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Bayer CropScience – MNC Agrochem Company


Company Name – Bayer CropScience Limited (Bayer CropScience)


Current Share Price – INR 4,131 (March 10, 2023)


Market Cap – INR 18,567 cr


 

1. What is interesting about the stock?


Indian agriculture is unique in several ways. Here are some of the key features that make Indian agriculture distinctive:

  • Smallholder farmers: Indian agriculture is dominated by smallholder farmers who cultivate small plots of land using traditional farming methods. About 85% of Indian farmers are smallholders who own less than 2 hectares of land.

  • Diverse crops: India has a rich diversity of crops due to its varied agro-climatic conditions. The country is a major producer of crops such as rice, wheat, pulses, cotton, sugarcane, and spices, among others.

  • Monsoon dependence: India's agriculture is heavily dependent on the monsoon rains, which provide water for irrigation and crop growth. Erratic monsoons and climate change have made Indian agriculture vulnerable to droughts and floods.

  • Traditional farming practices: Indian agriculture has a long history of traditional farming practices, including organic farming and agroforestry. These practices are being revived to promote sustainable agriculture and conserve natural resources.

  • Use of manual labor: Indian agriculture relies heavily on manual labor, with many tasks such as planting, weeding, and harvesting still done by hand. This has implications for productivity and labor costs.

India is one of the largest consumers of agrochemicals in the world. According to a report by the Federation of Indian Chambers of Commerce and Industry (FICCI), India is the fourth largest consumer of agrochemicals globally, after China, the United States, and Brazil. In terms of consumption per hectare of arable land, India's consumption of agrochemicals is lower than that of developed countries like the United States and Japan, but higher than that of other developing countries like China and Brazil. The consumption of agrochemicals in India has been increasing steadily over the years, driven by factors such as population growth, rising food demand, and increasing agricultural productivity. Top agrochemical companies in the world are Bayer, Syngenta, BASF, Corteva Agriscience, FMC Corp, ADAMA Agricultural Solutions, UPL, Nufarm, Sumitomo Chemical, and Mitsui Chemicals Agro.


Bayer CropScience Limited is the Indian subsidiary of Bayer AG's Crop Science division, which develops and markets crop protection products and seeds globally. Bayer CropScience Limited was founded in 1958 and has its headquarters in Thane, Maharashtra, India.


Bayer CropScience Limited is one of the leading companies in the Indian agrochemical market, providing a range of products including insecticides, fungicides, herbicides, and seed treatments.


Company, with the acquisition of Monsanto, is also a major player in the Indian seed market, with a range of genetically modified and conventional seeds for crops such as cotton, rice, and vegetables. The Company is committed to sustainable agriculture and works closely with farmers to develop innovative solutions that can improve crop productivity while minimizing environmental impact.


Sales mix in FY22 was domestic agrochemicals 82%, domestic corn seeds 11%, export 4%, and traded seeds 3%.


Bayer CropScience Limited operates in close collaboration with its global parent company, Bayer AG, and leverages its research and development capabilities to bring innovative technologies to the Indian market.


Company is also investing in digital farming. This comprises software tools that integrate data from farm equipment, satellites, field sensors, irrigation systems, drones, and other input sources and then analyze that data to empower farmers to make better decisions through data science and predictive analytics. With detailed, real-time assessments of growing conditions and crop health, Bayer’s digital tools such as FarmRiseTM and its Digital Prediction System support a sustainable, abundant harvest.


Why invest in Bayer CropScience?

  • Access to global R&D and learnings from other markets

  • Strong MNC brand

  • Diverse product portfolio and extensive distribution network

  • Investment in digital farming and new technologies like drone-based spraying

  • Potential to use India as a base for exports – reducing dependence on China

2. Key Historical Financials


  • Company revenue and profit have been growing 11% and 16% on a CAGR basis respectively in the last 5 years

  • EBITDA margin is in the range of 17-20%

  • Business is seasonal as it is linked to the agriculture cycle so Q1 and Q2 tend to drive revenue and profits

  • Working capital (especially receivables) days significantly increased in FY22 leading to a poor cash flow conversion (CFO/EBITDA) ratio

  • ROE and ROCE were at 25% and 31% respectively in FY22 – quite healthy

3. What is my view on company valuation?


The Company trades at P/E (TTM) multiple of 27x vs a 5-year median of 45x and an agrochemical industry median of 22x. Share price has been flat over the last 3 years. The disclosure level is weak with no quarterly investor presentation or an earnings call.


On an overall basis, Company looks quite exciting. However, the valuation looks expensive for a Company which is growing at 10-15%.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Monsanto carries reputation risk in India which could rub off on Company’s brand image

  • Bayer has local manufacturing in the US, Brazil, and Europe – limiting the export potential

  • Indian farmers focus on value for money – which tends to favor local players in a highly competitive market

 

About the Author


I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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