Company Overview:

Bayer CropScience Ltd (Bayer CropScience), a subsidiary of Bayer AG, manufactures and distributes pharmaceutical, consumer health, and crop protection products. The company's product portfolio includes fungicides, insecticides, herbicides, plant growth regulators, corn seeds, hybrid seeds, and nonagricultural pest control products. It markets its products under the brand names Bayer, Nativo, Vayego, DEKALB, Glamore, Flotis, Saridon, and Supradyn, among others. Bayer CropScience serves farmers and consumers across the globe. The company's manufacturing site for drying and processing station is located in Hyderabad and breeding stations at Bengaluru and Udaipur, India. It also has an agrochemical production manufacturing site located at Himatnagar and Silvassa, India. They have developed products specifically for the Indian market and have established themselves as a trusted brand in the fields of agriculture, health, and sustainability. Bayer Cropscience works with nearly 20 million farmers in India and is committed to advancing Indian agriculture and promoting agricultural solutions globally. They are involved in initiatives such as the Better Life Farming alliance, which aims to empower smallholder farmers, and the Food Chain Partnership, which focuses on sustainable food production. The company also provides services in professional pest control and vector control to protect public health. The company markets its products in India, Germany and Bangladesh, among others. Bayer CropScience is headquartered in Thane, Maharashtra, India. The company reported revenues of (Rupee) INR51,397 million for the fiscal year ended March 2023 (FY2023), an increase of 8.6% over FY2022. In FY2023, the company’s operating margin was 18.6%, compared to an operating margin of 17.3% in FY2022. In FY2023, the company recorded a net margin of 14.8%, compared to a net margin of 13.6% in FY2022. The company reported revenues of INR16,172 million for the second quarter ended September 2023, a decrease of 7% over the previous quarter.

Industry Overview

India is a significant global producer and exporter of chemicals. India's chemical expertise spans a wide range of product categories. Despite these advantages, India is still a net chemical importer. In several key categories, India lacks adequate access to raw materials. For example, India lacks phosphate or potassic rock deposits to produce enough indigenous fertiliser. Furthermore, India's specialty chemicals industry needs more R&D investment, forcing end users to rely on higher value-added imports, adding to India's import dependence. Nonetheless, the Indian government promotes economic self-sufficiency, implying it will implement policies to encourage domestic production capacity.

The Indian agrochemicals and fertilisers industry is facing significant short-term challenges. The Russia Ukraine conflict fueled fertiliser price increases due to uncertainty about fertiliser exports from Russia and Belarus due to the conflict, sanctions imposed on both countries, and disruptions in Black Sea trade routes. The Middle East conflict also raises concerns about potential crude oil supply constraints, which could lead to further increases in fertiliser prices. The Chinese government's decision to suspend urea exports in 2023 also contributed to tighter supplies, especially given India's reliance on Chinese fertilisers. High raw material and finished fertiliser import prices present a critical policy test for the Indian government, which must balance the need for fertiliser availability and affordability to ensure food security in India with the ballooning financial burden of maintaining subsidies.

The Indian government's introduction of subsidised fertilisers under the "Bharat" brand as part of its One Nation One Fertiliser programme creates interesting opportunities and challenges for the fertiliser industry. As part of the programme to improve the quality and availability of fertilisers for farmers across India, the government will also establish up to 325,000 Kisan Samruddhi Kendras. In the long run, the government's policy may encourage fertiliser use. Nonetheless, the One Nation One Fertiliser initiative threatens to reduce manufacturers' profit margins.

Technical View: BAYER CROPSCIENCE LIMITED :

Segment Opportunities:

The specialty chemicals subsector in India has the most promising growth prospects. India's per capita chemical consumption is only 10% of the global average, implying significant room for increased application of chemical products in end-use industries. Furthermore, global manufacturers are rethinking their over-reliance on Chinese chemical supplies. The Chinese government has imposed increasingly stringent environmental regulations on their chemical producers, eroding their price advantage over foreign competitors. Furthermore, existing geopolitical tensions between the United States and China are persuading global manufacturers to diversify their supply chains away from China in a so-called "China plus one" strategy, which could benefit Indian chemical producers.

Sector Outlook:

The government hopes to reduce India's import bill by encouraging import substitution. Simultaneously, the government hopes to transform the chemicals sector into a critical engine of India's export growth. Thus, the government has implemented policies such as encouraging the development of industrial clusters such as petrochemical zones and plastics parks, as well as providing financial assistance to exporters through the Remission of Duties or Taxes on Export Products (RoDTEP) scheme. If the government approves the PLI scheme, which grants financial incentives to chemical producers the form of tax rebates to establish manufacturing plants in India, the sector's export potential may be enhanced even further.

Domestic demand from end-use industries has significant room for growth because India's per capita chemical consumption remains 10% of the global average. India may also benefit from the realignment of global supply chains away from China. Compared to Europe and other parts of Asia, manufacturing costs in India remain low and competitive. Furthermore, Indian chemical companies are generally of high quality, and they are planning to rapidly expand their capacity to capitalise on expanding export opportunities.

Valuation and strategy:

Bayer Crop Science Ltd (BCSL) reported a 37 per cent increase in its net profit to Rs 222.9 crore for the second quarter of this fiscal on higher revenue. Its net profit stood at Rs 162.6 crore in the year-ago period. Total income rose to Rs 1,633.3 crore during the July-September period of 2023-24 fiscal year from Rs 1,465.7 crore in the corresponding period of the previous year. Going ahead we see forward EPS to grow with demand in agriculture production, high level of crop protection. We recommend buy Bayer and hold for Target looking at forward EPS of 198.7 for F.Y 2025-26 as compare to 175.8 for 2024.25 for price Target of Rs 6400.