Sabero Organics: Profits from pests

Sabero Organics Gujarat Limited is a manufacturer of specialty chemicals and intermediates for the crop protection business. Sabero Organics has a presence in all the three segments of the crop protection industry Herbicides, Fungicides, and Insecticides.

Sabero Organics main products are Mancozeb & Glyphosate. Sabero Organics is the largest producer of these products in India and second largest producer in the world. Mancozeb contributes about 35-40% of Sabero Organics‘ sales. While mancozeb is a fungicide, glyphosate is a herbicide.

Sabero Organics product portfolio comprises of five insecticides, two fungicides and one herbicide. In 2009 Sabero Organics introduced two new products. “Propineb” is a fungicide while “methamidophos” is an insecticide. Several other products are in the pipeline. Sabero Organics doubled its mancozeb capacity to 30,000 TPA. This helped Sabero Organics to become the world’s second largest producer of this product.

Sabero Organics business model is to set up subsidiaries (six in all) and associate companies in countries such as Australia, Europe, Philippines, Argentina and Brazil. This enables it to obtain registrations locally as well as in adjoining countries. In FY09 65% of
Sabero Organics revenues came from exports. Sabero Organics is expected to garner about 70% of revenues from exports in FY 10.

Sabero Organics has about 240 product registrations across 50 countries. About 100+ registrations are presently under process. Sabero Organics‘ registration of Chlorpyriphos in Brazil was obtained in April, 2009. It expects to obtain three more registrations of Mancozeb, Acephate & Glyphosate in Brazil in FY10. Brazil is the second largest Agrochemical market in the world and provide an immense marketing opportunity for Sabero Organics. To capitalize on this, Sabero Organics is trying to register its herbicide and fungicide products as a source for all 24 European Union countries. If this works out, a huge market will open up for Sabero Organics.

One advantage of having a geographically diversified business is that Sabero Organics is protected from the risks and vagaries of monsoon in a particular territory. This provides much-needed revenue visibility to Sabero Organics.

Sabero Organics‘ business model does not require much capital expenditure. Its business strategy is to register and introduce new products in overseas markets and increase the retail business.

Sabero Organics has a good growth track record. In the preceding five years, Sabero Organics has increased its profits at a cumulative annual growth rate (CAGR) of 61% while the net sales have grown at 30%. Sabero Organics‘ net worth has grown at 24% while Sabero Organics debt-equity ratio has improved from 2.1 in FY05 to 1 in FY09. Sabero Organics‘ operating margins have improved from 10.6% in FY06 to 14.4% in FY09. For the year ended December 2009, Sabero Organics‘ operating margins increased to 18.4%. Sabero Organics has a consistent record of generating cash from operations. Sabero Organics‘ return on employed capital (RoCE) was 37.5% in FY09.

Sabero Organics has a strong financial track record, good management pedigree, diversified product portfolio and a wide spread geographical presence. Sabero Organics‘ prospects and valuations can be expected to improve further after the new registrations from Brazil and European countries are obtained by FY10 – FY11. At CMP of Rs. 75, Sabero Organics is trading at a price-to-earnings multiple (P/E) of 6.6 for FY 10. At expected net profit of Rs 47 crore in FY11, the CMP is 4.7. This is cheap compared to competitors Meghmani Organics (PE 13), United Phosphorous (PE 15) and Rallis India (PE 16) though the competitors are entitled to some premium owing to their presence in other agri-chemical sectors.