Bayer, Dhanuka, Sumitomo, UPL - Structural Growth Story Is Intact: Anand Rathi Initiates Coverage With A 'Buy'

Anand Rathi Report

Current slowdown not as bad as the last one

Domestic agrochemicals companies (those we cover) clocked an 8.7% revenue compound annual growth rate over FY14-16 as two consecutive years of below-normal rains (FY15 and FY16) coupled with greater channel stocks and pressure on farm incomes curbed sales.

Cash-flows were strained, and the below-normal monsoons led to industry-wide price cuts and subdued volumes. We believe that the pressure this time will not be as severe as the last slowdown (FY15/16) given-

1. on-ground demand is still strong unlike during the last slowdown when farmers down-traded to less expensive products driven by pressure on farm output prices;

2. green-shoots visible in terms of modest channel stocks across regions (barring the U.S.);

3. crop prices—domestic and global—continue to be remunerative;

4. the government’s thrust on improving farm income;

5. expectations of special aid from the government to the farming community in case of crop damage or losses (due to adverse weather, etc.) given Lok Sabha elections next year.

Recommendation synopsis

Sumitomo Chemicals India Ltd. – Near term hiccups; long-term intact; 'Buy'

Strong parental advantage to support growth: Strong parental support from Sumitomo Chemical Corporation gives its Indian subsidiary unique advantages such as-

1. access to SCC’s portfolio;

2. technical and research and development expertise to develop proprietary products and

3. financial strength and a wider market reach.

To be the ‘go to guy’ for SCC’s generic exports globally: The Indian arm is the only technical and generic grade manufacturing site of the SCC group outside Japan. It intends to enhance exports by levering SCC's global supply chain and marketing network (received approvals for five molecules).

We expect its export revenue to record a 35% CAGR over FY24-FY26 (FY20-FY23: 23%) on the back of SCC's intent to maximise synergies from the integration of Nufarm's distribution business in Latin America and Sumitomo India's exports.

Outlook and Valuation: Considering the above, the company is poised to post 4%/7% revenue/ PAT CAGRs over FY23-26 (FY18-23: 13%/28%). Further, the company had a healthy 23% RoE, a 30% pre-tax RoCE and a net-cash balance-sheet in FY23. We initiate coverage with a Buy at a TP of Rs.500, 40x FY26e EPS

Bayer Crop Science – Market dominance likely to endure; Buy

Market dominance in domestic agrochemicals: Strong brand recall and superior products have helped Bayer Crop Science dominate domestic agrochemicals with a ~17% market share (in FY23), and a ~40-45% market share in rice hybrids.

Product launches to propel growth: The company is on track to launch several innovative products from the parent in the next few years (it launched 25 products over FY15-FY24 ytd). This in turn would support overall growth ahead. The company has registered three products in FY23 and FY24 year-to-date; likely to reap benefits in future.

Outlook and valuation: The better product mix (greater contribution of maize hybrids in overall revenue) has in turn resulted in the company’s decent margin improvement in H1 FY24 despite the uncertain crop protection environment.

Ahead, we believe dominance in domestic crop protection and the greater contribution from maize hybrids would support earnings. The company is likely to post 10%/13% revenue/profit after tax compound annual growth rates over FY23-FY26.

The earnings growth trajectory is robust, with debtfree balance sheets and strong cash-flows. We initiate coverage on the company with a 'Buy' at a target price of Rs 6,500, 30 times FY26E earnings per share.

Dhanuka Agritech – Making a foray into technical manufacturing to aid sustainable growth; 'Buy'

Asset-light business model with an extensive distribution network: Dhanuka Agritech has a unique asset-light business model (three formulations facilities; focusing on new products, supported by tie-ups with global giants) reinforced by an extensive marketing network (6,500 dealers/distributors, 80,000 retailers), giving it an edge over competitors

Foray into technical manufacturing to aid sustainable growth: The company’ made a foray into technical manufacturing at Rs 3 billion capex (to be spent over FY22-24; funded through internal accruals) at Dahej, Gujarat (with Rs 1.5 billion-2 billion revenue potential in FY24 and Rs 3 billion from FY25).

Phase-1 of the formulations unit has already gone commercial from August 2023 (with one molecule currently; potential to manufacture 4-5 molecules at this multi purpose plant), while the technical unit will go commercial by FY24. It will largely take care, through backward integration, of generics required.

Outlook and valuation: We believe the successful execution and ramp-up of the Dahej project would set the company on the next leg of growth, which would lead to re-rating the stock over the longer term.

The company has a good distribution-led business model with robust return on equity (more than 23%) and balance sheet. We expect it to register 13%/ 13% revenue/PAT CAGRs over FY23-FY26, boosted by the healthy demand context and product launches.

We initiate coverage on the company with a 'Buy' at a target price of Rs 1,200, 16 times FY26E EPS.

UPL – Challenges subsiding; 'Buy'

LATAM is the key region for UPL (~40% of revenue): Brazil is the fastest growing region for UPL (FY23e ~$1.5 billion revenue; ranked fourth-largest in Brazil). It brings more than 50% to LATAM revenues and is expected to grow twice that of the industry over next few years on its strong product pipeline and widening distribution reach.

Margins expected to recover from H2 FY24: We expect a gradual recovery in margins from H2 FY24 (now showing early signs), as the drop in finished goods prices (in line with the fall in raw material prices) seems to be arrested. This, liquidation of high-cost stocks and stable raw material costs are likely to result in margin expansion in H2.

UPL generates ~60% of its annual revenue/ profitability in the second half of the year, with the last quarter bringing ~30%. Thus, we expect a strong margin expansion in Q4 to be aided by-

1. greater operating leverage and

2. low base

Outlook and valuation: We anticipate the better performance in H2 FY24, particularly in Q4, to be driven by the improved demand context across markets (barring NAFTA), supported by higher commodity prices.

We expect UPL to clock 3%/12% revenue/PAT CAGRs over FY23-26. We initiate coverage on the company with a 'Buy' at a target price of Rs 690, 10 times FY26e EPS.

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