Sharda Cropchem Ltd Management Discussions.

ECONOMIC OVERVIEW

The last fiscal year has been an unprecedented one. It was dominated by the COVID-19 pandemic which began to impact the global economy towards the last quarter of FY20 and continued to impact the full year of FY21. According to IMFs World Economic Outlook April 2021, after witnessing a contraction of 3.3% in CY2021, the global economy is estimated to grow at 6% in CY2021 and moderate to 4.4% in CY2022. As the more vulnerable segments of the population get vaccinated, contact-intensive activities are expected to steadily resume.

More than a year into the arrival of the COVID-19 pandemic, the worlds population is gradually being vaccinated, thanks to the discovery and production ingenuity of the global scientific community. Notwithstanding the resurgence of second and third waves, coupled with more infectious variants of the COVID-19 virus, the steady progress in gradual immunisation is expected to lessen the need for social restrictions and power recoveries in many countries during the latter half of CY2021.

The global growth forecast remains uncertain due to factors that are difficult to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, supply disruptions, the repercussions of the dramatic tightening in global financial market conditions and shift in spending patterns. Moreover, although recent vaccination drives have raised hopes of a turnaround in the pandemic later this year, renewed waves and new variants of the virus could cause a reassessment of this outlook. The IMF also highlights that the strength of the recovery projected may vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country.

GLOBAL CROP PROTECTION INDUSTRY

Overview

Crop protection chemicals control pests that compete with crops for nutrients or consume the crop itself. Government-approved and highly regulated chemicals improve the financial returns of growers (farmers) by increasing the value of the crop for a given chemicals cost.

Pests come in many forms: weeds, insects (both visible and microscopic), and diseases. The tools supplied by chemical producers include herbicides (weed killer), insecticides (bug killers), and fungicides (disease killers). While pesticides are toxic to bugs, and must be applied safely because they can be toxic to humans, they have increased the affordability of food and the quality of life.

Crop chemical 2020 sales forecast by region

Region 2020E ($bil)
Asia Pacific 19.1
Latin America 17.3
Europe 12.2
North America 11.4
Middle East & Africa 2.4
World 62.4

According to a Morgan Stanley Research paper published in December 2021, the crop science market is estimated to grow at a 3.0% CAGR from 2018 to 2023. Globally, herbicides and insecticides are expected to record the strongest growth at a 3.1% CAGR, followed by fungicides at 2.7% and other crop protection products at 2.6%. By region, Asia is expected to grow at a 2.3% CAGR, North America and Europe at ~2.7%, and Latin America and the Middle East/Africa at 4.1% and 4.5%, respectively.

Sustainability

The global Agri-Food System is transforming itself to meet world demand that is asking for ~50%1 more food commodities by 2050 due to population growth and increased wealth. From a sustainability perspective, fertilisers increase yields, thus reducing the need to cultivate new land, which may include deforestation. However, application rates have already plateaued in the US and Europe, with limited upside in other regions too. In addition, there is a regulatory headwind, with the EU aiming to reduce fertiliser consumption by 20% by 2030, Organic food is steadily gaining popularity, and is grown without the use of synthetic fertilisers, pesticides, herbicides or fungicides. As such, it helps to protect biodiversity, reduces greenhouse gas emissions and enhances soil quality and growth is only expected to be 1-2% for nitrogen and ~2% for potash. Two new areas to watch will be green ammonia and biofertilisers2.

Industry Drivers

According to Morgan Stanleys Research report3, the following key factors are driving the crop protection industry:

1. A growing population: the global population is set to increase by 1.2 billion by 2030 and 2 billion by 2050, while the middle class will more than double to 4.9 billion by 2030.

2. A growing middle class fuels demand for increased food and protein production, which in turn drives demand for grain to support growth.

3. Fewer arable acres per capita means that products need to continue to maximise farmer yields; arable land is expected to decrease from half an acre per person today to less than one-third of an acre per person by 2050.

4. Estimated 17% of harvest losses from climate change through to 2050.

5. Ongoing disruption from biotech traits.

Outlook

Crop protection products such as fungicides, herbicides and insecticides improve agricultural yields, thus helping with the need to produce more food for a growing and increasingly wealthy population. However, as with fertilisers, the EU wants to reduce the use of chemical pesticides. Annual growth for the crop protection market is expected to be ~3%4, and companies that focus on building bio-based products would be at a relative advantage.

In recent years, low crop prices and adverse weather conditions have had a negative impact on market development. Price improvement was limited, primarily due to elevated levels of distributor inventory in many markets, as well as oversupply. Looking forward, the global crop protection market is set to move into more positive territory, since firm and steady commodity prices and inventories that are not too high look set to lay a solid path ahead.

According to Magna Information Centres report on Global Crop Protection Chemicals Market, the Crop Protection Chemicals market was valued at $59,800.0 Million in 2021, and is projected to reach $76,979.6 Million by 2030 growing at a CAGR of 3.53% from 2021 to 2030. Herbicide segment is expected to be the highest contributor to this market, with $42,004.0 Million in 2021, and is anticipated to reach $52,926.7 Million by 2030, registering a CAGR of 3.31%. Insecticide segment is anticipated to reach $7,650.4 Million by 2030 with the highest CAGR of 4.80%. Herbicide and Fungicide segments collectively expected to account for about 83.7% share of the Crop Protection Chemicals market in 2021, with the former constituting around 70.2% share. Insecticide and Molluscicide segments are expected to witness significant growth rates at a CAGR of 4.80% and 4.59% respectively, during the forecast period. Presently, share of these two segments is estimated to be around 9.7% in the overall Crop Protection Chemicals market in 2021, and is anticipated to reach 11.0% by 2030.

North America

According to Magna Information Centres report on Global Crop Protection Chemicals Market, the North American Crop Protection Chemicals market was valued at $15,667.6 Million in 2021, and is projected to reach $17,866.7 Million by 2030 growing at a CAGR of 2.28% from 2021 to 2030. Herbicide segment is expected to be the highest contributor to this market, with $10,905.5 Million in 2021, and is expected to reach $12,074.1 by 2030, registering a CAGR of 1.97%. Molluscicide segment is expected to reach $506.5 Million by 2030 with the highest CAGR of 5.34%. Herbicide and Fungicide segments collectively expected to account for about 82.9% share of the North America Crop Protection Chemicals market in 2021, with the former constituting around 69.6% share. Molluscicide and Insecticide segments are expected to see significant growth rates at a CAGR of 5.34% and 3.51% respectively, during the forecast period. Presently, share of these two segments is estimated to be around 10.7% in the overall North America Crop Protection Chemicals market in 2021, and is anticipated to reach 12.6%by 2030.

Europe

As per Magna Information Centres report on Global Crop Protection Chemicals Market, the Europe Crop Protection Chemicals market was valued at $8,730.8 Million in 2021, and is projected to reach $9,891.2 Million by 2030 growing at a CAGR of 2.21% from 2021 to 2030. Herbicide segment is expected to be the highest contributor to this market, with $6,150.7 Million in 2021, and is expected to reach $6,852.7 by 2030, registering a CAGR of 2.04%. Insecticide segment is expected to reach $987.1 Million by 2030 with the highest CAGR of 3.43%. Herbicide and Fungicide segments collectively expected to account for about 84.0% share of the Europe Crop Protection Chemicals market in 2021, with the former constituting around 70.4% share. Insecticide and Nematicide segments are expected to see significant growth rates at a CAGR of 3.43% and 2.97% respectively, during the forecast period. Presently, share of these two segments is estimated to be around 15.4% in the overall Europe Crop Protection Chemicals market in 2021, and is expected to reach 17.0% by 2030.

Asia

According to Magna Information Centres report on Global Crop Protection Chemicals Market, the Asia Crop Protection Chemicals market was valued at $22,903.4 Million in 2021, and is projected to reach $30,491.7 Million by 2030 growing at a CAGR of 3.87% from 2021 to 2030. Herbicide segment is expected to be the highest contributor to this market, with $16,169.2 Million in 2021, and is anticipated to reach $21,089.7 by 2030, registering a CAGR of 3.66%. Insecticide segment is anticipated to reach $3,063.5 Million by 2030 with the highest CAGR of 5.18%. Herbicide and Fungicide segments collectively expected to account for about 84.2% share of the Asia Crop Protection Chemicals market in 2021, with the former constituting around 70.6% share. Insecticide and Nematicide segments are expected to witness significant growth rates at a CAGR of 5.18% and 4.66% respectively, during the forecast period. Presently, share of these two segments is estimated to be around 15.4% in the overall Asia Crop Protection Chemicals market in 2021, and is anticipated to reach 17.1% by 2030.

Brazil

As per Magna Information Centres report on Global Crop Protection Chemicals Market, the Brazil Crop Protection Chemicals market was valued at $3,587.0 Million in 2021, and is projected to reach $4,568.8 Million by 2030 growing at a CAGR of 3.41% from 2021 to 2030. Herbicide segment is expected to be the highest contributor to this market, with $2,529.2 Million in 2021, and is anticipated to reach $3,119.4 Million by 2030, registering a CAGR of 3.08%. Molluscicide segment is anticipated to reach $81.4 Million by 2030 with the highest CAGR of 11.42%. Herbicide and Fungicide segments collectively expected to account for about 84.0% share of the Brazil Crop Protection Chemicals market in 2021, with the former constituting around 70.5% share. Molluscicide and Insecticide segments are expected to witness significant growth rates at a CAGR of 11.42% and 4.69% respectively, during the forecast period. Presently, share of these two segments is estimated to be around 9.5% in the overall Brazil Crop Protection Chemicals market in 2021, and is anticipated to reach 11.6% by 2030.

BUSINESS OVERVIEW

We are a fast-growing global agrochemicals company with a peer position in the generic crop protection chemicals industry. With a unique asset-light business model, our vast and growing library of dossiers and IPRs provide us solid foundations for growth in the global marketplace, especially in Advanced Markets such as Europe, North America and Latin America. It equips us with the ability to operate in a diversified range of formulations and generic active ingredients space globally.

The Company has a strong foothold in the advanced economies of European countries and US markets. Additionally, the Company has penetrated the regulated markets of LATAM and the Rest of the World. The Companys revenues are geographically segmented into 4 markets namely Europe, NAFTA, LATAM and RoW.

Our Business Verticals

The Company has two business verticals namely agrochemicals and non-agrochemicals.

Agrochemicals

Sharda Cropchem is primarily a crop protection chemical company engaged in the marketing and distribution of a wide range of formulations and generic Active Ingredients (AIs) across Fungicides, Herbicides and Insecticides. The Company operates across Europe, the NAFTA region, Latin America and the rest of the world.

Non-Agrochemicals

Under the Non-Agrochemical division, the Company is involved in the order-based procurement and supply of belts, general chemicals, dyes and dye intermediates. Sharda Cropchem sources these non-agrochemical products, from Chinese or Indian manufacturers and supplies to over 30 countries across Europe, North America, Latin America, Australia, and Asia.

A differentiated Business Model

The highly regulated agrochemical industry across the globe makes a strong case high entry barrier for obtaining registrations. We have the core capability to pick out interesting and hard-to-enter molecules to make a generic entry into. Once identified carefully, we have the strength to make the requisite investment in line with our growth strategy and go through the arduous journey towards obtaining registrations in advanced, regulated markets with critical entry barriers. Once filed and launched in the key target market, we then focus on widening our geographic access for each of our molecules and leverage economies of scale.

Our presence in multiple geographies has helped us diversify our revenue sources and possess critical regional knowledge to compete and cater to the needs of our customers. A key strength of our Company has been our rich and deep network of distributors and an experienced direct salesforce across multiple markets. Sharda Cropchem has made its presence felt following a strong framework in the agrochemical value chain. Adhering to our asset-light business model, we offera diversified range of formulations, without incremental manufacturing capex. It serves the fungicide, herbicide and insecticide segments, which protect different kinds of crops; the turf and specialty markets; as well as disinfectants in the biocide segment.

Sharda Cropchems asset-light business model facilitates the management to focus on the identification of generic molecules and registration opportunities, preparing dossiers and securing registrations for formulations and generic active ingredients.

The Company sources formulations and generic active ingredients in their finished form from third-party manufacturers for sale and effectively engages in third-party formulations. This acts as a key enabler for the Company to offer a diversified range of formulations and generic active ingredients in the fungicide, herbicide and insecticide space. Sharda Cropchem caters to diversified market demand with different formulations and molecules protecting multiple crops, serving turf and specialty markets and also providing disinfectants in the biocide segment.

An Agile & Asset-Light Business Model

Unlike the innovators, Sharda Cropchem follows a unique asset-light business model facilitating its competitiveness in identifying generic molecules, preparing dossiers, seeking registrations, marketing and distributing formulations through third party distributors or through its own sales force. The asset-light business model enables the Company to focus and invest its scarce resources i.e. capital and time for strengthening its registrations portfolio of generic active ingredients. Sharda Cropchems asset-light business model acts as a key differentiator from an innovator company, allowing the Company to save its capital, time and resources on R&D.

Building Global Growth on Registrations

The Company continues to bank on its strength to identify opportunities in generic molecules and corresponding formulations and generic active ingredients, preparing dossiers and seeking registrations in the relevant jurisdictions. Sharda Cropchems focused approach has yielded fruits as the number registrations and library of dossiers, owned by the Company has grown strength to strength. The Company has been assiduously devoting its time and capital for procuring registrations in different countries. Every jurisdiction has different legal and procedural requirements for seeking registrations. With its rich experience, Sharda Cropchem has successfully obtained the necessary regulatory approvals from these jurisdictions. The Company is well-equipped to respond to the potential issues as well as has the readiness to efficiently respond and comply with the regulatory requirements.

Investing in a deep Registrations Pipeline

With its smart product registrations management over the years, the Company has strategically identified generic molecules going off-patent and focused on seeking registrations to strengthen our portfolio of formulations and generic active ingredients across key markets. As of March 31 2021, the Company has obtained 2,543 registrations. With these kinds of numbers, Sharda Cropchem continues to embark on its IP Portfolio expansion with a firm registration pipeline for the future. In addition to its existing portfolio, the Company has filed for 1,128 new applications for registrations globally, pending at different stages. Our ability to deliver profits and free cash flows consistently over the years, enable us to make requisite investments to expand our portfolio in line with our strategy and build economies of scale in our offerings to the global marketplace.

De-Risking Sourcing Capabilities

The Company maintains a healthy relationship with multiple manufacturers in the agrochemical industry, mainly in China, from where it sources and with various formulators mainly from Europe and the US. Sourcing from multiple manufacturers helps the Company in getting quality products at optimal price thereby de-risking its sourcing capabilities.

Despite swinging demand cycles, the Company has gained the flexibility to supply of formulations or generic active ingredients at competitive market prices through its cordial relationships with the third-party manufacturers and third-party formulators.

Widespread Global Distribution Network

Sharda Cropchem is strengthening and widening the sales force in Europe, USA, Canada, Mexico, Colombia, South Africa, India, and rest of the world, in addition to third party distributors with a goal to enhance its presence in the agrochemical value chain. It enables the Company to penetrate its formulations and generic active ingredients in various countries backed by the third-party distributors and presence of its own sales force.

Diversified Geography and Product Portfolio

Sharda Cropchem uses incremental and disruptive augmentation in creating product variants in the pursuit of growth and delivering added value to our esteemed customers. It uses a two-fold strategy of further penetrating existing markets and entering new markets. As a global player participating in markets across all continents, the Company continues to expand and strengthen its distribution presence in tandem with its continual investment in obtaining registrations. Backed by rich experience in multiple geographies and products, Sharda Cropchem has developed knowledge about the local weather and soil conditions which aids to predict and meet the local demand. Additionally, the Companys rich library of dossiers gives an opportunity to enter untapped markets.

Prudent and Professional Management

Sharda Cropchems Promoters and the Management have rich experience in the agrochemical business, playing a key role in developing the business. The Companys apt domain knowledge and experience gives a substantial competitive advantage for expanding its business in existing markets and entering new geographies. The Companys business and operations are led by qualified, experienced, and capable management team. Sharda Cropchems ability to attract and retain the key management personnel and the in-house team propels it to streamline the registration process, thus optimizing registration costs and the time involved.

FINANCIAL OVERVIEW

The total revenue of Sharda Cropchem grew by 19.6%, from Rs 20,030 million in FY20 to Rs 23,956 million in FY21. The agro-chemicals division of the Company surged by 22.2% from Rs 16,850 million in FY20 to Rs 20,585 million in FY21. The revenues from non-agro division grew by 6% from Rs 3,180 million in FY20 to Rs 3,372 million in FY21.

The revenue contribution in agro-business is driven primarily by European Union region constituting 50.6% of the agro revenues, followed by NAFTA region, LATAM and rest of the world with 35.2%, 7.3% and 6.9%, respectively. The total Agro business revenue grew by 22.2% .The region wise Agro business revenue in Europe, NAFTA,LATAM and Rest of the world grew by 20%, 26%, 24.6% and 17.1% respectively. The agrochemicals business contributed 86% and non-agrochemicals contributed 14% to the revenues in FY21. EBITDA excluding foreign exchange gain / loss and write off of intangible assets and intangible assets under development, grew by 29.8% from Rs 3,506 million in FY20 to Rs 4,552 million in FY21. Net profit after tax increased by 39.2% YoY from Rs 1,647 million to Rs 2,292 million. PAT margin stood at 9.6% in FY21.

The total number of product registrations stood at 2,543 as of March 31, 2021. The Company has another 1,128 product registrations in pipeline across geographies. The Company has a strong net cash position of Rs 2,757 million as of March 31, 2021.

BUSINESS STRATEGY AND OUTLOOK

Sales Force Expansion

Sharda Cropchem aims to strengthen its own sales forces network. The Company believes that marketing and distribution play a key role in the agrochemical value chain. The Company is continuously expanding its sales force and minimizing dependency on third-party distributors.

Scaling our Biocides Portfolio

The Company continues to focus its Biological crop protection portfolio, also known as biologicals, representing a broad category of plant protection products that are derived.

Biological products, such as agricultural biologicals, are the fastest-growing segments in the agricultural input market. the key developer of this industry is the growing demand for eco-friendly, chemical-free products for better yield. According to Research and Markets report on "Agricultural Biologicals Market - Forecasts from

2021 to 2026"5, the agricultural biologicals market is expected to grow at a compound annual growth rate of 11.02% over the analysed period to reach a market size of US$19,699.792 million in 2026 from US$9,477.038 million in 2019. Agricultural biologicals are a distinctive group of natural products, derived from naturally occurring micro-organisms, beneficial insects, plant extracts, and other organic matters.

Continual Investment in Obtaining Registrations

The Company continues to bank on smart IP management for identifying the generic molecules going off-patent and focus on seeking registrations to strengthen its portfolio of formulations and generic active ingredients across Europe, NAFTA, LATAM and the Rest of the World. Sharda Cropchem scouts to obtain registrations of new formulations by leveraging its existing dossiers and portfolio of formulations & generic active ingredients.

One Stop-Solution provider Approach

The Company strives to adopt a factory-to-farmer approach and to become a one-stop solution provider with its established market presence and sound execution capability. Thus, it not only helps the Company to expand its margin and portfolio penetration, but it also helps to serve its esteemed customer efficiently. The approach helps in strengthening the existing customer relationship, additionally offering a wide scope to acquire and serve the new ones.

KEY RISKS AND CONCERNS

Sharda Cropchem continues to mitigate key risks across all levels of operations through structuring and continuously identifying, assessing and deciding on responses.

Exchange rate fluctuations

Being a global player, the Company has exposure to foreign currency revenue mainly in US Dollars and Euros. Owing to timing difference, the foreign exchange rate at which a sale is recorded in the books of account might not be equal to the foreign exchange rate at which the cash is realised by the Company which results in foreign currency gain or loss, based on the depreciation or appreciation of the US Dollar.

Mitigation: Sharda Cropchems exports act as a natural hedge against imports. Additionally, the Company takes plain vanilla hedge against the orders to reduce its exposure. However, any adverse movement in the foreign exchange rates might impact the results of operation, cash flows, liquidity, and financial condition of the Company.

Extension of Patents

The Company is exposed to high risks from patent laws in different countries. Any extension of patents may adversely impact the business leading to unnecessary delays in formulations and generic active ingredients. Additionally, the introduction of formulations and generic active ingredients might get postponed on the undue extension of patent terms, or the extension of exclusivity in the marketplace by the respective regulatory authorities, which will unfavourably affect the business.

Mitigation: The Company continuously looks to add multiple registrations in different geographies to mitigate the risk of patents extension.

Changes in government policies

The Company complies with the laws, rules and regulations of multiple countries due to global presence, which might affect the decision-making process. Any modifications in the governmental policies related to agriculture and any adverse alterations in policies relating to the agro-sector — like governments cutdown in agricultural expenditure, contraction of incentives and subsidy systems, new export policy for crops, fluctuation of commodities prices — will impact the Companys business. The stated factors could lower the farmers ability to obtain a minimum support price for the crop-output which might reduce their ability to spend on agrochemical, thereby impacting the Companys market demand and sales.

Mitigation: The Companys strong geographic spread and diversified product portfolio reduces its reliance on any single country for selling it products.

Adverse Climate or Weather conditions and reduced pest attacks can lower demand for agrochemicals

The demand for agrochemicals gets adversely impacted by unfavourable climate or weather patterns and pest attacks thereby building-up inventory in the system. The seasonality nature of the business makes it difficult for an agrochemical player to forecast crop output linking on historic production thereby affecting business operations.

Mitigation: Over the years, the Company has gained deep insights about the local weather and soil conditions, which facilitates to foresee and serve its customer ever-changing demands in different geographies.

Developing Resistance - Contracting the Product Lifecycle

With the passage of time, the effective life of agrochemicals diminishes as the targeted pests develop resistance. Thus, it becomes necessary to consistently introduce new agrochemicals for successfully eliminating pest attacks.

Mitigation: Sharda Cropchem continues to invest in registrations for new products, thereby, enhancing its portfolio in multiple geographies.

INTERNAL CONTROLS

The internal controls of the Company are being reviewed from the leading and reputed external agency. This results in an unbiased and independent examination of the adequacy and effectiveness of the internal control systems to achieve the objective of the optimal functioning of the Company. The scope of activities includes safeguarding and protecting the Companys assets against unauthorised use or disposition, maintenance of proper accounting records and verification of the authenticity of all transactions.

The Company has an effective compliance management system, which gives preventative warnings in case of any violations. To ensure that it is in conformance with the overall corporate policy and in line with predetermined objectives, the independent Audit Committee and/or the Board of Directors regularly review the performance of the Company. The Companys Internal auditors are renowned M/s. Bathiya & Associates LLP, to provide guidance in smooth functioning of risk management policies, building an organisation wide awareness of risks, across businesses and corporate functions; developing formal reporting and monitoring processes; building risk management maintenance plans that would keep the information updated and refreshed; deploying an ERM framework in key business areas and corporate functions; aligning risk management with the business planning exercise and aligning the role of assurance functions.

HUMAN CAPITAL

The domain knowledge and experience of the Companys Promoters and management team propels the Company with a significant competitive advantage as it continues to expand in existing markets and enter new geographies. Sharda Cropchem continues to invest in its ‘Human Capital. The Company onboards qualified professional management and key personnel, which empowers Sharda Cropchem to run independently. The open ‘human capital engagement has facilitated the Company to attract and retain the top talent.

CAUTIONARY STATEMENT

Statements made in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations may be "Forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting demand-supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the government regulations, tax laws and other statutes & other incidental factors.