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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily17042012.pdf
Agriculture
Medium-term hiccups. The profitability of Indian farms has stagnated after an initial
boost due to a big increase in MSPs in 2008. Input cost inflation, led by labor, has offset
much of the gain from higher MSPs. Despite potential for long-term growth, we see
moderating medium-term growth for agri-inputs as farm incomes leave little for
investment. We see opportunity in agri-chemicals, where usage is low and in the
formulations segment, where RoCEs are high (>20%). We initiate coverage on Rallis
with a BUY rating (TP Rs160; 16.5X Sept 13 EPS). We have a SELL rating on
Coromandel (TP Rs260; 12.5X Sept 13 EPS) as valuations are expensive.
Farm profitability stagnant; spends on agri-inputs to moderate in the medium term
In 2008, the Government increased MSPs (by over 30% yoy for rice and wheat), which boosted
farm income; but that initial fillip seems to have faded. A subsequent modest increase in MSPs, of
~10%, was offset by cost inflation, led by labor costs (25-40% of the cost of farming), which
almost doubled over FY09-12. The Commission for Agriculture Costs and Prices’ (CACP) index for
labor cost moved to 337 in FY2012 from 189 in FY2009. Besides, an increase in associated costs
like fertilizer, led to stagnating farm profitability in absolute terms and declining profitability in real
terms. We expect moderation in spends on agri-inputs.
Long-term drivers: Rising demand for fruits, vegetables and livestock products
Even as stagnant farm profitability has led to our cautious view on agri-inputs in the medium term,
we think higher consumption of fruits, vegetables and the indirect impact (higher demand for
crops used as feed) from higher consumption of livestock products, will drive higher consumption
of agri-inputs in coming years. According to the Planning Commission, demand for fruits,
vegetables and livestock products will grow at higher rates (over 5%) than food grain growth (less
than 1%) over the next 10 years.
Rallis better placed to capture long-term growth prospects in the agri space
We initiate coverage on Rallis and Coromandel, which operate in the agri-chemicals and complex
fertilizer segments, respectively. We believe the companies are well placed to capture long-term
growth in agri-inputs for the following reasons: (1) both are dominant in their respective product
segments and (2) there is a low (absent in agri-chemicals) degree of Government regulation. In our
view, agri-chemicals is a better business to play long-term growth in the agri-inputs space as usage
in India is lower than the world average (unlike complex fertilizer). Besides, it is a branded business
(formulations) that offers higher RoCEs (>20%). Rallis, being the largest domestic player in the
segment, is ideally placed to benefit.
We have a SELL rating (TP Rs260; 12.5X Sept’13 EPS) on Coromandel as we find valuations
expensive for a commodity business, with no backward integration. The company has weak
competitive (globally) positioning on cost parameters and hence, low RoCEs on green-field
investments. We see subdued earnings growth in coming years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily17042012.pdf
Agriculture
Medium-term hiccups. The profitability of Indian farms has stagnated after an initial
boost due to a big increase in MSPs in 2008. Input cost inflation, led by labor, has offset
much of the gain from higher MSPs. Despite potential for long-term growth, we see
moderating medium-term growth for agri-inputs as farm incomes leave little for
investment. We see opportunity in agri-chemicals, where usage is low and in the
formulations segment, where RoCEs are high (>20%). We initiate coverage on Rallis
with a BUY rating (TP Rs160; 16.5X Sept 13 EPS). We have a SELL rating on
Coromandel (TP Rs260; 12.5X Sept 13 EPS) as valuations are expensive.
Farm profitability stagnant; spends on agri-inputs to moderate in the medium term
In 2008, the Government increased MSPs (by over 30% yoy for rice and wheat), which boosted
farm income; but that initial fillip seems to have faded. A subsequent modest increase in MSPs, of
~10%, was offset by cost inflation, led by labor costs (25-40% of the cost of farming), which
almost doubled over FY09-12. The Commission for Agriculture Costs and Prices’ (CACP) index for
labor cost moved to 337 in FY2012 from 189 in FY2009. Besides, an increase in associated costs
like fertilizer, led to stagnating farm profitability in absolute terms and declining profitability in real
terms. We expect moderation in spends on agri-inputs.
Long-term drivers: Rising demand for fruits, vegetables and livestock products
Even as stagnant farm profitability has led to our cautious view on agri-inputs in the medium term,
we think higher consumption of fruits, vegetables and the indirect impact (higher demand for
crops used as feed) from higher consumption of livestock products, will drive higher consumption
of agri-inputs in coming years. According to the Planning Commission, demand for fruits,
vegetables and livestock products will grow at higher rates (over 5%) than food grain growth (less
than 1%) over the next 10 years.
Rallis better placed to capture long-term growth prospects in the agri space
We initiate coverage on Rallis and Coromandel, which operate in the agri-chemicals and complex
fertilizer segments, respectively. We believe the companies are well placed to capture long-term
growth in agri-inputs for the following reasons: (1) both are dominant in their respective product
segments and (2) there is a low (absent in agri-chemicals) degree of Government regulation. In our
view, agri-chemicals is a better business to play long-term growth in the agri-inputs space as usage
in India is lower than the world average (unlike complex fertilizer). Besides, it is a branded business
(formulations) that offers higher RoCEs (>20%). Rallis, being the largest domestic player in the
segment, is ideally placed to benefit.
We have a SELL rating (TP Rs260; 12.5X Sept’13 EPS) on Coromandel as we find valuations
expensive for a commodity business, with no backward integration. The company has weak
competitive (globally) positioning on cost parameters and hence, low RoCEs on green-field
investments. We see subdued earnings growth in coming years.
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