Bayer: Investors must wait for a better entry point for significant gains

The sharp rerating of the sector and the company has taken valuations into expensive zone

The Bayer CropScience stock is up about 10 per cent over the past week after the company tied up with ITC’s agri-business division. The tie-up will help Bayer expand the reach of its crop protection products through ITC’s e-Choupal 4.0 platform, offer advisory services, and mitigate the disruption caused by the Covid-19 pandemic. 

Growth is expected to be strong on the back of an uptick in demand, led by a normal monsoon and the benefits from the merger with Monsanto. In addition to the higher minimum support prices for rabi crop, steps taken to improve procurement should help in the upcoming kharif season. Non-agricultural cash flows have been robust, led by the government’s increased focus on the rural employment guarantee scheme. This, coupled with the frontloading of rural schemes, is positive for the agri-input sector.  

A major trigger is the onset of monsoon, which unlike the 44 per cent deficit last year (until the third week of June) is 28 per cent above normal this year. Analysts at JM Financial believe the early and timely onset of rains should ensure that sowing increases in rainfed areas (west and south India). This is beneficial to the agrochemical sector, given the increased use of branded agrochemicals in these regions. 

While these are positive, growth should be driven by an increased portfolio, including the products of Monsanto, the ramp-up of speciality products and tapping into the innovation-based pipeline of the parent. Unlike the muted new product launches in the last few years, the company has 20 agrochemicals and 30 seeds launches lined up for until 2022, besides 100 brand extensions. 

 

 

Saurabh Kapadia of AMSEC Research believes that the integration with Monsanto will help drive synergies, while lower commodity costs and the product mix change will improve margins. The firm has guided for Rs 120 crore of synergy benefits given the consolidation of channel presence, procurement and supply chain efficiencies, and administrative cost savings.

Raw material prices across chemicals have declined by up to 20 per cent year-on-year. The costs of some chemicals the company imports have also declined 10-30 per cent. While the company does source raw material from China, the management indicated that its sourcing is well diversified with some raw materials imported from Germany and the US. 

Improving product mix, coupled with lower raw material costs, is expected to boost operating profit margins by 200 bps over the next two years, from 20.1 per cent in FY20. While revenues are expected to grow at a steady pace of high single digits on the FY20 base of Rs 3,600 crore, higher margins should boost earnings growth. Analysts expect bottom-line growth of 20 per cent over the next two years. 

While there are multiple positives led by a re-rating of both sector and company, the stock, which has gained 93 per cent over the last three months, is trading at an expensive 36.5 times its FY22 earnings estimates. Investors should wait for a better entry point to make significant gains from these levels.