Companies to focus on agri input space

Agricultural input companies have gained 25-46 per cent on the bourses, led by expectations of a good monsoon. The trends that draw attention beyond the monsoon include co-marketing arrangements of foreign players with Indian companies, offering growth opportunities for both.

While Sumitomo acquired Excel Cropcare to  augment its India presence, PI Industries and Mitsui Chemical Agro have decided to establish a joint venture for registration of agrochemical products in India. Analysts feel that Indian companies with a strong distribution footprint and capabilities on brand building will continue to see higher growth rates. In the past, different players with the same product have seen different sales results as one drove better efforts on farmer engagement and brand building over the other, say analysts at Ambit Capital who reiterate their ‘Buy’ rating on PI Industries, looking at its strong execution track record.

PI’s already robust product basket for the domestic market is likely to strengthen further following the new agreement to market Mitsui products. The company has various in-licensed products that are doing well and continues introducing new products.

Analysts at Edelweiss remain upbeat on PI’s prospects expecting better monsoons and new launches acting as catalysts for domestic growth, as also bright prospects of contract manufacturing (CSM) business in FY17. Crops during FY16 were impacted not only in India but internationally and hence the growth rate of PI’s CSM business (60 per cent of overall revenues) had remained subdued at 10 per cent compared to the compounded annual growth rate (CAGR) of 36 per cent seen during FY08-16.

Thus, the stock remained range-bound. While the trend may continue till earnings catch up, triggers for growth are visible. The CSM business is likely to grow 18-20 per cent during FY17 led by stabilisation of the Jambusar plant and order book of $850 million which is equivalent to about four years of revenues. Analysts at Axis Capital say they like PI due to its in-licensing model in domestic agrichem (enjoying higher margins) and strong entry barriers in the CSM business. Sighting similar reasons, analysts at Edelweiss say they remain upbeat on the company’s long-term prospects.

Like PI, a few other companies also have a strong portfolio in herbicides and fungicides in addition to insecticides. Analysts at HSBC say the herbicide category is currently 28 per cent of the $2.4-billion domestic market and they expect this category to grow at 15 per cent CAGR over the next five years aided by labour shortage. Within domestic pure-plays, they continue to prefer Bayer CropScience and Dhanuka Agritech, given their excellent product portfolios and pipeline, and the alignment of these towards the high-growth categories of herbicides and fungicides. Analysts at Emkay Research believe Bayer will continue to enjoy rich valuations due to MNC premium, cash-rich balance sheet and history of buybacks. Trading at Rs 3,934, HSBC has a target price of Rs 4,335 and a good monsoon can lead to further upgrades.

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