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Will MSP hike increase farmers’ income?
The government has raised MSPs (minimum support prices) of kharif crops by 1- 9% (median hike 3.5%). Farmers’ income levels depend on 1) realisation growth (higher MSP) and 2) increase in food grain production (higher area sown and increase in yield per hectare). We note 9.5% decline in area sown may negate the benefit of higher MSP and productivity improvement (if any). Even if area sown increases with better monsoon in Jul’19, we expect negligible increase in revenues for farmers which may force them to curtail the investments in agri inputs. We believe FY20 may turn out to be weak year for agri sector in India. However, silver lining is attractive valuations as many agri stocks are trading near mean PE -1 standard deviations offering opportunity for long-term investors. BUY: Avanti Feeds, Insecticides (India), Kaveri Seed and ADD: Godrej Agrovet.
* Farmers’ revenues to be hurt: The farmers’ revenues depend on higher realisations (MSP hikes), increase in area under cultivation (area sown) and better productivity (improved yield per hectare). We note the 3.5% median MSP hike, 9.5% decline in area sown and ~2% assumed yield improvement may result in decline in revenues for farmers. Even if the area sown increases with better monsoon in Jul’19, we expect the income levels of farmers to see negligible increase, YoY. This indicates limited scope for investment in seeds, agrochemicals and fertilisers.
* Median MSP hike of 3.5%: The government has increased MSPs of kharif crops by 1-9%. MSP of major crops i.e. paddy, jowar and bajra has been hiked by 3.7%, 4.9%, and 2.6%, respectively, YoY. MSP of cotton is also hiked by 2%. Prices of soybean and ragi have been hiked maximum i.e. 9.1% and 8.7%, respectively, YoY.
* Decline in sowing data: The sowing data (28th Jun’19) indicates 9.5% YoY decline and 25.5% decline compared to normal area sown. The sowing data, excluding sugarcane, indicates decline of 12.6%. Area sown of major crop cotton is down 15.9%, YoY.
* Productivity improvement of ~2%: The food grain production per hectare in India was 2,153kg in FY17. It has grown at CAGR of 1.7% over FY1991-17. We believe better farming practices may improve productivity by ~2% even in FY20.
* Limited growth tailwinds for agri input sector in FY20: We note second weak monsoon in a row will hurt farmers as well as agri input companies. While there was impact on income statement of Agri companies in FY19, we expect some impact even on the balance sheet in FY20 due to higher debtors and inventory.
* Stock calls: Though agri sector continues to suffer, we note the stock prices of most agri companies are at attractive levels for medium-long term investors. We believe investors can add companies which have steadily generated return ratios above cost of capital and quoting below mean PE of past 10 years. We rate Avanti, Insecticides and Kaveri as BUY and Godrej Agrovet as ADD.
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