of specific pesticides depends on the sowing of specific crops,

which is seasonal in nature. Therefore, the demand for these pesticides peaks up
during a couple of months of a particular crop season and declines sharply after
the crop season.
Even within the season, the demand for pesticides fluctuates widely depending
upon factors like rainfall (monsoon), pest attacks, pest resistance etc. Therefore,
a company may be ready with full inventory; however, there might be a rain
deficit leading to lower acreage of crops and less demand for pesticides.
Demand may also get affected if a particular pest attack may not happen in any
year or the pest becomes resistant to the existing pesticide.
Therefore, it is very difficult for agrochemical companies to decide the exact
demand for their products in any year. However, they need to keep sufficient
stock of pesticides so that they do not run out of the product when the demand
comes.
Due to the seasonal nature of the business and the uncertainties related to

timing and coverage of monsoon, level of pest infestation, etc., the level
of inventories needed by the companies to stock is large.
In addition, due to the seasonal nature of demand, if any quantity of pesticide is
not sold in the current season, then it is left unsold as inventory until the onset of
the next season, which might be many months away.
Conference call by Sharda Cropchem Ltd, May 2017, pages 16-17:

Ramprakash V. Bubna: …it does take time to get rid of the inventories in
agrochemical business these are seasonal businesses for some reason
because of the weather or any other impact there has been a less demand, the
companies are compelled to carry their inventory forward and then the next time
is possibly after six or eight months.
Therefore, the seasonality and uncertainty in the demand for pesticides lead
companies to keep an excess buffer of stock to meet the fluctuating demand and
be ready to carry it over to the next season. This significantly increases the
inventory requirements of agrochemical companies and makes their operations
working capital-intensive.
An investor may read our detailed analysis of Sharda Cropchem Ltd in the

following article: Analysis: Sharda Cropchem Ltd
2) Fragmented industry with intense competition and low pricing

power:
In India, most of the pesticide players are formulators who import technical
pesticides from China and then produce formulations in India. This business
model does not require a large investment in manufacturing plants etc. because
producing formulations is low capital intensive whereas producing technical
products is highly capital intensive.

formulations business is not capital and technically intensive…Technical and
capital intensity is higher in case of production of technicals, which are generally
higher value-added products.
Due to low capital requirements and easy availability of technical pesticides from
China, the Indian pesticide industry has a presence of numerous formulation
players making the industry highly fragmented.
domestic agrochemicals industry is highly fragmented with more than 60

technical grade pesticides being manufactured indigenously by about 125
manufacturers, including almost 60 large and medium scale enterprises
(including 10 MNCs), about 800 formulators and more than 145,000 distributors
spread all over the country.
Moreover, the majority of these players produce generic pesticides, which are
commodities i.e. the product of one company is non-differentiable from the
product of another company.
Most Indian companies manufacture and market generic and off-patent

pesticides, which comprise ~80% of the technicals being produced by the
domestic industry.
As a result, the Indian agrochemical industry has intense price-based
competition, where many players undercut the prices of their competitors.
industry is characterized by overcapacity and low offtake leading to intense price

competition among players.
Such intense price-based competition reduces the profit margin of the entire
generics agrochemical industry.
Generics are commodity products and hence, competition is intense with a large

number of players present in the segment. Margins remain low in generics
manufacturing
Only the innovator agrochemical companies whose products are protected by the
exclusivity granted by patents are able to protect their profit margins.
Advised reading: How to do Financial Analysis of a Company
3) Price-sensitive consumer without any brand loyalty:
The key consumer of the pesticide industry in India, the farmer community is not
very rich and has to manage with limited resources. As a result, they are very
price conscious in their pesticide purchase decisions and are unwilling to pay a
high price for any specific brand.
As a result, even though marketing spending by pesticide companies creates

awareness about their products and may give them a slight premium in their
pricing; however, they cannot price their branded pesticides at a significant
premium because then the demand would shift to low-priced competitors’
products, which are already available in the market.
the market for pesticides is low brand conscious and highly price sensitive. Due
to dominance of generic products, there are several ‘me too’ and spurious
products available in the market.
4) Fluctuating raw material prices impacting profitability:
Most of the raw materials used as inputs for the production of technical products
and subsequently formulations are derivatives of crude oil. As a result, the raw
material costs of agrochemical companies witness a lot of fluctuation as the
crude oil prices are very volatile.
However, generic agrochemical companies find it difficult to pass on the increase

in costs to their customers because of low bargaining power. These companies
sell generic-commoditized pesticides, where any increase in product prices
would shift the customer to buy competitors’ products.

Commodity price risks: Prices of most chemicals are exposed to input price
cyclicality, which renders the profitability of the end-product vulnerable to these
fluctuations. Given that many of the technical are produced from derivatives of
crude oil, prices of the raw materials have witnessed fluctuation over the years
as crude oil prices have remained volatile.
Companies, which have a high R&D strength and enjoy protection either due to
patented drugs or exclusive marketing arrangements with innovator MNCs, are
better at protecting their profit margins in the face of volatile raw material costs.
few Indian entities also manufacture specialty products in-licensed from larger

MNCs wherein the entities sign exclusive manufacturing and marketing
arrangements with the MNCs in-lieu for royalty paid to the MNC. As a result,
these entities face lesser competitive intensity and hence, profitability is
protected to that extent
5) R&D: Companies must renew their product portfolio regularly:
Pesticide companies face a significant challenge of product obsolescence. There

are multiple reasons for obsolescence.
First, over time, the pests develop resistance to existing pesticides that stop
working. As a result, newer pesticides need to be developed, which requires a
significant investment of money and time in R&D.
Also, due to growing pest resistance and newer pest attacks/diseases, it is

essential for the companies to introduce new products/molecules at regular
intervals and provide newer solutions to crop problems
Second, R&D by innovator companies keeps bringing out newer pesticides,
which are safer for plants and humans. Therefore, governments ban the older
version of more harmful pesticides. As a result, companies, which are
significantly dependent on old pesticides for their business face a big challenge.
Due to these reasons, agrochemical companies must invest resources to

continuously maintain a pipeline of newer pesticides so that they may stay
relevant in the fast-changing business environment.
An investor would appreciate that developing a pipeline of newer pesticides
would require a large investment in R&D. Therefore, the companies who spend
significant money on R&D to develop new drugs/generics are in a competitively
better position than others.
Entities with strong R&D capabilities and high budgetary allocation for R&D work
will be better placed in terms of tapping the opportunity arising from patent
expirations.
Unfortunately, most Indian agrochemical companies have a small R&D budget
and spend only 1%-2% of their revenue on R&D in comparison to multinational
companies (MNCs), which spend about 11%-12% of revenue on R&D.
Currently R&D expense as a percentage of turnover in India is about

1% compared to 11-12% globally.
One method by which Indian companies mitigate the risk of product
obsolescence is by entering into an exclusive marketing arrangement with
innovator MNC agrochemical companies so that they continue to get access to
the latest pesticides to sell in the Indian market and maintain a healthy business
with good profitability.
Therefore, an investor should analyse the R&D spending by the company along
with its tie-ups with innovator MNCs to assess whether the company would be
able to counter product portfolio obsolescence.
6) Working capital intensive business:
Agrochemicals (pesticide) business is working capital intensive because it

requires maintaining high inventory as well as a large amount of trade
receivables.
As discussed earlier, the demand for pesticides is seasonal as well as highly
uncertain. Therefore, companies need to keep a large stock of pesticides to meet
demand in case the rains and crop sowing are good while running the risk of
large unsold inventories if there is a rain deficit, fewer pest attacks or lower crop
sowing.
Rating methodology – agrochemicals by ICRA, November 2017, page 7:
Due to seasonal nature of demand, unpredictability of pest attacks and

high dependence on monsoons, agrochemical players have to maintain high
level of inventory to meet the seasonal requirements.
Moreover, the sale of pesticides happens in a specific season; however, the
companies need to run their plants throughout the year, which adds to the
inventory and the working capital levels of agrochemical companies.
Working capital intensity of the agrochemical players (especially formulations)

tends to remain moderately high owing to the long operating cycle as production
and placement of products happens throughout the year while the sales of the
product happen majorly during the cropping season.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
In addition, agrochemical companies need to sell pesticides with a large credit
period to customers. This is because farmers buy pesticides at the last stage of
the crop sowing cycle after they have already spent their money on preparing
fields, seeds etc. By this time, the farmers are already low on resources.
Therefore, usually, they buy pesticides on credit with a promise to pay for them
after the crop is harvested.
Rating methodology – agrochemicals by ICRA, November 2017, page 7:
Agro-chemical entities normally have high debtor days owing to i) long credit

period extended to the customers ii) sales made at the onset of the crop season
with realisation from the same mostly coming post-harvest.
Agrochemical companies also need to offer a higher credit period to customers
because they mostly sell commoditised generic products, which are non-
differentiable from each other. As a result, offering a longer credit period offers
an incentive to the customer to buy their product instead of competitors’
products.
However, the long credit period hurts the agrochemical companies because in
the case of bad harvest, poor monsoon etc. the farmer is unable to pay the
money.

Furthermore, the industry needs to offer long credit periods to farmers due
to intense competition and low offtake. Also, farmers tend to have little surplus
money left for purchasing pesticides, as applying pesticides is the last leg in the
agriculture operation. This leads to higher bad debts in events of crop failure or
poor monsoon.
Further advised reading: Receivable Days: A Complete Guide
7) Large and diversified companies have an advantage; big gets

bigger:
The demand for pesticides is crop-specific, seasonal, and prone to

obsolescence. Therefore, any agrochemical company, which is significantly
dependent on any one product or geography is at a high risk of business
disruption.
As a result, agrochemical companies, which sell many products in different

geographies are at a comparative advantage because any deficit in rainfall, pest
attacks, pest resistance etc. would not harm their business significantly.
Pesticide companies having large market share, wide distribution setup

and geographic spread in the domestic markets are at an advantageous position
to withstand the uncertainties due to monsoons and regional seasonality.
Moreover, in case, the govt. decides to ban any pesticide, then a diversified
agrochemical player with a large product portfolio would not be impacted
significantly. In contrast, concentrated agrochemical players relying on a single
product may go out of business due to such a ban.
This risk is especially high for companies who have most of their products under
the red label (extremely toxic) and yellow label (highly toxic) instead of products
under the blue label (moderately toxic) and green label (slightly toxic).
entities which are highly dependent on red and yellow triangle pesticides run the
risk of losing their source of revenue from products falling under banned
category.
In addition, diversified companies, which are usually large in size also have
advantages because they have higher bargaining power over their suppliers as
well as customers and distributors.
Large-scale typically leads to greater bargaining power with suppliers and

dealers, besides enabling superior competitive position on the back of cost and
manufacturing process efficiencies.
Large agrochemical companies also benefit from economies of scale i.e.
operating leverage resulting in cost competitiveness. These companies are better
able to compete against other domestic as well as foreign players. One reason
Chinese technical producers dominate the world of agrochemical technical is
their large size resulting in cost-competitiveness due to economies of scale
economies of scale play a big role in reducing cost of production and hence,

domestically produced technicals have faced tough competition from imported
technicals as manufacturers in countries like China operate on a very large
scale giving them an advantage over domestic producers.
Large agrochemical players are able to enjoy the strength of a well-established
distribution network, which acts as a competitive advantage as such companies
are able to push their products close to as many customers as possible and are
able to educate them for their use.
While the formulations business is not capital and technically intensive, the
profitability of the entities depends on their ability to develop a strong brand and
distribution network, which may entail significant time and cost and act as key
competitive strengths.
Moreover, if they are integrated players i.e. produce technical products as well as
formulations, then they are able to capture a higher share of the value chain and
earn a high-profit margin in addition to better control of the supply and quality of
raw material.

Integrated entities may have better protection against such risks due to better
control on supply of technical and better profitability margins.
Geographical diversification by agrochemical companies in exports helps them
as they can sell their excess production capacity due to the seasonality of
domestic demand in foreign countries. In addition, the exports provide a better
price and lower credit period as well as tax incentives from the Indian govt.
Increased export focus of the Indian pesticide industry is a consequence

of seasonal demand, better price realization in the export markets, global
outsourcing opportunity, low credit periods in export markets, domestic
overcapacity and tax sops.
Until now, Indian companies have been able to perform well in the export market
due to their lower cost of production as a result of the easy availability of a skilled
workforce.
India has the advantages of being a low-cost manufacturing hub with technical

competence and manpower availability for producing quality agrochemical
products, which has led to a substantial increase in exports over the past few
years, primarily to the US, Europe and Africa.
8) Risk from organic farming, genetically modified seeds as well

as fake-spurious products:
Organic farming promotes growing food without the use of agrochemicals like
pesticides, fertilizers etc. However, in the absence of these additive factors, the
production yield of organic crops is low, which results in a high market price for
organic products.
If going ahead, improvement in technology and processes leads to an
improvement in the production yields of organic farming, then a resultant decline
in the price of organic products may lead to a large section of the population
shifting to consuming organic foods. It may lead to a decline in the demand for
agrochemicals like pesticides.

innovations in the organic farming techniques, which could lead to increase in
yields and lowering of the pricing premium for organically grown products, in the
long term could weigh on agrochemicals demand.
Currently, a lot of agricultural research is focused on making crops resistant to
pests by modifying their genetic composition. These crops called genetically
modified (GM) crops have proved to be a success in the case of cotton, soybean
and corn. In 2013, most of the crops sowed in the USA for corn, cotton and
soybean were genetically modified.
FY2015 annual report of Sharda Cropchem Ltd, page 11:

As of 2013, GM seed weightings in the US have reached 90% for corn, 90% for
cotton, and 93% for soybeans.
Advised Reading: How to study the Annual Report of a Company
As GM crops are resistant to pesticides, therefore, increased usage of GM crops
leads to lower utilization of agrochemicals like pesticides. In fact, after the
introduction of GM crops, the agrochemicals industry witnessed a long-term
decline, which was evident from 1998 to 2006.
Red-herring prospectus of Sharda Cropchem Ltd, September 2014, page 46:
Following the initial introduction of GM crops in 1996, the market experienced

a period of decline in real terms between 1998 and 2006. This reflected the
increase in uptake of GM technology, particularly in North America and Latin
America where a rapid switch to crop varieties containing traits conferring
glyphosate tolerance and insect resistance led to declines in selective herbicide
and insecticide applications
Even in the Indian context, it is expected that increased usage of GM crops
would lead to a decline in the usage of agrochemicals.
Growing acceptance for the BT cotton which would adversely impact the

pesticide demand and widespread use of GM seeds in other crops like
soyabean, maize, canola, etc., makes it imperative for the companies to focus on
other crops besides cotton, for future growth.
Apart from GM crops and the increasing trend of organic foods, agrochemical
companies are severely impacted by fake/spurious pesticides present in the
market, which as per some estimates constitute about a third of all pesticide
sales.
The industry is also plagued with spurious pesticide products which account

for over one-third of the domestic market size
Therefore, an investor should be cautious about the possible impact of GM
seeds, organic food and fake/spurious products on the business of agrochemical
companies.
Summary
Overall, the agrochemical (pesticide) industry seems an essential segment of the
economy like the pharmaceutical industry, which is essential to prevent damage
to food crops due to pests. Developing newer pesticides is a very resource-
intensive exercise due to multiple safety trials because pesticides enter the food
chain and affect human health. This also makes it a heavily regulated industry.
Companies with higher R&D spending are at an advantage because they are
able to get an exclusive period to see their products at a profitable price to
recover their R&D expenses. However, once the patent period ends, then many
generics players enter the market and bring down the prices as well as
profitability.
Most of the agrochemical companies in India are generic formulation players that
produce commoditised products, which is not a capital-intensive process. As a
result, the industry is highly fragmented and intensely competitive where many
players compete on the price to gain customers. Moreover, the customers are
also highly price conscious with low brand loyalty. All this leaves a very low
pricing power in the hands of generic agrochemical players.
Demand for pesticides is seasonal and uncertain due to weather changes and
pest resistance. As a result, companies need to keep a large inventory to meet
the seasonal increase in demand. In addition, companies need to update their
product portfolio to meet regulatory and market demands for newer and safer
pesticides.
Agrochemical operations are working capital intensive due to large inventory and
trade receivables requirements. Farmers use pesticides at the end of crop
sowing operations when they have consumed almost all their resources.
Therefore, they need a credit period to pay after the harvest is over. If the crop is
bad, then they are not able to pay leading to bad debt for companies.
As a result, large agrochemical companies with a significant R&D budget and a
diversified product portfolio and extensive distribution are at a competitive
advantage. These companies can develop new products, enter into an exclusive
alliance with innovator MNCs, sell in different geographies, educate customers
about their products as well as generate resources for working capital needs.
Effectively, in the agrochemical industry, big players have a ready stage to
become bigger.
The agrochemical industry is facing threats from the growing use of GM seeds,
preference for organic food as well as the growing presence of fake/spurious
products in the market, which may affect the business of agrochemical
companies going ahead.
Therefore, an investor should keep in mind these multiple aspects for

agrochemical pesticide companies to understand the true picture of their
business position.
 Seasonality, uncertainty and wide fluctuations in local demand

 Huge investment of money and time in R&D for developing new
pesticides, patents and generics
 Requirement of registration with authorities
 A fragmented industry with intense competition and low pricing
power
 Price-sensitive consumers without any brand loyalty
 Fluctuating raw material prices impacting profitability
 Working capital-intensive business
 Large and diversified companies have an advantage; big gets bigger
 The risk from organic farming, genetically modified seeds as well as
fake-spurious products
We believe that if an investor analyses any agrochemical pesticide company by
considering the above parameters, then she would be able to assess its business
properly.
As ready examples, an investor may read our detailed analysis of the following
companies operating in the agrochemical sector.
 Analysis: Sharda Cropchem Ltd

 Analysis: Bharat Rasayan Limited
Regards,
Dr Vijay Malik
Below are 2 notable examples of agrochemical
companies along with their analysis(Sharda Cropchem
and Bharat Rasayan)
Analysis: Sharda Cropchem Ltd

 Published: 31-May-22
Modified: 20-Aug-22
1. Sharda Cropchem Ltd Research Report by Reader
2. Dr Vijay Malik’s Response
3. Analysis Summary
The current section of the “Analysis” series covers Sharda Cropchem Ltd, a
trading company focusing on agrochemicals, conveyor belts etc. that has taken
registrations for selling agrochemicals in many countries.
“Analysis” series is an attempt to share with all the readers, our inputs to the
company analysis submitted by readers on the “Ask Your Queries” section of our
website.
To benefit the maximum from this article, an investor should focus on the process
of analysis instead of looking for good or bad aspects of the company. She
should learn the interpretation of different types of data and transactions and pay
attention to the parts of annual reports etc. used to get the information. This will
help her in improving her stock analysis skills.
Sharda Cropchem Ltd Research Report by Reader

Hello Dr Malik,
I am a big fan of your blog and I have learned a lot from your analysis. I have
analyzed Sharda Cropchem Ltd. Please review and provide feedback. Thank
you,
Abhijit Dutta
Financial Analysis:
1. a) Sales Growth – Sharda Cropchem Ltd had a consistent sales

growth of YoY > 15% in the last 10 years except for FY2014 and
FY2020 (1.6% and 0.27% respectively). Sales growth CAGR 10
Years: 16.34%, 7 Years: 17.17%, 5 Years: 14.41% and 3 Years:
11.97%
2. b) Profitability – Net profit margin (NPM) varies from 8% to 14% in
the last 10 years.
3. c) Tax payout ratio has been above 25% in most of the years except
FY2020 where it was just 11%.
4. d) Interest coverage ratio has always been high in the last decade.
5. e) Debt to equity ratio has always been minimal
6. f) Current ratio is 2.08, which is a healthy sign.
7. g) Cash flow: It has had a positive cash flow in the last 8 years.
Total cash flow from operations (CFO) in the last 10 years is ₹1,546
Cr
8. h) Cumulative profit after tax (cPAT) ~ cumulative cash flow from
operations (cCFO) – Cumulative CFO is little more than cumulative
PAT in the last 10 Years.
Valuation Analysis:
 P/E ratio – 20
 PEG ratio – 2.68
 Earnings yield (EY) – 5%
 P/B ratio – 3.73
 Price to sales ratio (P/S) – 1.90
 Dividend yield (DY) – 0.75%
Business & Industry Analysis:
1. a) Comparison with industry peers: Sales growth is higher than

peers)
2. b) Conversion of sales growth into profits – operating profit margin
(OPM) is higher than sales growth.
3. c) Conversion of profits into cash – Past 8 Years: cPAT: ₹1,361 cr
and cCFO: ₹1,546 cr
4. d) Creation of value for shareholders from the profit retained – 2
times (as of March 2021). However, if we calculate until date, then it
would be 5 times.
Management Analysis:
1. a) Background check of promoters & directors – Nothing suspicious

found.
2. b) Management succession plan – Ms Sharda Bubna and Ashish &
Manish Bubna are actively engaged in the business for the last few
decades. Therefore, a succession plan is in place.
3. c) Consistent increase in dividend payments – The dividend payout
ratio fluctuates from 16% to 22%.
4. d) Promoter shareholding – 74.82%
5. e) Promoter buying the shares – A minimal share purchase by
promoters in FY2020. Since promoters hold a maximum allowable
percentage of shares, we can ignore this insider buying.
6. f) FII shareholding – 1.69%
Other Business Parameters:
1. a) Product diversification – A pure play. It is mainly in the

agrochemical business. Non-agrochemical business is order based.
2. b) Govt influence – No govt influence
The margin of safety (MoS):
7. a) MoS in the purchase price – EY is 5% and 10-year G-Sec yield is

7.2%
8. b) Self-Sustainable Growth Rate (SSGR): SSGR was higher than
the sales growth until FY2019. However, in the last 2 years, it has
come down to 9-12%, which is almost the same as the 3-years sales
growth CAGR. As a result, we are seeing some amount of increase
in debt in FY 2018 and FY 2021.
9. c) Free Cash Flow – FCF/CFO ~ 22%
Credit Rating Analysis:
2017. a) Credit Rating History – CRISIL has assigned it a rating of

A1+ since FY2017.
Thanks,
Abhijit Dutta
Dr Vijay Malik’s Response

Dear Abhijit,
Thanks for sharing the analysis of Sharda Cropchem Ltd with us! We appreciate
the time & effort put into the analysis.
While analysing the history of Sharda Cropchem Ltd, an investor notices that
over the years, the company had many subsidiaries both in India and overseas to
conduct its business. As per the Q4-FY2022 results announcement, pages 3-4,
on March 31, 2022, Sharda Cropchem Ltd had 41 subsidiaries.
We believe that while analysing any company, an investor should always look at
the company as a whole and focus on financials, which represent the business
picture of the entire company including its subsidiaries, joint ventures etc.
The consolidated financials of a company present such a picture.
Further advised reading: Standalone vs Consolidated Financials: A Complete
Guide
Therefore, in the case of Sharda Cropchem Ltd, we have analysed the
consolidated financials of the company.
With this background, let us analyse the financial performance of Sharda

Cropchem Ltd.
Financial and Business Analysis of Sharda Cropchem Ltd:
Sales of Sharda Cropchem Ltd have grown at a pace of 18% year on year from
₹778 cr in FY2013 to ₹3,580 cr in FY2022. Moreover, sales have increased
every year since FY2013.
The operating profit margin (OPM) of the company has fluctuated within the
range of 17% to 23% during this period with periods of declining OPM like
FY2015 when the OPM decreased to 17% from 20% in FY2014 and FY2018-
FY2020 when the OPM declined to 17% in FY2020 gradually from 23% in
FY2017. During the same period, the net profit margin (NPM) of Sharda
Cropchem Ltd decreased from 14% in FY2017 to 8% in FY2020.
To understand the reasons for the financial performance of Sharda Cropchem

Ltd, an investor needs to read the publicly available documents of the company
like its annual reports, conference calls, credit rating reports, and red herring
prospectus (click here), as well as its corporate announcements. Then she would
understand the factors leading to the increase in its revenue and the fluctuations
in its profit margins as well as the reasons for the decline in profitability in certain
periods.
After going through the above-mentioned documents, an investor notices the
following key factors, which influence the business of Sharda Cropchem Ltd,
which she needs to keep in her mind before making any predictions about the
performance of the company.
1) No pricing power over its customers (distributors):
Sharda Cropchem Ltd sells off-patent (generic) agrochemicals. However, despite

being off-patent, most of the market share of these agrochemicals is still with the
innovator, large-multinational companies (MNCs). As per Sharda Cropchem Ltd,
about 75% of the market share is held by large multinational innovator
companies.
Due to the market dominance of MNCs, Sharda Cropchem Ltd has to sell its
products at a discount to MNC products. The company does not have the power
to price its products higher or equal to the prices of MNC products because then
the customers would simply buy the products of MNCs.
Conference call, July 2018, page 6:
Ramprakash V. Bubna:…Sharda is a very small player in the entire

international market. So, we cannot determine the prices, we have to follow. In
most of the markets innovators are still having 70%-75%-80% of the market
share…and after we get the registrations we follow the multinational. We offer a
price of about 10% to 15% as a discount to the multinational
Conference call, May 2021, pages 4-5:
Ramprakash V. Bubna:…we do not decide our selling prices independently on
our own. We are only following the footsteps of multinationals…we cannot
increase the prices beyond certain limits because we cannot exceed the prices
of the multinational. The market always gives preference for the multinationals
Due to this lack of pricing power, Sharda Cropchem Ltd suffered significantly
during FY2018-FY2020. The cost of its raw material was increasing due to
supply chain disruptions in China; however, it was not able to increase prices to
its customers. This is because the MNCs did not want to lose market share and
refused to increase the prices of their products.
Rohan Gupta:…we have been able to pass on to the end customer or not?
Ramprakash V. Bubna: Not in all the cases…Because we are to follow the
footsteps of the multinationals and multinationals are also very conscious of not
losing their market share and they do not pass and they do not increase
During FY2018-FY2022, Sharda Cropchem Ltd suffered a lot of pressure on its
profit margins because despite increasing costs, the MNCs instead of increasing
their prices, decided to decrease them to maintain their market share.
Conference call, January 2021, page 11:
Ramprakash V. Bubna:…They are not increasing their prices…even at making

a loss or no profit situation, they continue to choose their prices downwards
rather than upwards. These are very strange situation, but it is a fact.
While listening to the management of Sharda Cropchem Ltd, the frustration of the
company clearly comes out due to its lack of pricing power and near-total
dependence on MNCs for its pricing.
Conference call, October 2018, page 6:
Ramprakash V. Bubna: Sir this is very unfortunate. Innovators are not

increasing. I was travelling to some country last week and I am told by my
customers that companies like Syngenta and BASF they are trying to reducing
the prices, which is very discouraging…I cannot understand why. I am sure they
are also taking a big hit, but then that is their strategy and our strategy is purely a
followup on their strategies.
Therefore, an investor is not surprised to see that the operating profit margins of
Sharda Cropchem Ltd declined significantly from 23% in FY2017 to 17% in
FY2020. The biggest role in this decline was of the European market where due
to the refusal of MNCs to increase prices, its profit margins declined from 45% to
30%.
Chetan Thakkar: Europe gross margins that you mentioned, earlier we used to

operate at 40% to 45% range, it has now shifted to 30%, so is it purely on
account of higher raw material cost or there is some pressure on pricing also?
R V. Bubna: Sir, it is both put together, the pricing is not increasing there,
unfortunately because of the approach of multinational companies and on the
other side the costs are going up, so that is impacting the gross margins.
As a result, an investor would appreciate that even though Sharda Cropchem Ltd
is among the few generic players holding registrations for any molecule in these
markets, still, the pricing power is in the hands of innovators/multinational
companies who continue to hold about 75% market share.
In fact, at times, the MNCs buy active ingredients (AI) for their final products from
the company at a cheaper price and then give Sharda Cropchem Ltd strong
competition in its target markets.
Ramprakash Bubna: The AIs have increased in the last year or before last year
mainly because of the demand from many multinational companies who were not
able to secure the AIs on their own and we were able to supply them at
competitive prices
Therefore, the pricing and business strategy of Sharda Cropchem Ltd is highly
dependent on the large MNC competitors.
Further advised reading: How to do Business Analysis of Agrochemical

2) Sharda Cropchem Ltd works mainly with smaller distributors:
The market situation faced by Sharda Cropchem Ltd is such that the large
distributors do not encourage generic players. This is because the MNCs provide
them with many financial incentives, which makes it difficult for smaller generic
players like Sharda Cropchem Ltd to convince them to stock their products.
In FY2018, Sharda Cropchem Ltd attempted to break into large distributors;

however, they asked for low prices, which hit the profit margins of the company.

Conrad Fernandes:…we have started being little more aggressive and
proactive. We were finding that the potential is very huge, only if we are able to
match up the price requirements to the distributors…So we have changed our
approach to this extent that we have become more aggressive at the cost of the
margins
Nevertheless, its attempts did not seem to succeed and it communicated the
challenging situation to its shareholders in June 2020. The company found that
large distributors are content with the business from MNCs and do not eagerly
await the business from smaller players.
Conference call, June 2020, page 14:
R.V. Bubna: Opening the door for the distributors it is not so easy Sir,

because most of the distributors are fairly well off, multinational companies
reward them …We have to push ourselves into their office, they do not come to
us and then they are not so much dependent upon small molecules or small
companies, multinationals take care of them.
Another challenge that Sharda Cropchem Ltd faced while dealing with
distributors was that the large MNCs were willing to give them extended credit
periods without pushing them to make payments, which small companies find
difficult to match.
Ramprakash V. Bubna: The MNCs are not very keen and they do not press the
customers for the payments and are very liberal, they give very liberal
extensions and on the contrary, smaller companies like us, we are having
pressure on cash flow so we put the pressure on them to make the payments
Moreover, Sharda Cropchem Ltd also realized that it could not match the MNCs
in terms of very long credit periods to distributors even if it wants to. This is
because Sharda Cropchem Ltd being an Indian company is not allowed to give
very long credit periods.
R.V. Bubna: No, we cannot match with them because they are in a different
atmosphere, we have lot of regulations and we have to comply with our
regulations in India. So we cannot give very long credit even if we feel that the
customer is safe.
Therefore, Sharda Cropchem Ltd is caught in a difficult situation where it is not
able to get a large opportunity with big distributors as the MNCs have created
strong barriers due to their existing relationships with them.
An investor may estimate the restrictions faced by Sharda Cropchem Ltd in the
business environment when she gets to know that in the USA, the big 4
distributors hold about 75% of the market share. The generics companies are
only fighting for the remaining 25% share.
R.V. Bubna: …somehow the market is very complicated. The big four

distributors control more than 75% market and the generics are fighting for the
balance 20%-25% market share.
Therefore, when any investor estimates the future growth of Sharda Cropchem
Ltd, then she should keep in her mind the difficult distribution situation present in
its key markets of Europe and North America.
3) Almost complete dependence on China for its business:
China is the world’s largest agrochemical producer and supplies about 75% of
the world’s demand for agrochemicals.
Ramprakash V. Bubna:…I think China is meeting the demands of more than

75% of the world agrochemical demands.
Sharda Cropchem Ltd sources more than 95% of its material from China and is
almost completely dependent on it. As per the company, there is no alternative to
sourcing from China. India does not produce even half of the chemicals required
by Sharda Cropchem Ltd. Moreover, the price of Indian producers is not as
competitive as the prices of Chinese producers. Therefore, it is either source
material from China or stop doing business altogether.
Ramprakash Bubna: At present, that alternative does not exist. The local

industries are not able to produce the quantities that are required for the
international market and also the product mix. Our portfolio is much bigger not
more than 45% of those are not manufactured in India, so we have to either not
supply or supply it from China.
R. V. Bubna: …the Indian prices are not as competitive as Chinese in terms of
dollars.
During one interaction, the company intimated to the shareholders that for a few
chemicals, China alone has a manufacturing capacity, which is much larger than
the entire world’s demand.
RHP, September 2014, page 115:
There is also an excess of capacity for agrochemicals in China. For example,

China now has 60 companies registered to manufacture imidacloprid with a total
capacity of 25,000 tons of AS, however actual output in 2009 in the region of
12,000 tons with 8,000 tons exported for a world market of 18,000 tons.
As a result, in the rest of the world, not many agrochemical-manufacturing
capacities have developed in the last few decades.
Ramprakash V. Bubna: See, those alternatives do not exist in our opinion as of

now. China is the factory to the world and everybody is sourcing from China.
There are no new capacities or new alternatives in terms of hardware that has
been added significantly in the last 10-15 or 20 years.
As there are no other alternatives for sourcing agrochemicals when the Chinese
govt. started its crackdown on the industry to control pollution, then there was a
shortage of agrochemical raw material and Sharda Cropchem Ltd faced
significant cost pressure as well as challenges in availability of material.
Ramprakash V. Bubna: See today it is a sellers’ market so increasing the

quantity does not excite the supplier because he is already stressed up with his
and he has more demands than what he can produce.
The situation was further complicated by the fact that Sharda Cropchem Ltd had
not entered into any long-term supply arrangement with its suppliers. It deals with
both its suppliers as well as customers on a transaction-to-transaction basis.
R.V. Bubna: No, we don’t enter into any supply agreement, we negotiate them
with them from order to order basis because this is to our advantage.
The company avoids long-term supply agreements with its suppliers because it
thinks that in a long-term agreement it would have to accept delivery of products
even if its customers’ demand declines due to poor weather etc. The company
fears that in such a situation, it would be stuck with unsold inventory.
Conference call, June 2015, pages 25-26:
Gautam Arora: Also I would be put at a disadvantage if I enter into long term
supply arrangements with supplier because the products that we deal in are very
sensitive to weather conditions across the globe so in case I have any kind of
a tie up for specific volumes to be picked up from my supplier and the weather
turns bad in a particular region then I will be tied down with this inventory and
with nowhere to go.
However, such a strategy relies on everything being normal in the entire supply
chain. During FY2018-FY2020, when the Chinese govt. came down heavily on
polluting industries, which disturbed entire Chinese production, then this strategy
of only doing spot buying hurt Sharda Cropchem Ltd. This was because it had to
accumulate excess inventory that too at higher prices and it had no other
alternative.
Moreover, once registration is granted, then it becomes difficult for Sharda

Cropchem Ltd to change the supplier country because it has already mentioned
China as the supplier country in the registration application form.
R V. Bubna: If Sharda wants to import the product from any other country, it is
being prohibited by the registration law. As per the registration rules, we have
to source the products only from the registered source, which is declared in our
registration application or registration document and this is applicable to every
supplier in USA.
In addition, once a source country is finalized in the registration, then it becomes
difficult to change it later on because, at times, it may involve repeating the entire
trial. Moreover, in almost all cases, changing/adding a new supplier is a time-
consuming process.
Conference call, October 2019, pages 10-11:
Vishnu Kumar:…how easy is it for you to add another supplier let us say

coming from India or some other countries
R V. Bubna:…in Europe, it is not so easy, it does take time, in USA, it is
possible to add that process is not so lengthy, but it takes time there also.
Vishnu Kumar: Is it costly or is it like just a procedural aspect we are going to
spend too much money.
R V. Bubna: In some countries we may have to repeat the trials then it becomes
costly, other countries if they accept the laboratory results then it is not so
costly…
Therefore, Sharda Cropchem Ltd is almost completely dependent on China
without any alternative.
R V. Bubna: We have to depend upon China, and it is very difficult to find an

alternative.
As a result, when the Chinese supply chain faced challenges, then the complete
dependence of Sharda Cropchem Ltd on China affected its costs, which coupled
with its inability to increase prices to its customers, hurt its profit margins during
FY2018-FY2020.
FY2018 annual report, page 36:

Gross margins and EBITDA margins (excluding foreign exchange impact) were
marginally lower at 33.2% and 20.2% respectively on account of higher
procurement cost and supply constraints in China due to the clamp on
manufacturers in view of environment issues.
Advised Reading: How to study the Annual Report of a Company
4) Vulnerability to foreign exchange fluctuations:
Sharda Cropchem Ltd does almost its entire business in overseas locations
where it sources most of its material from China and sells it primarily in Europe,
North and Latin America and a bit in the rest of the world.
Almost all of its purchases from China are in US Dollars (USD) whereas the
majority of its sales are from Europe, which is in Euro (EUR). Therefore, Sharda
Cropchem Ltd is highly vulnerable to the movement of the Euro and USD relative
to each other.
The dependence of Sharda Cropchem Ltd on the EUR/USD is such that during
FY2015 when the Eurozone was under crisis and the value of the Euro declined
significantly, then its profit margins were impacted significantly. The OPM of
Sharda Cropchem Ltd declined from 20% in FY2014 to 17% in FY2015.
Gautam Arora: Gross margins as a percentage of total income from operation

in the fourth quarter ended March 2015 was at 34.84% and the same was
lower as compared to 39.60% in the fourth quarter of the previous finical year,
decline of 476 basis points. Primarily due to depreciation of the Euro against the
dollar during this period.
The company is not able to escape this dependence on the volatility of EUR/USD
because the Chinese suppliers quote their prices in USD. When Sharda
Cropchem Ltd requested the Chinese suppliers to accept payments in Euro, then
they quoted an exchange rate, which was not good for the company.
Conference call, November 2015, page 12:
Gautam Arora: No normally the sourcing in China is in US dollars. Some

suppliers after lot of pursuance can accept sourcing currency to Euros but no
other currencies and even that they want to use a very favorable exchange rate
to their advantage.
Moreover, as the business of Sharda Cropchem Ltd is in foreign countries where
its customers also have to convert their local currencies into US Dollars (USD) to
make payments to the company; therefore, whenever, the local currencies of its
customers decline in value against USD, then the company faces trouble. This is
because with the devaluation of the local currency, the agrochemicals sold by
Sharda Cropchem Ltd become costly for the customers, as they had to pay more
local currency to buy the same number of USD. As a result, the purchasing ability
of the customers decrease and they start asking for discounts from Sharda
Cropchem Ltd, which hurts its business.
Conference call, February 2016, page 9:
Ramprakash V. Bubna: Sir not only LATAM, all the countries where the
currencies have devaluated even in say Canada, Mexico, South Africa we have
to take the price reduction.
As a result, the volatility of cross currency pairs is one of the key risks highlighted
by the company to its investors.
Ramprakash V. Bubna: One of the biggest risk factors for our business is

the cross currency foreign exchange rate, Euro versus US Dollars, Canadian
Dollar versus US Dollars and some of the European currencies and the Central
American currencies versus US Dollar
An investor should always keep this risk in her mind whenever she analyses
Sharda Cropchem Ltd.
5) The demand for agrochemicals is seasonal and cyclical:
The agrochemicals sold by Sharda Cropchem Ltd are relevant for specific
crops/pests etc.; therefore, their demand peaks up during the season when a
particular crop is grown. As a result, the business performance of Sharda
Cropchem Ltd is seasonal. The Jan-March (Q4) is usually the best quarter for the
company followed by April-June (Q1) and July-Sept (Q2). The Oct-Dec (Q3)
quarter is the weakest quarter in its business performance.
Conference call, May 2018, page 4:
R. V. Bubna: See our business is a seasonal business, and this has been the
practice for the last 8 to 10 years. But the Q4 is the best quarter for our
business, Q1 is the second best, Q2 is the third best and Q3 is the weakest
One problem in a highly seasonal business is that if the company is left with an
unsold inventory of any chemical, then it has to wait for almost 8-9 months for the
next season before it can sell it. Therefore, if there is any problem in inventory
sourcing/logistics and the products arrive late in the season, then the company is
stuck with inventory for a long time.
Ramprakash V. Bubna: …it does take time to get rid of the inventories in

agrochemical business these are seasonal businesses for some reason
because of the weather or any other impact there has been a less demand, the
companies are compelled to carry their inventory forward and then the next time
is possibly after six or eight months.
The company faced this issue in FY2019 when due to supply chain issues in
China, its suppliers delayed sending the products and it was saddled with unsold
inventory.
Ramprakash V. Bubna: Mr. Resham, last year has been a little bit of an
aberration because of very difficult situation in China and late deliveries by the
suppliers. So by the time we shift the goods and landed in the various regions, it
was bit late for that season. So we are left with the lot of unsold inventories.
When a company has unsold inventories from the previous season, then it
carries the risk of inventory losses because of the volatility in the product prices.
Apart from regular seasonality, the sale of agrochemicals is also cyclical in

nature due to its high dependence on weather, monsoon, soil conditions, drought
etc., which lead to periods of good harvest followed by poor harvests and vice
versa. These factors make the demand for agrochemicals unpredictable.
agrochemical business is primarily dependent on

appropriate weather conditions. Weather conditions are cyclical in nature and
dependent on factors such as amount of rainfall, varying soil conditions, climatic
conditions, varying seasons and temperature changes. These factors make the
overall performance of the agricultural sector unpredictable.
The unpredictability of demand affected Sharda Cropchem Ltd multiple times;
however, the most severe was in Q2-FY2019 when the company reported a loss.
As per the company, reduced demand due to adverse weather was the key
reason for losses.
R V. Bubna: The main reason has been adverse weather factor. In NAFTA

region, the winter was very much extended which has resulted into contraction
of the spring season and application of agrochemicals. Similarly, in Europe
region also there was some adverse weather
In FY2016, the entire global agrochemical industry witnessed a decline
contributed by adverse weather conditions including a weaker monsoon due to El
Nino.
The global agrochemicals market declined by 8.6% YoY to US$51.8 billion at the

distributor level in 2015 driven by…variable weather patterns including a weak
monsoon as a result of the El Nino phenomenon. Crop protection sales in
almost all regions declined, with the deepest falls occurring in Europe and Latin
America.
Once again, in 2019, the global agrochemical industry declined due to adverse
weather conditions.
global market for crop protection products contracted by 0.8% to US$59.8 billion

in 2019 owing to extreme global weather conditions from severe flooding in
North America to dry conditions and drought across major areas of Europe and
the Asia Pacific.
Therefore, an investor should always remember that the business of Sharda
Cropchem Ltd is dependent on weather conditions and would contain an element
of unpredictability. She should keep it in her mind before assigning any certainty
to her projections about its future performance.
Advised reading: How to analyse New Companies in Unknown Industries?
6) Agrochemicals industry shows the potential of only moderate growth:
Agrochemicals are known to enter the food chain and affect all consumers.
Therefore, there are continuous studies to assess the harmful impacts of
agrochemicals on humans, other animals and the environment. This leads to a
frequent ban on various agrochemicals, which has become a routine practice in
the industry.
In May 2022, Sharda Cropchem Ltd also intimated to its shareholders that a ban
on the products is a very normal occurrence in the agrochemicals industry and
investors should not be surprised by it.
Ramprakash V. Bubna: it is a normal process, the process of banning will

continue because as and when the product becomes older the technical experts
find some weaknesses in those products which affect the quality of the
application on the agri products and they are slowly getting banned
To reduce the harmful impacts due to the use of agrochemicals, nowadays,
research is driven towards genetically modifying seeds/crops in such a way that
they do not need agrochemicals for a good harvest. As a result, after the
introduction of GM crops, the agrochemicals industry witnessed a long-term
decline, which was evident from 1998 to 2006.

Following the initial introduction of GM crops in 1996, the market experienced
a period of decline in real terms between 1998 and 2006. This reflected the
increase in uptake of GM technology, particularly in North America and Latin
America where a rapid switch to crop varieties containing traits conferring
glyphosate tolerance and insect resistance led to declines in selective herbicide
and insecticide applications
Genetically modified (GM) seeds have achieved a significant share in some key
crops like cotton, corn and soybeans.
As of 2013, GM seed weightings in the US have reached 90% for corn, 90% for

cotton, and 93% for soybeans.
Therefore, an investor should note that due to the harmful effects of the use of
agrochemicals on the food chain and environment, there would be frequent bans
on products and in general a trend to reduce their use in the crops. She should
have an open mind while projecting the demand for agrochemicals in the future.
Overall, Sharda Cropchem Ltd seems to be highly dependent on MNCs for its
pricing and China for its sourcing. It does not seem to have any pricing power
over its counterparties. The business is exposed to seasonality, cyclicity,
vagaries of nature/weather as well as the movement of foreign exchange. An
investor must assess all these aspects in her analysis of Sharda Cropchem Ltd.
Over the years, the tax payout ratio of Sharda Cropchem Ltd has been in the
range of standard corporate tax rate except in a few instances where the payout
ratio was low because of the business conducted by the Dubai subsidiary, which
is in a tax-free zone.
Conference call, November 2015, page 7:
Ramprakash V Bubna: The effective tax rate, the only thing that we can off
hand guess is that may be last year the volume on our subsidiary in Dubai that
have been higher where there is no tax liability
Sharda Cropchem Ltd reported a low tax payout ratio of 11% in FY2020, which
was primarily due to choosing the new corporate tax rate for its deferred
tax liabilities.
Company has applied the lower income tax rates on the deferred tax assets /
liabilities to the extent these are expected to be realised or settled in the future
period when the Company may be subjected to lower tax rate and accordingly
reversed net deferred tax liability of INR 3,522.84 lakhs.
As per the company, it may continue with the old tax rate regime for a few more
years until it exhausts its minimum alternate tax (MAT) credit entitlements.
R.V. Bubna: Not for the next two years because we have a lot of minimum
alternative tax (MAT)to be recovered for which we have credit entitlement. So,
we will not adopt the new tax regime atleast for the next one or two years.
Operating Efficiency Analysis of Sharda Cropchem Ltd:
a) Net fixed asset turnover (NFAT) of Sharda Cropchem Ltd:
Sharda Cropchem Ltd follows a very asset-light business model where it focuses
only on getting the registrations/approvals to sell agrochemicals in different
countries. The company has completely avoided investing in any manufacturing
or R&D facility. Its business model involves taking registrations for off-patent
agrochemicals and then sourcing them from outside third parties in countries like
China and then selling them into its target markets.
Therefore, it is primarily a trading company with the rights to sell agrochemicals

in different countries.
The Company does not conduct any manufacturing activity and is a trading

company
Net fixed asset turnover (NFAT) does not provide any significant insights for such
a trading business, which does not depend on fixed assets for its sales.
Further advised reading: Asset Turnover Ratio: A Complete Guide for
Investors
b) Inventory turnover ratio of Sharda Cropchem Ltd:
The inventory turnover ratio (ITR) of Sharda Cropchem Ltd has declined from 9.1
in FY2013 to 5.0 in FY2022. A declining ITR indicates that the inventory
utilization efficiency of the company is declining over the years.
The ITR witnessed a sharp decline over FY2017-FY2018 when it reduced to 4.2
in FY2018 from 8.2 in FY2016. The company increased its inventory in FY2017
in anticipation of high sales as it had received new registrations in the USA.
Ramprakash V. Bubna: We have received number of new registrations in

United States of America and we wanted to prepare ourselves with sufficient
inventories because in many of these countries when they give the order they
want the product yesterday. This has built up the inventories and we are very
happy
However, the inventory levels continued to stay high and did not come down
even in the next 6-months. The company stated that it is now accumulating
inventory as there are supply disruptions in China and the prices are increasing
every week. It said that in the previous 3-months, the prices of its raw material
had risen by 50%.
Conference call, October 2017, pages 7-8:
Ramprakash V. Bubna: The uncertain situation in China, we have been

predicting that Chinese prices will go up and the Chinese prices are going up
every week. We are trying to cover and there is no availability of the product. So
we are very happy with the strategy.
Ramprakash V. Bubna: We will be in a better position compared to competition,
who would be buying in the normal course only. The prices have gone up by
50% in the last three months.
Moreover, the company was also forced to buy excess inventory at a high price
because due to its strategy of remaining a completely trading company, it had
lost control of its supply chain. The crackdown of the Chinese govt. on polluting
industries had disrupted the supplies of agrochemical. Chinese suppliers were
taking 3-4 times more to ship the goods. If Sharda Cropchem Ltd had to meet its
customers’ expectations, then it did not have any other option but to buy goods at
a high price.

Ramprakash V. Bubna: we are increasing the level of inventories keeping in
mind the time lag or delay in the supplies from China. Earlier we used to get the
products shipped within two to three weeks of our order. Today it takes about
one and half to two months.
The company seemed very happy with its strategy of accumulating excess
inventory. However, carrying excess inventory exposes companies to write-
downs when prices fall. This risk is increased in the case of agrochemicals,
whose sales are seasonal in nature and a company is stuck with unsold
inventory for 6-8 months during which time, the prices can be very volatile.
Within a year, Sharda Cropchem Ltd faced the risks of excess inventory and
suffered a drop in its profit margins as it had accumulated inventory at high prices
whereas now the prices had come down.
Rohan Gupta: Actually, rather than we benefiting from the inventory gain, we

actually have lost
Ramprakash V. Bubna: I will not say we have had a loss. We had lesser
margins.
Advised reading: Why We cannot always Trust What Management Claims
In FY2019, the company had to write off about ₹4.28 cr of inventory (FY2019
annual report, page 177).
The effect of inventory buildup was also seen in FY2020 when players were
trying to get rid of the inventory even at lower prices.
R.V. Bubna: I would say an element of frustration on the part of many players
who want just to get rid of their stocks at beaten down the prices.
In FY2020 as well, the company had to write down some of its inventory.
Nevertheless, the business model of Sharda Cropchem Ltd is such that it has to
keep a lot of inventory as it has obtained many registrations, which it claims to
supply. As a result, to meet customers’ expectations of immediate delivery, the
company ends up maintaining an inventory of a large number of products.
Otherwise, it would lose its customers.
Conference call, August 2020, page 13:

R.V. Bubna: Most of our customers in North America, if they want a product they
want it immediately and if you tell them that the goods are in transit and it will be
coming after a week then they do not call up next time and they get it from
somebody else.
As a result, to keep an inventory of numerous agrochemicals, the company ends
up having a large inventory with itself, which makes its business working capital
intensive.
Credit rating report by CRISIL, July 2021:
Working capital-intensive operations: Sharda group’s working capital

requirement is typically higher than that of its peers because of wide product
portfolio and geographic reach. Inventory is large due to numerous stock-
keeping units and seasonality in the geographies that the group operates in.
Going ahead, an investor should keep a close watch on the inventory utilization
efficiency of Sharda Cropchem Ltd to understand if it is able to bring any
improvement in the same.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
c) Analysis of receivables days of Sharda Cropchem Ltd:
Receivables days of Sharda Cropchem Ltd have improved from 180 days in

FY2013 to 138 days in FY2022. Even though in FY2022, receivables days have
declined to 138 days; however, over most of the last 10-years, the receivables
days have been in the range of 155 to 170 days, which is high.
From the above discussion on the business analysis of Sharda Cropchem Ltd, an
investor would remember that the key competitors of the company, which are
MNCs, give very liberal credit periods to the distributors. As a result, generic
companies like Sharda Cropchem Ltd also need to provide the longest possible
credit period to their distributors; otherwise, the distributors would source all of
their requirements from MNCs.
In addition, especially the business done by Sharda Cropchem Ltd in Latin
American (LATAM) countries exposes it to significant delays in receivables
collection. This is because the economies of most of the Latin American
countries are stressed by high inflation and declining currencies. As a result, the
customers in LATAM countries ask for a long credit period and then delay
payments further.
The company intimated to its shareholders that in LATAM and Mexico, the credit
period for collection is about 240 days.
Gautam Arora: So Europe is roughly about 135 days, US is close to about 90-
100 days, NAFTA and LATAM is close to about 240-odd days
As per the credit rating agency, CRISIL, outstanding receivables in LATAM
countries make its business model working capital intensive.
Credit rating report by CRISIL, July 2021:
Working capital-intensive operations:…Additionally, there are substantial

receivables from certain overseas markets, especially Latin America.
In fact, during FY2018, the working capital requirements of Sharda Cropchem Ltd
increased so much that it had to urgently take unsecured loans from its
promoters.
R. V. Bubna: See this is only because we don’t have any borrowings in the
company. So, this is only to meet the temporary requirement of working
capital which has been inflated due to inventories and receivables…the funds
have come from the promoters, which came in at a notice of one or two days.
The working capital requirements of the company increased so much that in
FY2019, the company reduced its investments in filing registrations so that it
could spare money to fund its working capital.
Resham Jain: Is there any flexibility for us to reduce some of the

CAPEXs to ease out the working capital requirement that is what I wanted to
understand?
Ramprakash V. Bubna: That is the strategy exactly which we have been
working on.
In FY2019, Sharda Cropchem Ltd reduced its expenditure on registrations to
about ₹105 cr from ₹214 cr in FY2018.
The situation of a long credit period to customers by Sharda Cropchem Ltd

becomes risky because most of its receivables are not backed by sureties like a
letter of credit or bank guarantees.

majority of our agrochemical and non-agrochemical sales are not supported by
letters of credit or bank guarantee.
In the past, after facing challenges in the collection of receivables from LATAM
countries, the company had done a course correction and reduced its business
there.
Ramprakash Bubna: We will be mainly focusing on US and Europe. LATAM

countries are not very comfortable in terms of their economies and
the receivables are also under pressure.
However, as per the recent disclosures, Sharda Cropchem Ltd again intends to
increase its exposure to LATAM countries.
Ashok Vashisht: The major focus earlier was on Europe. Now we have been
putting equal focus on NAFTA and Latin America regions as well.
Going ahead, an investor should keep a close watch on delays in receivables
beyond 6-months and the write-off of bad debt to assess whether Sharda
Cropchem Ltd is able to collect its money on time.
Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and
cumulative cash flow from operations (cCFO) of Sharda Cropchem Ltd for
FY2013-2022, then she notices that over the years (FY2013-FY2022), the
company has converted its profit into cash flow from operations.
Over FY2013-22, Sharda Cropchem Ltd reported a total net profit after tax
(cPAT) of ₹1,794 cr. During the same period, it reported cumulative cash flow
from operations (cCFO) of ₹1,813 cr.
It is advised that investors should read the article on CFO calculation, which
would help them understand the situations in which companies tend to have the
CFO lower than their PAT. In addition, the investors would also understand the
situations when the companies would have their CFO higher than the PAT.
Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of
Sharda Cropchem Ltd is higher than the cPAT due to the following factors:
 Depreciation expense of ₹903 cr (a non-cash expense) over
FY2013-FY2022, which is deducted while calculating PAT but is
added back while calculating CFO.
The Margin of Safety in the Business of Sharda Cropchem Ltd:
a) Self-Sustainable Growth Rate (SSGR):
Read: Self Sustainable Growth Rate: a measure of Inherent Growth

Potential of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is
growing at a rate equal to or less than the SSGR and it can convert its profits into
cash flow from operations, then it would be able to fund its growth from its
internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its
SSGR, then its internal resources would not be sufficient to fund its growth
aspirations. As a result, the company would have to rely on additional sources of
funds like debt or equity dilution to meet the cash requirements to generate its
target growth.
An investor may calculate the SSGR using the following formula:
SSGR = NFAT * NPM * (1-DPR) – Dep

Where,
 SSGR = Self Sustainable Growth Rate in %

 Dep = Depreciation rate as a % of net fixed assets
 NFAT = Net fixed asset turnover (Sales/average net fixed assets
over the year)
 NPM = Net profit margin as % of sales
 DPR = Dividend paid as % of net profit after tax
(For systematic algebraic calculation of SSGR formula: Click Here)
SSGR estimation depends significantly on net fixed asset turnover (NFAT).
However, in the case of Sharda Cropchem Ltd, which is a pure trading company
without any manufacturing facility, NFAT is not a very significant parameter.
Therefore, while analysing the business of Sharda Cropchem Ltd, SSGR does
not provide best of the results.
Therefore, an investor should focus on the free cash flow (FCF) analysis of
Sharda Cropchem Ltd.
b) Free Cash Flow (FCF) Analysis of Sharda Cropchem Ltd:
While looking at the cash flow performance of Sharda Cropchem Ltd, an investor
notices that during FY2013-FY2022, it generated cash flow from operations of
₹1,813 cr. During the same period, it did a capital expenditure of about ₹1,517
cr.
Therefore, during this period (FY2013-FY2022), Sharda Cropchem Ltd had a free
cash flow (FCF) of ₹296 cr (=1,813 – 1,517).
In addition, during this period, the company had a non-operating income of ₹122
cr and an interest expense of ₹105 cr. As a result, the company had a total free
cash flow of ₹313 cr (= 296 + 122 – 105). Please note that any capitalized
interest is already factored in as a part of the capex deducted earlier.
Sharda Cropchem Ltd has used this money primarily to pay dividends to its
shareholders.
Going ahead, an investor should keep a close watch on the free cash flow
generation by Sharda Cropchem Ltd to understand whether the company
continues to generate surplus cash from its operations.
Further advised reading: Free Cash Flow: A Complete Guide to

Understanding FCF
Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main
pillars of assessing the margin of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The
Cornerstone of Stock Investing
Additional aspects of Sharda Cropchem Ltd:
On analysing Sharda Cropchem Ltd and after reading annual reports, RHP, its
credit rating reports and other public documents, an investor comes across
certain other aspects of the company, which are important for any investor to
know while making an investment decision.
1) Registration requirements prove to be a strong entry barrier for companies:
Sharda Cropchem Ltd has stated in multiple disclosures that its key business
strength is its registrations/approvals in different countries. As per the company,
getting registration is a costly and time-consuming process where the outcome is
very uncertain.
Even if a company invests a lot of money to gain registrations, then it may not get
an appropriate value if it decides to exit the business by selling the registrations.
Ramprakash V. Bubna: Mr. Sonal please understand that the process

of registrations requires a lot of patience and a heavy amount of capital and a lot
of time. These three factors reduce the competition very considerably…The risk
involved in the intangible asset registrations is very high and uncertainty of
getting any value if they want to get out
Another factor related to the registration process, which is very time consuming is
getting access to the laboratory & field studies’ data related to the product that a
generics company wants to register. Either the company can conduct fresh
laboratory tests and field trials, which would be very expensive and time-
consuming or it can purchase data from someone else who already owns it. Most
of the time, these data owners are the innovators, the large MNCs.
Therefore, to save on time, the generics companies purchase the data from the
data-owners and use it in their registration application. In return, the generics
companies pay data compensation charges to the data owners. However,
gaining access to the data is not a simple and quick negotiation. At times, these
negotiations with the data owners can take even up to 12 years.
Ramprakash V. Bubna: As I told you for some molecules it took us about 11 to

12 years to complete the negotiation. In some of the cases we did in a matter
of 1, 2 to 3 years. It all depends how fast the data owner responds to our reply
and how our experts and data owner experts have time to meet and progress the
negotiation.
Therefore, an investor may appreciate how uncertain and prolonged a
registration process can be.
Moreover, in key European markets like Germany, the success rate of getting a
registration even for a seasoned player like Sharda Cropchem Ltd is very low.
Ramprakash Bubna: in Germany the things are very difficult. Our rate

of success of registrations in Germany is very, very low.
Moreover, nowadays, the cost of registrations is going up because the
governments have started looking at them as a revenue-generating activity.
Ramprakash Bubna: The cost of registrations is exponentially high. The

government authorities, the sourcing authorities, who used to charge nominal
fees, they now started at looking some more kind of profits in these regions
because they feel the operators and players in the market are getting profits then
why not the government
In fact, Sharda Cropchem Ltd has mentioned the increasing cost of registrations
as one of the key reasons for a decline in ratios like return on equity.
Tushar Sarda: What steps are we taking to address the reason for decline in the
ROCE and ROE?
Ramprakash Bubna: The reasons are increase in the capex and surge in the
cost of registrations.
As a result, registrations become a critical entry barrier for new companies.
the process of preparing dossiers and seeking registrations is fairly time

consuming. In addition, capital investment required for preparing dossiers and
seeking registrations is also a critical entry barrier for a generic agrochemical
company.
An investor learns about the difficulties in obtaining registrations when Sharda
Cropchem Ltd intimated to its shareholders that it has decided not to renew the
registration of Quizalofop-Ethyl in Europe. This agrochemical was a very
profitable product for the company bringing in revenues of about EUR 1.5 million
per year. However, looking at the challenges in obtaining the registration, Sharda
Cropchem Ltd decided that it would be too much of an effort and the company
would be better off pursuing other opportunities.
Conference call, July 2017, pages 8, 9:

Ramprakash Bubna: We lost one registration of Quizalofop-Ethyl, which
was selling very well with good margins. This registration was open through
some me-too registration based on some registration in other country. The
original registration was expired and we also lost that registration…The cost
of investment on this molecule would have been very high and it is not just a
question of spending, it also is a factor of time. If we renew it, it will take us at
least three, four years to generate all the data
Ramprakash Bubna: Well it must have generated about 1.5 million
Euros approximately
The instance of Sharda Cropchem Ltd giving up on a significantly profitable
product because the renewal of its registration would be a highly cumbersome &
time-consuming process tells an investor that the process of registration is a real
entry barrier for generic agrochemical companies.
In fact, the difficulty in obtaining registrations becomes a benchmark for the profit
margins earned by the agrochemical companies in different geographies.
The registration process is the most difficult in Europe; therefore, companies

earn maximum profit margins in Europe. This is followed by North America and
then Latin America and the rest of the world.
Ramprakash V. Bubna: See in the financial year 2022 the gross margins
in Europe is 35.7%, NAFTA 29%, LATAM 15.4% and rest of the world 22.6%.
In fact, when different countries in Latin America and the Rest of the world
relaxed their registration requirements, then the increased competition made
these markets non-attractive for Sharda Cropchem Ltd. As a result, the company
reduced its focus on these markets.
Ramprakash V. Bubna: You see the rest of the world is getting slowly and
slowly less important for us because the registrations barriers are not so
strong and the margins are less and it requires an equal amount of efforts so it
is receiving lesser attention from us.
Sumant Kumar: The third question is the revenue declined by 16.8% in

LATAM region
Ramprakash Bubna: There the registration process is getting little
simpler and more competition is entering the field
Therefore, the tough process of obtaining registrations for agrochemicals is
acting as a good entry barrier and a source of decent profit margins for the
industry in key geographies.
In fact, the tough process of obtaining the registration motivated Sharda

Cropchem Ltd to focus solely on registrations and getting other approvals and
remove its entire focus from manufacturing. The company now operates as a
completely trading company that has approvals for selling multiple products in
different countries.
As per the company, outsourcing entire manufacturing saves it from being tied to
any particular product. The company wants to keep its business highly flexible
and does not want to be in a situation where it has to manufacture a product
even if there is no demand for the same. In case, the demand for any one
product declines or is banned altogether, then Sharda Cropchem Ltd wants to
quickly move over to other products, which have a strong demand instead of
being stuck with a plant manufacturing a product that no one wants to buy.
Gautam Arora:…most of the other serious player in the market are also

manufacturers of these products so they would largely want to focus on those
products which they have a manufacturing capability for because they would like
to recover the plant overheads by way of getting registrations for these products.
Now, players like us who don’t have any manufacturing capabilities of our own
have a strong operating leverage here because we are not tied down to any one
particular product nor are we under any kind of a compulsion to sell any kind of a
product if its’ a loss making product we can always pick and choose those
products which we want to deal in.
Sharda Cropchem Ltd could take such a strategy of outsourcing entire
manufacturing and instead specialize in getting registrations only because the
registration process is very cumbersome and acts as an entry barrier.
As per the company, the manufacturing process is the least value-adding step in
the entire agrochemical value chain. Most of the value in the entire supply chain
is enjoyed by the marketing entities.

Ramprakash V. Bubna: Mr. Gandhi if you take the total margin from the stage of
manufacture in the factory or from the raw materials to the consumer
the manufacturing stage contributes very small part from the total margin. Most
of the margins come from marketing and from sales so there could be some
saving in the cost for the manufacturing but the manufacturing has also lot
of disadvantages mainly to continue their factory running during off season.
However, Sharda Cropchem Ltd faced the downside of the strategy of total
outsourcing of manufacturing during FY2018-FY2020 during the Chinese
crackdown on polluting units. The company could not be certain of getting its
products ready for shipment to customers. As a result, it had to store an excess
inventory that too at high prices and the promoters had to infuse loans in the
company because no bank would be willing to give money to a company, which
does not have any physical assets.
Ramprakash V. Bubna: Yes, for fund-based limits the company should have

some tangible assets to give us a collateral, which our company does not have.
Nevertheless, Sharda Cropchem Ltd is relying on its extremely asset-light
strategy of outsourcing all manufacturing due to the strong entry barriers
provided by the capital-intensive, time-consuming and cumbersome registration
process.
Further advised reading: How to do Business Analysis of a Company
2) Not all registrations are profitable investments for Sharda Cropchem Ltd:
From the above discussion, an investor would feel that getting registrations is
difficult; therefore, getting as many of them as possible should be a great
strategy. However, the case of Sharda Cropchem Ltd indicates that a lot of its
investment in the registrations did not bear fruit. Instead, a significant amount of
money spent by it on registrations was written off when it did not provide requisite
returns. In fact, many of the registrations were written off even during the process
of pendency of a grant of the registration i.e. in the capital work in progress
(CWIP) stage.
Conference call, January 2019, pages 3-4:
Ramprakash V. Bubna:…there have been a lot of changes in the agrochemical

environment in the world, many products, which were considered good are
getting banned or they are getting faced out and the ministries have also
stopped registering many of these products. Some of the products, which when
picked up for registration were appearing to be very attractive and then slowly
down the line, we found that the margins are getting depleted and there is a lot
of crowding and the products were becoming commodities. Considering these
factors, we have a written off that CWIP of those products and we do not want to
spend more money on this.
In fact, during FY2019-2022, the company wrote off almost ₹135 cr of investment
done on registrations.
 In FY2020, it wrote off about ₹55 cr of intangible assets (FY2020

annual report, page 194)
The write-off of the investments done for the registration process was one of the
key reasons for the decline in the profit margins of the company during FY2019
and FY2020.
Ashish Lodha: Profit after tax declined by 7.6% from Rs.191 Crores to Rs.176
Crores in FY2019. This was mainly on account of CWIP write off of Rs.42.2
Crores in FY2019.
PAT declined by 6.61% from last year due to Intangible Assets & Intangible
Assets under Development write off & higher depreciation
Sharda Cropchem Ltd has mentioned that going ahead; every year, it may have
to keep writing off about ₹30-50 cr of its investments in registrations.
Himanshu Binani: …intangible write offs which has been now a constant
feature…So, going forward how one may look at this number?
Ramprakash V. Bubna:…it will be in the same range of Rs. 30 to 50 Crores.
Sometimes, the government authorities ban some registrations while we have
already made the investments.
Such a substantial write-off of the investment done in registration indicates that
the due diligence done by Sharda Cropchem Ltd for its product selection leaves
scope for improvement. The company highlighted that while selecting products
for registration, it primarily relies on the feedback of the market participants.
Sonal Minhas: Just want to understand how do you qualify filing in some

molecule or let us say a product success and what gets defined basically so is
there like internal metrics of return on capital…
Ramprakash V. Bubna: Mr. Sonal we do not do so much of analysis from the
feasibility front or return on capital because the final prices that we will get from
the market or we will sell at are never defined that whenever fixed…All we go
and select the product after getting a feedback from our customers or distributors
and the market…
Going ahead, an investor should keep a close watch on the write-offs done by
the company from its intangible assets. It is necessary to track whether the
company is allocating its capital efficiently or not.
Advised reading: How to Identify if Management is Misallocating Capital
3) Regulatory risk is the biggest risk faced by Sharda Cropchem Ltd:
Regulators play a very important role in the business of agrochemical

companies. Their decisions play a very important role in the fate of companies’
businesses. Regulators’ decisions related to grant of registration, the process of
registration, approving or banning products as well as their thought process
about the priority of statutory protection to companies seen in the light of greater
public good significantly influence the companies.
In the earlier discussion, we noted instances like the relaxation of registration

requirements in Latin American countries that led to increased competition in
those markets and a decline in the profit margin for existing agrochemical
companies.
We also noted that when regulators increased the registration fees to generate
profits from the registration process, then the return on equity of Sharda
Cropchem Ltd declined.
We would also want to highlight another incidence in the case of Sharda

Cropchem Ltd when the change in the approach of the regulators affected two
different companies. In the case of Quizalofop-Ethyl, despite it being a good
profitable product, Sharda Cropchem Ltd had decided to let go of its registration
because the process of renewal would prove to be too cumbersome and time-
consuming.
Sharda Cropchem Ltd mentioned that it did not own the original registration for
Quizalofop-Ethyl. Instead, one of its competitors owned a registration for it.
Luckily, for a brief period, to ensure easy availability of Quizalofop-Ethyl, the
regulators allowed other companies to get registrations for Quizalofop-Ethyl at a
very low cost even if they do not own the original registration.
As a result, Sharda Cropchem Ltd got the approval to sell Quizalofop-Ethyl in

Germany and earn good profits for almost 6 years before the registration came
for renewal and the company realized that it could not renew it without the
special concessional window by the regulator.
Conference call, July 2017, pages 8, 10:
Ramprakash Bubna: Quizalofop, which I mentioned this was based on

somebody else’s registration where some window was open and we were able
to make an entry… so we got this registration about six years back at a very low
cost and it was a very good opportunity that we were enjoying.
The above incidence shows the regulatory risk, which worked out negatively for
the original registered owner of Quizalofop-Ethyl, who had to lose a lot of sales
and market share to generic players like Sharda Cropchem Ltd who got easy
registration due to a temporary change in regulations. Similarly, when the
regulatory window expired and regulators did not allow the concessional
registration, then Sharda Cropchem Ltd had to let go of its registration.
Therefore, any investor should always be aware of the significant impact that
regulators can have on the business of any agrochemical company like Sharda
Cropchem Ltd (“stroke of a pen” risk).
For example, in FY2017, the European regulators decided to go slow on

registrations of agrochemicals. It led to a significant impact on the growth plans
of Sharda Cropchem Ltd in Europe and its growth rate in the region declined
significantly.
Europe…we faced certain challenges unique to this region. Generally, we

faced more than normal delays in getting registrations approved through
respective regulators and agencies. This decelerated our growth rate for this
region during the year.
Regulatory risks for agrochemical companies also arise in the form of liabilities
for damage to the environment.
Sharda Cropchem Ltd faced two different instances where it faced litigations
when it was alleged that its products damaged crops and trees. In July 2013, it
settled a case in South Africa where it was claimed that its product damaged
trees and crops.
RHP, September 2014, pages 330-331:
a claim filed by Plaaskem Pty Limited, South Africa…in respect of the generic
active ingredients supplied by Hockley International Ltd. (“Hockley”) alleging that
the said formulation caused damage to the trees and crops of its end users. The
generic active ingredients used by Plaaskem to formulate the formulations
were supplied to Hockley by the Company….this matter was settled in July 2013
Another case against the company’s subsidiary in Europe claiming damage to
plants from its products was pending at the time of IPO.
Societa Agricola Allasia Plant s.s. (“SAAP”) has filed a case…in relation
to damage caused to its plants cultivated, by the use of Dessicash 200 SL (the
“Product”) provided by Sharda Europe…This matter is pending.
An investor may contact the company directly to know the status of this case.
Going ahead, an investor should keep in mind the risk of failing to meet
regulations as well as changing regulations while she assesses Sharda
Cropchem Ltd. This is because even if the company is able to successfully
defend a case against it, it still consumes a lot of resources of the company in
terms of money, management’s time and brand value.
Even unsuccessful product liability claims would likely require us to incur

substantial expenses on litigation, divert management’s time, adversely affect
our goodwill and impair the marketability of formulations.
To make the matters worse, agrochemical companies are not able to get proper
product liability insurance. So the risk of loss of resources due to litigations
whether successful or unsuccessful remains high.
From time to time, the agrochemical industry has experienced difficulty in

obtaining desired product liability insurance coverage.
Another way in which the regulatory risk expresses itself is through trade
barriers. At times, the governments in the target markets of Sharda Cropchem
Ltd may decide to reduce imports from specific countries by imposing various
duties or increasing import tariffs. In such instances, Sharda Cropchem Ltd may
have to bear the cost of such high import duties, if its customer is not willing to
pay them.
Sharda Cropchem Ltd was affected by high import duties in FY2020 during the
US-China trade war when under the leadership of President Donald Trump; the
USA imposed high duties on imports from China including agrochemicals. At that
time, the customers of Sharda Cropchem Ltd refused to absorb the impact of
these high duties and as a result, the company had to take a hit on its margins.
Credit rating report by CRISIL, April 2020:
Recently in USA, higher import duties were imposed on goods originated from
China. Since SCL imports about 97% of the goods from China, the gross
margins were impacted by 200 basis points
Advised Reading: Credit Rating Reports: A Complete Guide for Stock
Investors
Therefore, the entire strength of the business model of Sharda Cropchem Ltd
comes from the cumbersome and time-consuming registration process, which
dissuades many competitors from entering this field. The business strength is not
due to any proprietary technology or any difficult-to-manufacture product, which
no one else can produce.
This business strength is effectively granted to Sharda Cropchem Ltd by

regulators due to their difficult approval process. Therefore, the regulators can
take away this business strength overnight, by making the registration process
easy and simple (“stroke of a pen” risk).
An investor should always remember this fragility in the business model of

Sharda Cropchem Ltd while projecting its financial performance.
4) Management Succession of Sharda Cropchem Ltd:
Sharda Cropchem Ltd is a part of the Bubna family and currently, the founder-
promoter couple, Mr Ramprakash V. Bubna, CMD. (aged 75 years) and Mrs
Sharda R. Bubna, WTD, (aged 69 years) along with their sons, Mr Ashish R.
Bubna, WTD, (aged 49 years) and Mr Manish R. Bubna, WTD, (aged 47 years)
are present on the board of directors.
Mr. Ramprakash V. Bubna: Husband of Mrs. Sharda Bubna, Father of Mr.

Ashish Bubna and Mr. Manish Bubna
Therefore, an investor would note that currently, the next generation of promoter-
brothers has also joined the company and been working for Sharda Cropchem
Ltd for a significant amount of time.
The presence of younger family members at executive positions within the group,
while the senior members are still handling responsibilities, looks like a good
succession plan. This is because the young members can learn about the fine
nuances of the business under the guidance of senior members until the seniors
decide to take retirement.
Going ahead, an investor may keep a close watch on the relationships among
the sons of the founder-promoters to understand whether any ownership issues
arise between them.
Until now, the promoters have managed the equations between the two brothers;
Mr Ashish R. Bubna and Mr Manish R. Bubna, by making them draw an exactly
equal salary from the company every year.
 In FY2016, both the brothers took home a salary of ₹22,995,405
each (FY2016 annual report, page 60)
An investor may contact the company directly for any clarifications about any
ownership issues between the promoter-family members.
Further advised reading: How to identify Promoters extracting Money via

High Salaries
5) Risks/Scope for improvement in relation to brands, trademarks and

registrations:
Sharda Cropchem Ltd disclosed in the RHP in September 2014 that it has not
registered its brands in the foreign countries and as a result, there is a risk that
some competitors may launch products under the same brand name. The
company only believed that the regulators would not grand registration to any
competitor under the same brand name.
While we believe that the authority granting us registration for a particular

formulation or generic active ingredient would not grant a registration for such
formulation or generic active ingredient under the same label and name to
another applicant, the said label or name is not registered under any specific
intellectual property rights.
It seems that by not registering the brand names, Sharda Cropchem Ltd is
exposing itself to avoidable litigations.
In the RHP, Sharda Cropchem Ltd also intimated that it has taken registrations in
the names of its distributors, consultants and other third parties. The company
has done all the spending for these registrations and it derives economic benefits
from them; therefore, it sells its products under the licenses received in the
names of consultants and distributors. However, the company does not have any
binding agreement with such third parties.
we also undertake sale of formulations and generic active ingredients pursuant

to registrations owned by third parties being our distributors, consultants and our
Group Company, Sharphil Inc.. We have incurred expenditure towards obtaining
such third party registrations and we currently derive beneficial interest from
sales based on such registrations. However, we do not have any agreements
with such third parties for availing the beneficial interest of sales based on such
registrations. There can be no assurance that such third parties will not engage
with our competitors
Such an arrangement exposes it to the risk where any deterioration in the
relationship of the company with the third party i.e. consultant or distributor would
deprive it of the sales channel as well as the right to sell the product in a market.
Therefore, it seems that the arrangements done by Sharda Cropchem Ltd

regarding its brand names, trademarks, registrations etc. leave scope for
improvement. An investor may contact the company directly to know the current
status of these trademarks and registration agreements with third parties.
Further advised reading: How to do Management Analysis of Companies?
6) Weaknesses in the internal processes and controls at Sharda Cropchem Ltd:
In the past, there have been many instances where Sharda Cropchem Ltd has
been found lacking in its internal controls and processes.
As per the RHP, September 2014, pages 27-28, the company failed to make
necessary filings with RBI when it received foreign investment. At the same time,
it also failed to comply with FEMA regulations while incorporating subsidiaries
and making investments outside India.
In accordance with the requirements of the FEMA Regulations, we were

required to make the prescribed filings with the RBI at the time of making
remittance and certain annual filings in relation to the overseas investments. In
the past, there have been instances of delay and failure in making the necessary
filings with the RBI…We have also received foreign investment in our
Company…in this regard, there has been a delay in making the necessary filings
with RBI.
The RHP on pages 31-32, also states that from FY2010 to FY2013, the company
did not have an internal audit system. The RHP did not comment on the
presence of an internal audit before FY2010; therefore, an investor may contact
the company directly for any clarifications in this regard.
In 2011, Sharda Cropchem Ltd was penalized by customs officials for wrongfully
taking the duty-free clearances of imported goods.

Our Company has, in 2011, paid a penalty imposed by the Commissioner of
Customs (Export), Jawaharlal Nehru Custom House, Nhava Sheva,
Maharashtra, in relation to wrongful availment of duty free clearances of
imported goods
Previously, in 2007, Sharda Cropchem Ltd did a delay of one year and 10
months in appointing a full-time secretary.
Pursuant to an increase in our paid-up capital in March 2007…we were required

to appoint a whole-time secretary of our Company. However, the Company
appointed a whole-time secretary in January 2009 resulting in delay in the
appointment of the whole-time secretary for a period of one year and 10 months.
In addition, there have been multiple instances where Sharda Cropchem Ltd
failed to make timely disclosures to stock exchanges and directors, which have
been pointed out by the secretarial auditor of the company in its annual reports.
In 2015, the company did not timely disclose to the stock exchanges that in its
board meeting, it would also consider a declaration of dividend.
Board meeting held on 30th May, 2015…proposal for recommendation of

dividend was considered by the Board of Directors. However…Company has
inadvertently missed out this information in the prior intimation made to Stock
Exchange(s) with regard to recommendation of dividend and the same was
clarified later on to National Stock Exchange of India Limited.
The company repeated the same mistake in FY2021 and the stock exchanges
penalized the company with a fine.
The Company had conducted a Board Meeting on October 28, 2020…to

consider and declare the interim dividend…the company was required to intimate
the stock exchanges at least two working days in advance…however the
Company intimated to the stock exchanges only 1 working day prior…hence the
Company was non-compliant…for which the Bombay Stock Exchange (“BSE”)
and National Stock Exchange (“NSE”) levied fine on the Company
In FY2017, Sharda Cropchem Ltd delayed sharing the signed minutes of its
board meeting to its directors.
The certified copy of the signed Minutes of Board meetings and its committee

meetings…has not been circulated to all the Directors of the Company within the
period of 15 (fifteen) days after the minutes were signed.
In the FY2017 annual report, the company did not provide the Board’s response
to the secretarial auditor’s observations.
The report of Board of Directors for the financial year ended 31st March 2017 did
not contain the explanation or comments by the Board in respect of the
qualification made by the company secretary
In addition, the company did not furnish a required declaration needed as a part
of the audited financial result and therefore, the stock exchanges issued notices
to the company.
The Company has not furnished a declaration…for which the Company

had received the notices from BSE Limited and National Stock Exchange of
India Limited
In FY2020, the company delayed the disclosure of related party transactions to
stock exchanges by 117 days.
There was a delay of 117 days in filing of disclosure of related party

transactions for the half year ended September 30, 2019
In addition, there was a delay in submitting the annual report to the stock
exchanges.
There was a delay of 1 day in submission of copy of the Annual report to the
stock exchanges
During FY2010, FY2012 and FY2013, the company had delayed the deposit of
undisputed statutory dues to the govt. authorities (RHP, September 2014, pages
31-32).
An investor may contact the company directly for clarifications about the steps
taken by the company to reduce such instances of noncompliance.
Another instance of weakness comes across when an investor visits the website
of Sharda Cropchem Ltd. The website of the company does not have a security
certificate. It is opened via an “HTTP” connection instead of an “HTTPS”
connection. As a result, it is labelled “Not secure” by the web browsers. The cost
of a security certificate for a website to make it secure is about ₹1,000/- per year,
though various open-source free alternatives also exist.
Going ahead, an investor should keep a close watch on the signs indicating
weaknesses in the internal controls and processes of Sharda Cropchem Ltd.
The Margin of Safety in the market price of Sharda Cropchem

Ltd:
Currently (May 31, 2022), Sharda Cropchem Ltd is available at a price to

earnings (PE) ratio of about 19 based on consolidated earnings of FY2022. An
investor would appreciate that a PE ratio of 19 does not offer any margin of
safety in the purchase price as described by Benjamin Graham in his book The
Intelligent Investor.
However, we recommend that an investor may read the following articles to
assess the PE ratio to be paid for any stock, which takes into account the
strength of the business model of the company as well. The strength in the
business model of any company is measured by way of its self-sustainable
growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, even a low
PE ratio of the company’s stock may be a sign of a value trap where instead of
being a bargain; the low valuation of the stock price may represent the poor
business dynamics of the company.
 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value
Investors
 How to Earn High Returns at Low Risk – Invest in Low P/E
Stocks
 Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Sharda Cropchem Ltd seems a company, which has grown its sales at a
decent rate of 18% year on year for the last 10 years. The growth has been
associated with fluctuating profit margins; however, until now, the operating profit
margins have not fallen below 17%.
Sharda Cropchem Ltd has modelled its business around obtaining more and
more registrations to sell agrochemicals in many countries and has completely
avoided owning any manufacturing facility. It is a pure trading company, which
sources all of its products from third parties, mainly from China. The business
strength in relying only on registrations comes from the cumbersome and time-
consuming registration process, which acts as an entry barrier for generics
agrochemical companies.
Nevertheless, this business strength is a direct result of procedural obstacles in

obtaining registrations and it can vanish if the regulators make the approval
processes smooth and simple. Sharda Cropchem Ltd faced this situation in Latin
America when the regulators made the registration process easy leading to
higher competition and declining profit margins.
In addition, not all the registrations lead to profitable outcomes. Sharda

Cropchem Ltd has written off a significant amount of money invested in the
registration process where it could not realize any significant profits.
Generics agrochemical players including Sharda Cropchem Ltd do not have any
pricing power over their customers. They only follow the pricing strategy of large
MNCs that own 75% of the market share. When MNCs refuse to increase prices
even when costs are going up, in order to maintain their market share, then
Sharda Cropchem Ltd suffers significantly on its profit margins. The MNCs
pamper large distributors with incentives and rewards and as a result, they do not
entertain generics players; therefore, companies like Sharda Cropchem Ltd have
to primarily rely on smaller distributors limiting their market reach.
Sharda Cropchem Ltd is stuck with suppliers in China for its products because
there is no alternative. Even if it wants to switch to a new supplier, the
registration regulations do not allow an easy switch. Therefore, it is like either
supply from China or do not supply. As a result, when Chinese agrochemical
production came under stress in FY2018-FY2020, then Sharda Cropchem Ltd
had to buy an excess inventory at high prices to ensure that it does not lose its
customers. In the end, the company suffered due to excessive unsold inventory
when prices declined later on.
Sharda Cropchem Ltd has a high receivables days due to twin factors of MNCs
giving very long credit period to distributors, which puts pressure on Sharda
Cropchem Ltd as well to match and secondly, due to long-stuck receivables in
Latin America where many economies and their currencies are performing
poorly.
The company has a succession plan where the sons of the promoter are playing
an active role in the company; however, it remains to be seen whether the two
brothers would keep on collaborating.
There seem many weaknesses in the internal processes, controls, management

of trademarks etc. of Sharda Cropchem Ltd. The company has not registered its
brand names in its target markets exposing it to disputes. It has taken
registrations in the names of distributors, consultants etc. without having any
binding agreement with them. They can easily collaborate with its competitors
and shut the doors on Sharda Cropchem Ltd.
Sharda Cropchem Ltd has numerous instances of delaying important disclosures

to stock exchanges, RBI, the deposit of undisputed dues to authorities,
employment of secretary, sharing of documents with the board etc. Even the
website of the company is “not secure”. The internal controls and processes at
Sharda Cropchem Ltd seem to leave scope for improvement.
Going ahead, an investor should keep a close watch on the regulatory

developments regarding registrations in its target markets because any adverse
change can take away its business advantages (“stroke of a pen” risk). She
should closely monitor its profit margins as well as write-offs of intangible assets
to ascertain whether Sharda Cropchem Ltd is able to allocate capital efficiently.
She should keep a watch on its inventory and receivables days to see if the
company is able to keep its working capital under control. The investor should
look for signs whether its internal processes and controls show weakness.
Further advised reading: How to Monitor Stocks in your Portfolio
These are our views on Sharda Cropchem Ltd. However, investors should do
their own analysis before making any investment-related decisions about the
company.
Analysis: Bharat Rasayan Limited

 Published: 12-Jan-18
Modified: 20-Aug-22
1. Bharat Rasayan Ltd Research Report by Reader
2. Dr Vijay Malik’s Response
3. Analysis Summary
This article provides an in-depth fundamental analysis of Bharat Rasayan Ltd, an

Indian player in the crop protection industry dealing in the entire range of
products ranging from technical pesticides, formulations and its packaging
material.
In order to benefit the maximum from this article, an investor should focus on the
process of analysis instead of looking for good or bad aspects of the company.
She should learn the interpretation of different types of data and transactions and
pay attention to the parts of annual reports etc. used to get the information. This
will help her in improving her stock analysis skills.
Bharat Rasayan Ltd Research Report by Reader

Hi Dr. Vijay,
I have done research on Bharat Rasayan Ltd using the approach that I learned

from the many articles I read on your blog.
Please provide your valuable inputs on my analysis given below.
Regards,
Pratik Biyani
Financial Analysis of Bharat Rasayan Ltd:

Net Sales:
 Bharat Rasayan Ltd has been growing its sales at a fast pace of 20-
40% between 2012 and 2017 barring 2016
 The two consecutive years of FY15 & FY16 has suffered poor
monsoons which lead to a slump in pesticide sales
 However, FY17 turned out to be a good monsoon year after two
consecutive years of below-normal south-west monsoon (June-
September) rainfall
 This can be seen in the growth of the cos sales in 2015 and 2016. In
2016, the company’s sales grew by only 3.8%. This shows the
impact of seasonality or bad monsoon can have on the cos business
 The year 2017 saw good monsoons in India which can also be seen
in the cos numbers. Sales grew by 36.3% in 2017
 In the next two-three years, we may put in Rs 200 crore in the area
of intermediates for manufacturing new products, said Mr. Gupta
 When I did a peer analysis of the sales growth of the co, the co. in
tough times of 2015 and 2016 (due to poor monsoon) was amongst
the cos with a growth
 In addition, during good times like 2017, the co. clocked the highest
growth YoY
Peer Comparison:
Many companies in India couldn’t perform as expected in 2014-15 due to

unfavourable monsoon. This was not the case with Bharat Group who achieved
25- 30% growth to $165 million in sales The co figured in the list of Top 20
Indian Agrochemical Companies in the 2014 ranking released by AgroPagesThe
co attributes this growth to their consistent pursuit of quality and business ethics
“BRSN could outperform the competition mainly on the strength of its working
systems and professionalism,” said Mr. GuptaThe co’s S&OP (sales and
operating planning) facilitates advance planning and seamless working of supply
chain and manufacturing functions Through substantial investment in machinery
and plant automation, BRSN plants had a near zero down time, considerably
reduced manufacturing losses and improved operational efficiency. All the above
initiatives coupled with agility in decision making enabled BRSN to offer right
price at right time in a short active selling seasonAlso, BRL is always committed
to add new products in its pipeline. In the 2014-15 season, addition of new
molecules like diafenthiuron and fipronil also contributed to growth in company’s
turnover
(Source: http://news.agropages.com/News/NewsDetail—17003.htm)
Profitability:
 A look at the profitability trend of Bharat Rasayan would indicate that

both the operating profit margin (OPM) and net profit margins (NPM)
have been growing considerably over the years. The last 4 years
have been averaging 18% OPM and a below par 7.3% NPM
however, the NPM has grown from 5.1% in 2013 to 8.8% in 2017
 However, the OPM and the NPM have not been moving closely (as
seen in the graph above). This is mainly due to an increase in the
interest and depreciation cost of the company
 Depreciation increased from INR 1.5 cr to INR 7 cr to INR 18 cr in
FY12/13/14
 Capex increased to INR 46 cr, INR 77 cr, and INR 25 cr in
FY12/13/14 thus the increase in the cost of depreciation
 At the same time, the cos interest cost also significantly rose from
INR 1 cr in 2012 to INR 16 cr in 2014
 It is visible in the Debt to Equity ratio of the company, which
increased, from 0.2 in 2011 to 2.1 in 2013 and 1.7 in 2014
 Thus, the company had taken debt to finance their capital
expenditures
 Therefore, need to note is that Bharat Rasayan Ltd has been under
various capex investments in the past, and thus the NPM has
fluctuated, (due to depreciation and interest changing)
 However, over the last few years, the organization has managed to
keep a constant depreciation and interest expenses
Tax Payout:
The tax payout ratio of Bharat Rasayan Ltd, over the years, had been around the
standard corporate tax rate prevalent in India.
Operating Efficiency of Bharat Rasayan Ltd:

Asset Turnover:
 While assessing the Net Fixed Asset Turnover of the company, the

NFAT of the co has been consistently increasing from 2.5 in 2013 to
4.7 in 2017. The NFAT had declined from 18 in 2010 to 7.6 in 2011
and then 2.5 in 2013 due to an increase in the cos capex
 It is reasonable to ascertain that the NFAT would decline in the initial
phases of commissioning any new plant because the utilization of
the plant to optimal levels would take some time when the NFAT
would gradually improve, as in the case of NOCIL Ltd
 Another modern and larger plant, spread over 11 hectares (105,000
sq. m.) in the Chemical Approved Economic Zone at Dahej in
Gujarat was set up to manufacture tech grade pesticides,
intermediates, and bulk formulations. The Plant (Unit 2) worth $30
mn was set up in 2012
Inventory Turnover:
 Looking at the inventory turnover ratio of BRSL, it is noticeable that

the co has been able to improve its inventory turnover ratio
consistently since FY 2015. The ITR has increased from 7.0 in FY
2013 to 8.8 in FY 2017. This reflects good inventory management by
the company over the years
 The co keeps stressing about the importance of inventory
management due to the seasonality of its business and yet, it has
been able to improve its inventory turnover over the years
“BRSN could outperform the competition mainly on the strength of its working
systems and professionalism,” Mr. Gupta says proudly And through substantial
investment in machinery and plant automation, BRSN plants had a near zero
down time, considerably reduced manufacturing losses and improved
operational efficiency. All the above initiatives coupled with agility in decision
making enabled BRSN to offer right price at right time in a short active selling
season.
(Source: http://news.agropages.com/News/NewsDetail—17003.htm)
 Compare this to Insecticides India whose ITR has been only

between 2 and 3
 For Bayer Crop Science, the ITR has decreased from 6.2 in 2014 to
3.9 in 2017
 For Excel Crop care, the ITR has decreased from 4.9 in 2014 to 4.2
in 2017
The pesticide industry is working capital intensive. Due to seasonal nature of the
business and the uncertainties related to timing and coverage of monsoon, level
of pest infestation etc, the level of inventories the companies need to stock is
large. Further, the industry needs to offer long credit periods to farmers due to
intense competition and low offtake.
(Source: CARE Ratings: Rating Methodology for Pesticide Companies)
Receivables Days:
 Receivables risk is one of the biggest risks for the company

 The industry has to extend long credit period due to intense
competition amongst the players.
As, pesticides are the last input in the agricultural operation, after having
invested in seeds and fertilizers, farmers have little surplus money left for
purchasing pesticides and therefore, providing long credit is necessary to
stimulate the demand
(Source: Credit Rating Rationale, CARE Ratings)
 While analysing the receivable days, the co has been able to

decrease its receivable days from 73 in 2013 to 61 in 2017. It
reached to 67 in 2016 due to weak monsoon and thus an extension
of credit to its customers
 However, there is no stable trend visible and much of the reason is
due to the seasonality of its business
 In addition, due to intense competition, the co must have given a
credit period to retain customers
Let us do a peer comparison:
Peer Comparison:
All the cos peers hover around the same range.
CFO vs PAT of Bharat Rasayan Ltd:
 When we compare the cos cumulative CFO to its cumulative PAT,

we see that the cos CFO is a little lesser than its PAT
 This can be attributed to the seasonality of the cos business due to
which it has to keep greater levels of inventory and give longer credit
period to its consumers
 Thus, it is important to keep a watch on the operating
efficiency parameters especially inventory utilization going ahead to
ascertain whether the company is able to improve its working capital
utilization going ahead
 However, when seen on a year-to-year basis, CFO has been greater
than the cos PAT most of the years. However, there was a sharp
decrease in the CFO in 2017 due to an increase in the cos
receivables and inventory in 2017
Free Cash Flow of Bharat Rasayan Ltd:
 The co had a negative FCF in 2012 and 2013 due to a new plant
that was set up in Dahej in Gujarat
 Since then, the co was able to generate positive FCF and then
again, in 2017, the cos FCF deteriorated in 2017
 As previously noted, the cos negative CFO in FY17 was due to a
higher receivable and inventory- This can be attributed to the
seasonality of the cos business due to which it has to keep greater
levels of inventory and give longer credit period to its consumers
Market Capitalization of Bharat Rasayan Ltd:
It seems that the market has appreciated that BRSL has been able to
demonstrate a strong Cash Flow position, better margins, and better future
outlook and as a result, its market capitalization has increased from Rs. 53.28 in
FY 2013 to Rs. 1272 in FY2017, a CAGR of 121%
Leverage analysis of Bharat Rasayan Ltd:

Debt to Equity Ratio:
 The co has managed to decrease its Debt to Equity ratio from 2.1 in
2013 to 0.6 in 2017
 The co had carried out a major capex in 212 and 2013 for which it
had taken debt which increased the cos Debt to Equity ratio to 2.1
 In addition, the interest coverage of the firm has increased from 2.5
in FY2013 to 8.2 in FY2017
Management Analysis of Bharat Rasayan Ltd:
Remuneration of Directors and Key Managerial Personnel:
 According to the Companies act 2013, the remuneration payable to

anyone managing director or whole-time director or manager shall
not exceed five per cent. of the net profits of the company.
 Mr. Rajendra Prasad Gupta, Whole-time Director, got paid INR 6.4
crores remuneration in 2017 which is 11.8% of its Net Profits in that
year (INR 54.4 crores)
 Mr. Mahabir Prasad Gupta, Whole-time Director, got paid INR 2.3
crores remuneration in 2017 which is 4.2% of its Net Profits in that
year
Thus, the total remuneration of the directors is INR 8.7 crores which is 16% of
the cos Profits in 2017
Investable PE Ratio of Bharat Rasayan Ltd:
Self-Sustainable Growth Rate:
Self-Sustainable Growth Rate (SSGR) is a measure of the growth potential

inherent in the business model of a company, which it can achieve using
resources generated through its current profits without relying on external
sources of funds like debt or equity dilution.
SSGR = [(1-Dep) +NFAT*NPM*(1-DPR)] – 1
Where,
Dep = Depreciation Rate


NFAT = Net Fixed Asset Turnover

NPM = Net Profit Margin

DPR = Dividend Payout Ratio

If the SSGR is higher than the current sales growth rate, it means that the
company’s business features (NPM, NFAT & DPR) allow it to grow its sales at a
higher rate than the current growth rate.
Co.’s SSGR has decreased from 60% in 2011 to 6% in 2015 but is now on an
increasing trajectory to 8% in 2016 to 16% in 2017
Let us delve deeper into this:
 Co has been able to increase its SSGR in 2016 and 2017 due to an
increase in the NPM and NFAT, two key pointers
 In the earlier years of high SSGR, co had a high NFAT (due to less
or no capex)
FCF as a percentage of CFO:
Co does not deserve any premium in this aspect in terms of PE ratio.
Dr Vijay Malik’s Response
Hi Pratik,
Thanks for sharing the analysis of Bharat Rasayan Ltd with us! We appreciate
the time & effort put in by you in the analysis.
Let us first try to analyse the financial performance of Bharat Rasayan Ltd over
the last 10 years.
Financial Analysis of Bharat Rasayan:

Bharat Rasayan Ltd has been growing its sales at a very fast pace of 25-30%
year on year for the last 10 years (FY2008-17). Its sales have increased last year
from ₹67 cr. in FY2008 to ₹621 cr. in FY2017.
An investor would notice that the company had muted sales growth until FY2011
when it increased up to about ₹100 cr. However, the sales started increasing
sharply from FY2012 onwards and have become six times since then from about
₹100 cr. to current sales of ₹621 cr. This sudden increase in sales coincides with
the commencement of the second manufacturing plant of the company at Dahej,
Gujarat.
The sharp increase in sales from the start of the new plant indicates that the
company has been able to find customers for the new capacity and in turn that
the company has an untapped market, where it can supply its products.
Upon analysis, an investor would find that the sales of the company’s products
are dependent upon many factors like the performance of monsoon, commodity
cycles, general economic scenario etc. CARE Ratings in its credit rating
report for the company for January 5, 2018, states that:
“Highly dependent upon monsoon and climatic conditions:The pesticide
industry derives its sales from the agriculture sector which is highly dependent
upon monsoons as well as incidence of fungal/pest attack on crops.”
Further advised reading: 7 Important Reasons Why Every Stock Investor
Should Read Credit Rating Reports
However, upon understanding the past performance of Bharat Rasayan Ltd, an
investor would notice that the company has been able to increase its sales even
in those years when the industry faced the above-mentioned challenges.
In FY2013, the country faced a tough year from the perspective of monsoon

performance. However, the company could increase its sales by 32% from ₹142
cr. in FY2012 to ₹188 cr. in FY2013. (Annual report for FY2013, page: 14)
Financial Year 2012-13 was a tough year for Indian agriculture and agro
chemical industry. Serious challenges were posed by the delayed and not-so-
well distributed monsoon in the key agriculturally important geographies of the
country. However despite these challenges, your Company has managed to
overcome obstacles and achieved a reasonable growth through introduction of
new products, increased production and broadened customers’ base.
– Gross Sales increased by 32.66% to ₹ 20,127.38 Lacs from ₹15,172.19 Lacs
in the previous year;
Similarly, in FY2014, the company could almost double its sales from ₹188 cr. in
FY2013 to ₹361 cr. in FY2014 despite the challenges of slow growth scenario
prevalent in the economy. (Annual report for FY2014, page: 22)
During the year, Indian economy witnessed various issues such as slower

growth, high inflation, uncertain political environment and strong forex volatility.
Despite such an environment, Company’s Total Revenue stood at ₹36234.90
Lacs as compared to ₹18816.47 Lacs during the previous year thereby
registering a growth of 92.57%
Further advised reading: Understanding the Annual Report of a Company
The above incidences will indicate to an investor that the company operates in a
market, which is very under-penetrated indicating that many potential customers
do not have access to the products. As a result, in the periods of general
economic slowdown and poor monsoon, when its existing customers are not able
to maintain their purchases of the company’s products, the company is able to
find new customers who were not using its products in the past and thereby
generate higher sales.
Such a scenario indicates that the market segment of the company products
(crop protection: insecticides, pesticides, herbicides etc.) is still untapped by the
manufacturers. As a result, the company could sell the output of its new
manufacturing plant at Dahej despite tough economic situations.
The company has highlighted this aspect of the crop protection industry in its
FY2017 annual report (page 45) in the management discussion and analysis
section:
The growth of agrochemical industry is directly proportional to the growth of the

agriculture sector. Any improved situation like increased purchasing power with
the farmers to buy more of agro-chemicals is a further to the industry. The scope
of the agro-chemical industry in India is quite wide given the fact that there is still
a considerable part of the country not touched by the modern technology and
irrigation facilities.
Further advised reading: How to do Business Analysis of Agrochemical
The company has not disclosed the current capacity utilization of the plants
(Rohtak, Haryana and Dahej, Gujarat) in its communications. An investor may
contact the company directly to understand the current utilization levels to
estimate the ability of the company to generate future growth from existing
capacity or the requirement of increasing capacity in near future.
Upon analysing the profitability of the company, an investor would notice that the
sales growth achieved by Bharat Rasayan Ltd has been associated with a
significant increase in the operating profit margins (OPM). OPM has increased
from 6-7% until FY2011 to 18% in recent years. The improvement in the OPM is
significant and deserves deeper analysis by the investors.
For arriving at the factors leading to the improvement in OPM, investors should
do a comparative assessment of the expenses of the company for FY2011 when
OPM was 7% and FY2017 when OPM has increased to 18%.
Further advised reading: How to do Business Analysis of Chemical
Companies
Upon the comparison, the investors would notice that the raw material cost of the
company, as a proportion of sales, has remained almost constant at 65-66% over
the years. The stable raw material cost over the years indicates that the company
has the ability to pass on increases in the costs to its end customers and thereby
protect its profitability margins.
The stable raw material costs though highlight the pricing power enjoyed by the
company but do not explain the significant improvement of the operating profit
margins.
For finding out the reasons for the improvement of the margins, an investor
would have to look at other components of the company’s expenses. When the
investor compares these expenses over FY2011 and FY2017, then she notices
that Bharat Rasayan Ltd has achieved a significant reduction in its sales &
administration costs and other expenses. She notices that these two heads have
led to an improvement of about 9% (sales & admin costs = 4% and other
expenses = 5%) out of the total 11% improvement of the operating profit margin
of the company from 7% in FY2011 to 18% in FY2017.
Improvement of sales, general administration, and other expenses indicate that

the company has been able to increase the efficiency of its resources. The
company has been able to generate higher sales revenue from the Dahej plant.
However, it could avoid a proportionate increase in associated expenses like
administration staff, additional dealers, purchase costs etc.
Upon reading the past annual reports for the above-mentioned period, an
investor would find that the company has communicated the steps that it has
taken to save on costs in its FY2014 annual report (page 28) in the management
discussion & analysis section like the centralized purchase of raw material and
other cost control measures:
The centralized purchase of the major raw-materials and the centralized fund
raising exercise at Head Office level has indeed proved beneficial to the
Company as both these areas are fairly sensitive keeping in view the peculiar
nature of Company’s operations. As an ongoing exercise continuous planning by
senior personnel based at Head Office in Delhi with respect to crucial operational
matters goes a long way in exercising strict cost controls eventually resulting into
profit maximization.
The operating profit margin has been stable at about 18% for the last few years.
An investor should monitor closely whether going ahead the company is able to
achieve any improvement in the OPM.
An investor would notice that the net profit margin (NPM) of Bharat Rasayan Ltd
has not been able to show the same level of improvement as its OPM. It seems
that the higher interest cost due to the debt taken to complete the Dahej plant
has had an impact on the NPM. As a result, the improvement in the NPM is less
than the OPM of the company over the years.
The tax payout ratio of Bharat Rasayan Ltd, over the years, had been around the
standard corporate tax rate prevalent in India.
Further advised reading: How to do Financial Analysis of a Company
Operating Efficiency Analysis of Bharat Rasayan:
While assessing the net fixed asset turnover (NFAT) for Bharat Rasayan Ltd, an
investor would notice that the NFAT of the company witnessed a reduction over
FY2010-13 when it constructed the Dahej plant. From FY2014 onwards, the
NFAT is improving consistently due to improved utilization (i.e. higher sales) of
the Dahej plant as well as reducing fixed asset base due to depreciation.
Looking at the inventory turnover ratio (ITR) of Bharat Rasayan Ltd, an investor
would notice that the ITR of the company has been fluctuating from 6.9 to 10
over the years. Similarly, the receivables days of the company have been
fluctuating from 53 to 73 days over the years.
Such fluctuating working capital performance levels indicate that the company
faces a tough working capital planning situation where it has to keep the
significant level of inventory in the distribution channel and give a higher credit
period to customers.
Further advised reading: How to Analyse Operating Performance of

Companies
Such business situations make the operations working capital intensive as
highlighted by CARE Ltd in its credit rating rationale for the company in January
2018 (page 2):
Working capital intensive nature of operations: The commoditised nature of

the products and seasonality factor (high demand during crop sowing seasons)
makes the operations of the group highly working capital intensive. The group is
required to stack up variety of products as inventory in advance of the season
resulting in high inventory holding period which is a common phenomenon
across pesticide industry. Further, since pesticides are the last link in the
agricultural operation, after having invested in seeds, fertilizers, etc., the farmers
have little surplus money for purchasing pesticides. Therefore, providing credit is
necessary to stimulate demand. Thus, due to such intrinsic nature of business,
the group’s working capital requirement continues to remain high.
An investor would notice that the over last 10 years, the company has witnessed
a significant amount of money being stuck in the working capital. Approximately,
₹72 cr. has been stuck in the additional inventory and ₹104 cr. has been stuck in
the receivables from the customers.
As a result, it does not surprise an investor when she notices that Bharat
Rasayan Ltd is not able to convert its profits over the last 10 years into cash flow
from operations. The company has reported a cumulative cash flow from
operations (cCFO) of ₹169 cr over the last 10 years (FY2008-17) against
cumulative net profit after tax (cPAT) of ₹181 cr.
Further advised reading: Understanding calculation of Cash Flow from
Operations (CFO)
Margin of Safety in the Business of Bharat Rasayan:
i) Self-Sustainable Growth Rate (SSGR):
An investor would notice that Bharat Rasayan Ltd has witnessed an SSGR
ranging from 6-17% over the years. SSGR was at the higher levels in the past as
the company had high NFAT before the capex on the Dahej plant. However,
once the Dahej plant started production, the SSGR has been in the range of 6-
17%.
Further advised reading: Self Sustainable Growth Rate: a measure of

Inherent Growth Potential of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is
growing at a rate equal to or less than the SSGR and it is able to convert its
profits into cash flow from operations, then it would be able to fund its growth
from its internal resources without the need of external sources of funds.
Conversely, if any company is attempting to grow its sales at a rate higher than
its SSGR and additionally, it is not able to convert its profits into cash flow from
operations, then its internal resources would not be sufficient to fund its growth
aspirations. As a result, the company would have to rely on additional sources of
funds like debt or equity dilution to meet the cash requirements to generate its
target growth.
An investor would notice that the SSGR of Bharat Rasayan Ltd is about 6-17%
whereas it has been growing at a rate of about 25-30% over the years. As a
result, the investor would appreciate that the company required outside funds to
meet its growth requirements.
The company has been able to increase its sales from ₹67 cr. in FY2008 to ₹621
cr. in FY2017 by doing a capex of ₹208 cr. Over the same period, it had to raise
additional debt of ₹107 cr. as its total debt has increased from ₹8 cr. in FY2008
to ₹115 cr. in FY2017.
ii) Free Cash Flow Analysis:
If an investor analyses the total cumulative financial performance of Bharat

Rasayan Ltd over the last 10 years (FY2008-17), then she would notice that the
company has a total cumulative CFO of ₹169 cr. whereas it had to meet a capex
of ₹208 cr. and the interest expense of about ₹68 cr. indicating a total
expenditure of about ₹276 cr. (208+68).
Bharat Rasayan Ltd could meet the cash flow gap of ₹107 cr. (276-169) by
raising additional debt of ₹107 cr. as discussed above.
Free cash flow (FCF) and SSGR are the main pillars of assessing the margin of
safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The
Cornerstone of Stock Investing
Additional aspects and annual report analysis of Bharat

Rasayan:
While studying Bharat Rasayan Ltd, an investor comes across certain other
aspects, which are important for analysis and subsequent final investment
decision by investors:
1) Promoter/Management remuneration:
While reading the FY2017 annual report, page 36, an investor would notice that
the promoters/management of the company has drawn the maximum possible
remuneration permitted by the Companies Act 2013:
The maximum remuneration as per the Companies Act in FY2017 is ₹929.98 lac
and the promoters have taken home the maximum salary permitted.
Moreover, a look at the remuneration levels of the promoters/management for
the previous year (FY2016 annual report, page 29, indicates that in FY2016 also,
the promoters have taken home the maximum remuneration allowed by the
Companies Act:
The promoters/management took home ₹572.84 lac as remuneration against the

limit of ₹572.85 lac.
When an investor extends her analysis to FY2015, then she finds the same
behaviour of the promoters/management where they took home a total
remuneration of ₹533.53 lac against a limit of ₹534.05 lac.
From the above analysis, an investor would appreciate that the only factor, which
is limiting the remunerations of promoters/management is the ceiling put by the
Companies Act.
Additionally, the remunerations being usually at the maximum limit stipulated by

the Companies Act might also indicate that the company arrives at a
remuneration increase for the promoters/management in any year after it knows
the upper limit of remuneration for the year to ensure that no part of the
maximum limit goes unutilized. There seems to be little correlation between the
remuneration increase of the promoters/management and other employees.
When an investor analyses the FY2017 annual report, then at page 44, she
notices the data for the comparison of promoters/management remuneration and
other employees of the company:
The investor would notice that the on average the employees of the company
received an increase in remuneration of about 10%, whereas one of the
promoters, who draws a salary, which is more than 25,000 times the median
salary of the employees received an increase in remuneration of more than 70%
during the year. It is pertinent to note that the said 70% increase in remuneration
is at an already high salary level.
Further advised reading: How to identify Promoters extracting Money via

High Salaries
2) Loans and advances from promoters/related parties:
While analysing Bharat Rasayan Ltd, an investor would notice that the company
has taken a significant amount of loans from related parties. As per the FY2017
annual report, page 89, the total loans outstanding from related parties is about
₹80 cr.
Upon analysing the past reports for the company, an investor would notice that
the loans and advances from related parties started increasing significantly from
FY2013 onwards. In FY2014, the loans from related parties increased to about
₹34 cr. from ₹5 cr. in FY2013. Annual report FY2014, page 64:
An investor would notice that during the period from FY2013 to FY2017, the
loans from related parties have increased from about ₹5 cr. to about ₹80 cr.
whereas during the same period the overall debt of the company has witnessed a
net decline from ₹131 cr. to ₹115 cr.
The comparative analysis of total debt of Bharat Rasayan Ltd with its break-up
into the related and outsider (banks etc.) parties shows the following picture:
An investor would recollect that FY2013 is the period when the company
completed its capex of about ₹125-150 cr. on the Dahej plant and it became
operational. After FY2013, the company started its phase of high sales growth
(₹98 cr. in FY2013 to ₹621 cr. in FY2017) and significant improvement in the
operating profit margin (OPM).
The analysis of the breakup of the debt among the related parties and outside
parties indicates that since the start of the Dahej plant, the promoters have been
infusing more and more capital into the company in the form of debt/loans and
are replacing the outside lenders.
Related parties currently own 70% of the debt of the company in FY2017 up from
4% in FY2013.
An investor can assign two interpretations to such a development:
a)
The first interpretation can be that the company is facing liquidity stress, as it
might not be making sufficient cash from its business to meet the requirements of
its operations and the debt repayments to outside lenders. As a result, the
related parties have to infuse money into the company to support its operations
and debt repayments to outside lenders. Related parties have infused about ₹75
cr. in the company during FY2013-2017.
This interpretation would lead an investor to believe that if the related parties do
not infuse the money in the company, then the company would find it difficult to
run its operations and it might default to the outside lenders.
Additionally, this interpretation will question the credit rating of AA- assigned by
CARE Ltd to the company. The credit rating of AA- indicates a strong financial
position with a very low probability of default.
CARE Ltd on its part has safeguarded itself by using the methodology, which
takes the combined view of Bharat group including Bharat Rasayan Ltd, Bharat
Insecticides Ltd, and BR Agrotech Ltd to arrive at the rating of AA- for Bharat
Rasayan Ltd.
While arriving at the ratings of Bharat Rasayan Limited, CARE has taken a

combined view of Bharat Rasayan Limited, B.R Agrotech Limited and Bharat
Insecticides Limited due to integrated and interlinked business under the same
management. These entities are hereinafter collectively referred to as Bharat
group.
An investor would appreciate that the methodology used by CARE Ltd to assign
the credit rating of AA- to Bharat Rasayan Ltd by combining the strength of all the
entities of the group might not do justice with indicating the credit strength
of standalone entity Bharat Rasayan Ltd.
An investor would also appreciate that the other entities: Bharat Insecticides Ltd
and BR Agrotech Ltd are not the subsidiaries of Bharat Rasayan Ltd. Therefore,
the minority shareholders do not have any control/legal right over these entities.
These companies are controlled by the same promoters & management and the
promoters have been using these entities to infuse money into Bharat Rasayan
Ltd to support its operations and debt repayments. The promoters are taking
these steps today but in future, the promoters might not follow the same steps
and then the company might face difficulties in its business.
Therefore, the first interpretation to the infusion of funds by related parties in

Bharat Rasayan Ltd might indicate that the company on its own does not have
the business strength as perceived by the market and it might be standing on the
crutches of related parties.
b)
The second interpretation to the infusion of funds by related parties to replace

outside lenders of Bharat Rasayan Ltd can be that the promoters/related parties
are flush with funds and are not finding opportunities to deploy those funds
anywhere else at attractive rates of return. Therefore, they are replacing the
outside lenders of Bharat Rasayan Ltd and in turn ensuring that they get interest
income from Bharat Rasayan Ltd, which is higher than the interest income
available to them outside.
While analysing the FY2017 annual report of the company, pages 88 & 89, an
investor would notice that the company has disclosed the amount of the interest
paid by it to all the related parties on the loans given by them to the company. An
investor can use this data to find out the interest rate that related parties are
charging to the company.
The following table shows the calculation of interest rate paid to four of the
largest lenders from the related parties:
An investor would notice that the related parties are getting an interest rate of
about 9.6% to 10.2% on their loans to Bharat Rasayan Ltd.
The interest rate available for deposits in the banking system currently ranges
from 5.25% to 6.25% (January 12, 2018) (Source: SBI Website)
The second interpretation to the infusion of funds by related parties might

indicate that the related parties are getting an interest rate of about 10% from the
money put in by them into Bharat Rasayan Ltd against the interest rate of about
6%, which they might get when they put money as deposits in the banks.
Therefore, an investor would notice that the act of related parties to infuse ₹75
cr. as loans into Bharat Rasayan Ltd to replace the outside lenders might indicate
a situation where the company is facing cash flow constraints to run operations
and repay outside lenders. On the other hand, if Bharat Rasayan Ltd has a
strong cash flow position to run its operations smoothly and has the ability to
repay all its outside debt on its own, then the loans from related parties might
indicate an attempt by them to get higher interest rates on their money than the
deposit rates from banks.
We would suggest that the readers/investors should do further analysis and

arrive at their own conclusion regarding it.
Further advised reading: How Promoters benefit themselves using Related

Party Transactions
3) Sales and purchase of material from related entities:
The FY2017 annual report, page 88, indicates that Bharat Rasayan Ltd enters
into sale and purchase transactions with the related entities:
An investor would notice that the promoters of Bharat group have primarily
divided their business operations across the value chain of insecticides into the
following segments:
 Technical grade pesticides (equivalent to active ingredient): in

Bharat Rasayan Ltd
 Formulations (active ingredient mixed with inert
substances/excipients): in Bharat Insecticides Ltd and
 Packaging material to sell the final product: BR Agrotech Ltd
As all these companies play a role in different steps to manufacture and sell the
pesticide/insecticide in the market, therefore, each of these companies buys the
product of another company as its raw material and then processes it to sell it
further. As a result, there are many sale and purchase transactions between
them.
This business inter-relationship along with the loans given by these entities to
Bharat Rasayan Ltd might have led CARE Ltd to use the combined methodology
of using all the three entities of the Bharat group to arrive at the credit rating.
However, as the other entities: Bharat Insecticides Ltd and BR Agrotech Ltd are
not subsidiaries of Bharat Rasayan Ltd, therefore, it becomes essential for
the minority investors to assess whether the sales and purchase transactions
between Bharat Rasayan Ltd and other group entities are at market prices. This
is because if these transactions are not at market prices e.g. if sales from Bharat
Rasayan Ltd are at lower prices and purchases by Bharat Rasayan Ltd are at
higher prices, then these transactions might lead to the shifting of economic
benefits from Bharat Rasayan Ltd to other group entities.
Moreover, these group entities may invest this money back in Bharat Rasayan
Ltd at interest rates higher than bank deposit rates would make it a vicious cycle.
The investor can apply the same interpretation to the management personnel
getting a high salary from the company and then giving the same as a loan to the
company at a higher interest rate than bank deposit rates.
Further advised reading: How Promoters benefit themselves using Related

Party Transactions
4) Dividends funded out of debt:
An investor would notice that Bharat Rasayan Ltd has a negative free cash flow
(FCF) position where it has to raise debt to meet its operational and capital
expenditure requirements. In such cases, where companies do not make
sufficient cash flow from operations and raise debt to meet the capex, the
investor would notice that the companies meet their fund requirements for
dividends out of the debt proceeds.
Further advised reading: Steps to Assess Management Quality before Buying
Stocks (Part 2)
Margin of Safety in the market price of Bharat Rasayan:
Currently (January 11, 2018), Bharat Rasayan Ltd is available at a price to

earnings (P/E) ratio of about 31 based on trailing 12 months earnings, which
does not offer any margin of safety in the purchase price as described by
Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to
assess the PE ratio to be paid for any stock, taking into account the strength of
the business model of the company as well. The strength in the business model
of any company is measured by way of its self-sustainable growth rate and the
free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low
PE ratio of the company’s stock may be signs of a value trap where instead of
being a bargain; the low valuation of the stock price may represent the poor
business dynamics of the company.
 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value
Investors
 How to Earn High Returns at Low Risk – Invest in Low P/E
Stocks
 Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Bharat Rasayan Ltd seems to be a company, which has shifted gears in
terms of sales growth and profitability since it completed its manufacturing plant
in Dahej. The company seems to have the pricing power to pass on the changes
in the raw material costs to end customers. This ability along with the steps taken
by the company to improve resources efficiency/cut costs have ensured that its
growth over the last few years has been associated with a significant increase in
operating profit margins.
The company operates in a very competitive environment where it has to ensure

that a sufficient amount of inventory is always available in the distribution network
despite facing the challenges of seasonal variations of demand. Additionally, the
company needs to provide a long credit period to its customers to generate
demand. As a result, the business of the company is working capital intensive
resulting into the cumulative cash flow from operations of the company being less
than cumulative profit after tax over the last 10 years.
The cash flow from operations of the company has not been sufficient to meet its
capex requirements for sales growth. As a result, the company has to raise debt
to fund its growth.
Over the last few years, the company has been raising more debt from related
parties and using it to meet its operational requirements and repay outside
lenders. In FY2017, almost 70% of the debt is from outside lenders. The
investors should do further analysis and try to interpret whether the loans from
related parties are to help the company in its liquidity constraints or these loans
are an attempt by related parties to earn higher interest rates than the bank
deposit rates.
Investors should keep a close watch on the profitability levels, working capital
management including inventory and receivables, loans from related parties and
the cash flow position of the company to monitor the business position of the
company in future.
Further advised reading: How to Monitor Stocks in your Portfolio

These are our views about Bharat Rasayan Ltd. However, investors should do
their own analysis before making any investment-related decision about the
company.

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How to do Business Analysis of Agrochemical

Similarities with Pharmaceutical Industry

1) Classification into technical and formulations segments:

The agrochemicals industry is divided into technical products and formulation

Formulation products in the pesticide industry are similar to pharmaceutical

Rating Methodology – Pesticide Companies by CARE, November 2020, page 1:

Rating Methodology – Pesticide Companies by CARE, November 2020, page 6:

India is one of the major producers for pesticide formulations, however, it

2) Huge investment of money and time in developing new

Rating methodology – agrochemicals by ICRA, June 2022, page 5:

3) Requirement of registration with authorities:

Rating Methodology – Pesticide Companies by CARE, June 2017, pages 3-4:

Registering agrochemical generics in US / EU is a time-consuming

Conference call by Sharda Cropchem Ltd, October 2020, page 11:

Ramprakash Bubna: The cost of registrations is exponentially high. The

Rating Methodology – Pesticide Companies by CARE, November 2020, page 5:

CARE views the ability of a company to obtain registrations in different countries

Further advised reading: Credit Rating Reports: A Complete Guide for Stock

4) Demand is primarily influenced by local/domestic factors:

Rating Methodology – Pesticide Companies by CARE, November 2019, page 1:

The prospects for domestic pesticide sector depends on multitude of factors like

Key factors influencing the business performance of

1) Seasonality, uncertainty and wide fluctuations in local

Consumption of specific pesticides depends on the sowing of specific crops,

Rating Methodology – Pesticide Companies by CARE, November 2020, page 4:

Due to the seasonal nature of the business and the uncertainties related to

Conference call by Sharda Cropchem Ltd, May 2017, pages 16-17:

An investor may read our detailed analysis of Sharda Cropchem Ltd in the

2) Fragmented industry with intense competition and low pricing

Rating methodology – agrochemicals by ICRA, June 2022, page 2:

Rating methodology – agrochemicals by ICRA, June 2022, page 1:

domestic agrochemicals industry is highly fragmented with more than 60

Rating methodology – agrochemicals by ICRA, June 2022, page 1:

Most Indian companies manufacture and market generic and off-patent

Rating Methodology – Pesticide Companies by CARE, November 2020, page 2:

industry is characterized by overcapacity and low offtake leading to intense price

Rating methodology – agrochemicals by ICRA, June 2022, page 4:

Generics are commodity products and hence, competition is intense with a large

Advised reading: How to do Financial Analysis of a Company

3) Price-sensitive consumer without any brand loyalty:

As a result, even though marketing spending by pesticide companies creates

Rating Methodology – Pesticide Companies by CARE, November 2020, page 6:

4) Fluctuating raw material prices impacting profitability:

However, generic agrochemical companies find it difficult to pass on the increase

Rating methodology – agrochemicals by ICRA, June 2022, page 3:

Rating methodology – agrochemicals by ICRA, June 2022, page 4:

few Indian entities also manufacture specialty products in-licensed from larger

5) R&D: Companies must renew their product portfolio regularly:

Pesticide companies face a significant challenge of product obsolescence. There

Rating Methodology – Pesticide Companies by CARE, November 2020, page 3:

Also, due to growing pest resistance and newer pest attacks/diseases, it is

Due to these reasons, agrochemical companies must invest resources to

Rating methodology – agrochemicals by ICRA, June 2022, page 5:

Rating Methodology – Pesticide Companies by CARE, November 2019, page 2:

Currently R&D expense as a percentage of turnover in India is about

6) Working capital intensive business:

Agrochemicals (pesticide) business is working capital intensive because it