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Our Take:

Bayer CropScience Ltd (BCSL) a leading player in the Indian agrochemical sector, which benefits from (1) its healthy relationships with farmers, (2) extensive product portfolio, and (3) strong distribution network. The company is engaged in ‘Agri Care’ business, which includes manufacture, sale and distribution of insecticides, fungicides, herbicide and various other agrochemical products and corn seeds. It has a broad presence in crop protection, seeds & traits, environmental science, and digital farming. Its amalgamation with Monsanto India also lends diversity to its product offerings across the value chain in the agricultural input business, especially in the hybrid seed segment. Their combined research and development (R&D) capabilities, and wide market reach and farmer connect, will bring in benefits in the long run. BCSL has started realizing contributions from the integration with Monsanto through consolidation of employee talent, product portfolios, and business operations. This amalgamation should provide Indian farmers a strong portfolio of innovation-led agricultural solutions.

We expect better growth for the sector as a whole, given renewed focus on self-sufficiency in food with an increasing population and increasingly volatile world trade environment and continued focus on doubling farmer incomes. Continual emphasis on innovative solutions and new business models remain as key drivers for the company. The company’s Seed 2 Harvest initiative (launched in FY08) combined with initiatives taken by its parent Bayer BioScience Pvt Ltd offer integrated farmer solutions. The company is developing a package for the farmers, which would include everything from seed to harvest in key agriculture and horticulture crops like rice, cotton, fresh fruits and vegetables.

Bayer CropScience has also collaborated with more than 45 agricultural research universities and institutions for generating data of more than 275 registration trials. This data would help it secure more product registrations in the years ahead. In FY20, BCSL launched one new product in the crop protection segment, four in hybrid seeds, and one in environmental science. It had launched 12 products in FY19 (7 in crop protection, 4 hybrid seeds, and 1 in environmental science). Its vast distribution network, robust balance sheet, new product launches, and expectation of a good monsoon together should boost its earnings trajectory. COVID-19 did not have an adverse impact on the company’s operations, as it falls in the necessary product category, which, in fact, has helped it during the crisis. Further, its Monsanto connection has helped increase its distribution reach, and should add to topline and profitability.

View & Valuation:

Bayer CropScience has posted 9% revenue and 18% PAT CAGR over FY17-20. In FY20, the company recorded ~17% yoy increase in revenue as it also included the Monsanto business. EBITDA margin witnessed a sharp surge of 490bps on the back of lower other expenditure and lower employee costs after the merger. The Bayer-Monsanto merger is bringing in synergies, which are visible in FY20 and 9M FY21 performance. For 9MFY21, total revenue grew ~12% yoy at Rs 3528cr. EBITDA grew 9% yoy at Rs 729cr on lower gross margin. BCSL reported a ~3% decline in net profit, mainly due to one-off tax expenses. We estimate 11% revenue CAGR for FY20-23E, led by both Crop Protection and Seeds businesses. We expect margin to expand by 70bps over the same period, given cost curtail measures. A healthy topline and steady margin should drive 17% CAGR in PAT over the same period. Strong domestic business, MNC promoters, low capex requirements, and a debt-free balance sheet are the positive triggers for the stock. The company enjoys strong RoE/RoCE and consistently generates strong cash flow. We believe investors can buy the stock at LTP and add more on dips to Rs 4599 (27.5x FY23E EPS) for base case fair value of Rs 5603 (33.5x FY23E EPS) and bull case fair value of Rs 6105 (36.5x FY23E EPS) over the next two quarters.

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