Four farm stocks to own :: Business Line

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You're convinced that your portfolio can reap gains from companies manufacturing agricultural inputs, but which ones should you own? We sifted through the listed for companies with rock solid fundamentals- a diversified profile, limited debt, a return on net worth of about 20 per cent and operating profit margins of 15 per cent plus.

Coromandel International

With a portfolio spanning complex and phosphatic fertilisers, crop protection chemicals, micronutrients and recently rural retail, Coromandel is a preferred exposure for institutional investors seeking the agro theme. The stock has been through a rough patch recently owing to a drop in March quarter profits, which were impacted by lower trading volumes, high input costs and a plant shutdown. However, the business remains a good medium-term bet. The shift to a nutrient-based subsidy system has seen Coromandel improve its margins and upgrade its product mix. The recent upward revisions in subsidy for decontrolled fertilisers signals the shift to a more friendly policy stance. The company's backward integration into feedstock has provided a hedge against volatile prices. The stock (Rs 318) offers scope for gains at a price-earnings multiple of 13 times trailing 12-month earnings.

Rallis India

In barely five years, Rallis India has scripted a remarkable turnaround story, hiving off unrelated business and sharpening its focus on agri- inputs alone. Having built up the largest manufacturing capacity for crop protection chemicals in India, the company has scaled up revenues by diversifying from insecticides into herbicides and fungicides, stepping up launches of new branded products and leveraging its all-India distribution network to market other agri inputs. The distribution reach has also helped the company forge marketing tie-ups with global agrochem majors. A 30 per cent CAGR in profits on the back of 17 per cent sales growth in three years has been achieved with improvements in operating profit margins from 12 to 19 per cent, while the return on net worth has vaulted to 25 per cent. The growth prospects justify the current PE multiple of 21 times trailing 12 month earnings (market price Rs 1,398).

Kaveri Seed Company

A small-cap company with a focus on the Indian seeds market, Kaveri Seed Company (Rs.367) has managed a fourfold expansion in sales and an even better fivefold growth in profits since 2007, its IPO year. Those growth rates reflect the company's portfolio of nearly 50 certified hybrids in maize, sunflower and paddy. The strong export prospects for corn and the rising market and support prices have aided demand for the company's hybrid seeds and endowed it with pricing power as well. This also explains the high operating profit margins of 23-24 per cent with return on net worth at 20 per cent.

The company has used the Rs 68-crore proceeds of its IPO to invest in research and plans to expand its portfolio of seeds in vegetables, millets and rice. A license to market Bt cotton has allowed the company to bag a slice of this thriving market. The stock's small-cap status has made for a low valuation, with the stock's PE at 13.

United Phosphorus

With 70 per cent of its sales coming from exports of agrochemicals to North America, Europe, LatAm and Europe, United Phosphorus (Rs 168, PE of 14) is more a play on the global agri theme than the domestic one. While agrochemical companies are usually subject to risks of concentration in a few crops, molecules or regions, United Phosphorus has managed to neatly diversify away these risks by building a vast portfolio of products and brands and buying out brands and agrochemical companies overseas. The company's sales may have slowed in 2010 after growing at a scorching 23 per cent in the past five years, but recent acquisitions of have the potential to add to sales. A recovery in the European market may also improve the product mix and lift operating profit margins above the current 20 per cent.