SABERO ORGANICS GUJARAT – Multibagger

Sabero Organics Gujarat has been able to maintain a comfortable lead in terms of margins and can be banked upon as good scrip for the portfolio

There are a few companies whose unusual scrip movement may indicate that it is more of an operator’s fancy and the broader market may overlook the fundamental strength and the value pick it could be for long term. Sabero Organics Gujaratinvestors from considering it from a long-term perspective. In fact it is these wild gyrations that first caught our attention and we decided to go beyond this brisk scrip movement and try to understand what this company is really about. (SOGL), a fairly unknown name till last year, could be one such scrip whose unusual movement from a 52-week low of Rs 10.30 in March 2009 to a 52-week high of Rs 70.30 during November 2009 might have put off

SOGL is basically into the business of manufacturing crop protection chemicals. This Rs 377 crore turnover company has a presence in three broad segments viz, fungicide, insecticide and herbicide. The company is engaged in the production of largest-selling products globally such as Mancozeb, Acephate, Monocrotophos and Glyphosate. Nearly 65 per cent of the company’s sales are generated from exports, while the balance 35 per cent from domestic market. There are several reasons why we feel SOGL is a better pick for long-term investment.

First, SOGL has a well-diversified range of portfolio which helps de-risk its business. Its products span across fungicides, insecticides and herbicides which contribute 40 per cent, 40 per cent and 20 per cent to the total sales respectively. On the product front, Mancozeb is SOGL’s key product and contributes 40 per cent to the topline, while other core products such as Acephate, Monocrotophos, Glyphosate each contribute 15 per cent to the total sales respectively with the balance 15 per cent coming from Chloropyriphos and others intermediates.

Second, what have been the major driving factors for the growth of SOGL are the aggressive product registrations, new product launches and capacity expansion undertaken last fiscal. SOGL already owns 240 registrations in 50 countries and there are about 50- 60 registrations in the pipeline. SOGL is also developing new products and aims at launching at least 1-2 products every year. Besides, SOGL had also undertaken capacity expansion with aninvestment of Rs 35 crore in FY09 whereby it doubled the capacities of Mancozeb, Chloropyriphos and Glyphosate. It is also expanding the capacity of Monocrotophos through de-bottlenecking. All this expansion allows SOGL to generate growth through higher volumes.

But the biggest step for SOGL’s is its entry into the Brazilian market. SOGL got its first registration of Chlorpyriphos in Brazil in April 2009 and also got a technical registration for its product Mancozeb last month. Brazil is the second largest agro-chemical market in the world after the US and the biggest markets for Mancozeb, SOGL’s top revenue contributor. Once this happens, it could push SOGLs revenue growth to another trajectory altogether. Explains Chuganee, “Brazil is a big market for Mancozeb and the growth out there could be 50 per cent more than what we are currently doing.”

For 9MFY1O SOGDs revenue grew by 25 per cent to Rs 333.74 crore while its net profit increased by 61 per cent to Rs 31.59 crore. This result was on account of higher volumes, increased realisations and flat raw input prices. In fact management expects the product prices of Mancozeb and Glyphosare to go up, even as input prices are expected to remain stable. This could positively impact margins in the coming quarters. For FY10, SOGL could post revenuesSOGL generates PE of mere 5.5x, compared to 16x of Rallis India and 46x of United Phosphorous. On an EV/EDBITA basis too SOGL is available at 2.41x, which is quite low and makes sense to grab it at its CMP of Rs 80 with a one year target price ofRs 108. of around Rs 450 crore while profits could be around Rs 42 crore. At these estimates,