Sabero Organics

 

 

A scalable and sustainable growth model with a proven track record makes Sabero Organics an attractive investment

 

SABERO Organics is following a steady business model that requires a little capex to grow. Registering more and more products in overseas markets, introducing new products and expanding retail footprint are the three-pronged strategies the company has adopted. At a time when Indian agrochemical players are expected to gain from the pressure to improve agricultural yields and the shift of manufacturing base from western countries to Asia, long term investment in Sabero Organics can be considered.

BUSINESS:

Sabero Organics Gujarat (SOGL), which started as an agrochemical intermediates manufacturer in 1991, started manufacturing agrochemicals from 1998. Today, SOGL manufactures and supplies crop protection chemicals to large pesticide companies both in India and aboard focusing mainly on two chemistries — organophosphorous and dithiocarbamate. The company has a product portfolio of five insecticides, two fungicides and one herbicide — albeit with large market share. It is one of the largest producers of its two key products, mancozeb and glyphosate globally, which are currently the world's largest selling fungicide and herbicide, respectively. Insecticides and fungicides each bring in 40% of SOGL's revenues, while the herbicide — glyphosate — accounts for the balance 20%.

   The company has set up a total of six subsidiaries and associate companies in Australia, Europe, Philippines, Argentina and Brazil to obtain registrations locally as well as in neighbouring countries. It currently has 240 product registrations across 50 countries with over 100 registrations under process. It derives nearly two-thirds of its sales through exports.

GROWTH DRIVERS:

The company's growth strategy primarily focuses on expanding geographical reach through new registrations for its existing products, expanding capacities while gradually adding new products to its portfolio. The company, which is a relatively new player in the retail market, is also pushing its branded sales in India — currently stand at 30% of total — by increasing dealer network.

   The company recently doubled its mancozeb capacity to 30,000 TPA to become the world's secondlargest producer. It recently got its first registration in Brazil, which is world's leading agrochemical market for chloropyriphos — an insecticide. Three other registrations are expected later this year in Brazil. It has also obtained registrations in the UK and Germany and is expecting more in France and Spain.

   In addition, SOGL has tied up with a multinational firm to register its herbicide and fungicide products as a source for all 24 European Union countries, this year. The company introduced two new products — propineb, a fungicide and methamidophos, an insecticide —in 2009 and aims to launch two new products every year going forward.

   The company is not required to incur any major capex for increasing its sales from the present level and hence its focus will continue to remain on new registrations, new product launches and retail branding. As such the capex plan for FY11 is estimated around Rs 10-15 crore.

FINANCIALS:

In the past five years, the company has increased its profits at a cumulative annual growth rate (CAGR) of 61% while the net sales grew at 30%. The net worth has grown at 24% during this period. The company's debt-equity ratio has improved from 2.1 in FY05 to 1 in FY09. The company has steadily improved its operating margins from 10.6% in FY06 to 14.4% in FY09. For the year ended December 2009, the operating margins expanded to 18.4%. The company has a consistent record of generating cash from operations and clocked a 37.5% return on employed capital (RoCE) in FY09.

VALUATIONS:

The company is currently trading at a price-to-earnings multiple (P/E) of 6.6, which is good compared to its peers, such as Rallis India (16.5), United Phosphorous (14.3), Insecticides India (4.1) and Meghmani Organics (12.5). We expect the company to post net profit of Rs 47 crore in FY11. The current price is 4.7 times of its expected EPS for FY11.