The stock of Bayer CropScience may be a good bet for investors looking for a defensive buy. With a portfolio of branded chemical formulations that caters to crop protection, public health and household pest management, the company has notched up consistent sales and profit growth in the last five years despite adverse business cycles.
Steady profit margins, negligible debt and cash coffers that have been recently bolstered by a huge land sale, are other positives that should help support the stock. At the current price of Rs 1,395, the stock trades at 21 times its 2012-13 earnings (excluding one-offs) and about 18 times forward earnings. This is a discount to most MNC peers and at the lower end of its own historical band of 20-32 times.
Despite a deficient Southwest monsoon that curtailed overall agricultural growth to just 1.9 per cent, Bayer CropScience closed 2012-13 with a 19 per cent jump in its overall sales to Rs 2,626 crore and a nearly 90 per cent rise in its net profits (excluding income from land sale). Prospects for the current year should be supported by a better monsoon, rebound in acreage and higher farm incomes arising from 15-30 per cent hikes in the minimum support prices of key crops last year. Bayer CropScience, in any case, has demonstrated a fair degree of resilience to the ups and downs of agricultural cycle.
This seems to be due to three factors. One, drawing on its parent’s research pipeline, the company has regularly come up with new products catering to niche segments in the agrochemical industry that aren’t very susceptible to generic price competition. While cotton insecticides are the mainstay for most agrochemical players, Bayer CropScience has focussed instead on wheat and rice herbicides, demand for which have been boosted by shortage of farm labour, and fungicides for foodgrains and horticultural crops.
Two, the company has been successfully expanding its presence in the promising hybrid seeds business. Bayer now holds a nine per cent share in the domestic hybrid seeds market, dominating crops such as paddy and millets. It has over 18 new hybrid varieties lined up for launch over the next three years. This business offers not just high growth potential, but also high margins, not available in the agrochemical business. A third leg that provides stability and predictability to Bayer’s earnings is its supply of pesticides to the public health programme, aimed at eradicating vector borne diseases. A thrust on marketing Bayer products to household pest management outfits has also lifted sales from this segment.
The only weak spot in Bayer CropScience’s finances are its high material costs (over 60 per cent of sales) which are susceptible to a weak rupee. However, with two-thirds of the import bill covered by exports and the rest hedged through forward contracts, the company seems to be adequately protected against the currency risk. Sale of a large tract of land at Thane for a profit of Rs 1,175 crore this fiscal has bolstered its cash coffers. While Bayer has offered no indication on how this surplus will be deployed or distributed, it translates into over Rs 220 per share, net of taxes.
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