Agro chemicals

30 Jun

Monsoon – One of the key growth drivers of the Indian economy?

Southwest monsoon arrives early in the mainland of India and it covered many Indian states and union territories but many of those states have received deficit rainfall in early June.

But wait, why does it matter to us, how the excess or deficit rainfall is going to affect the Indian economy and Investors?  So, let’s discuss

In India, the monsoon season starts in June and lasts till September. India receives more than ~70% of rainfall in this period. India is an agrarian economy and more than half of the workforce is engaged in agriculture and the allied sector. The farm sector also has a double-digit contribution to India’s GDP.

*LPA – Long Period Average

Here is the equation – Good monsoon = Good farm output = Strong consumer demand and vice versa

The monsoon has a direct relationship with the agricultural and allied sectors. Approximately half of India’s total food output is contributed by Kharif crops that are largely dependent on monsoon. A good monsoon season accelerates the farm output and boosts the income of the farmer community. This improves the spending power of rural areas which leads to strong demand sentiments. There is a hidden part of the above equation which is “Inflation”. Normal monsoon and bountiful harvest keep inflation under control since food contributes ~45% in the consumer Price Index (CPI). That is why a normal monsoon is a crucial factor for the inflation.

If we record deficit and a drought-like situation, it will directly weaken the farm production and lowers the income of the farmers. This reduces the consumption demand. At the same time, we get a hit from inflation as lower food production accelerate the food inflation. The government may have to spend towards import of food and adversely impacts the overall economy.

Sectors that have a large exposure to monsoon –

  • Consumer –India’s rural market contributes a significant share of the revenue of the Indian companies. Many Indian consumer companies are expanding their reach and significantly stepping up direct distribution in rural markets. The normal monsoon will improve the purchasing power of the rural population and may revive the sluggish rural demand and drive revenue growth.
  • Automobiles and farm equipment – Tractor companies have a direct relationship with the monsoon. A good monsoon improves the farmers’ spending capacity for better farm equipment. This will effectively result in better crop yields. Major Indian 2W makers derive ~50% of their revenue from the rural areas. This demand is again dependent on the agricultural growth.
  • Agro chemicals and fertilizers – Agrochemicals and fertilizers business directly depends on farmers’ income and agricultural growth. Companies derive their major revenues during the monsoon period. As the good monsoon sentiments enable farmers to spend more on crop care protection chemicals and fertilizers.

In the short, we need a normal monsoon for the smooth economic activity, especially in rural areas, So, let’s hope and pray for a good and normal monsoon every year.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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03 Dec

Royal Enfield is many steps ahead of the competition – Eicher Motors

Update on the Indian Equity Market:
On Wednesday, NIFTY closed at 13,114 (-0.04%). Top gainers in NIFTY50 were GAIL (+4.9%), ONGC (+3.8%), and ASIAN PAINTS (+3.7%). The top losers were KOTAK BANK (-3.3%), HDFC Bank (-1.9%), and HDFC (-1.4%). The top sectoral gainers were REALTY (+2.9%), METAL (+2.6%), and AUTO (+1.2%) and the sectoral losers were BANK (-1.2%), PVT BANK (-1.2%), and FIN SERVICES (-1.1%).

Excerpts of an interview with Mr. Siddharth Lal, MD – Eicher Motors with ET Now dated 1st December 2020:
• With a 90-95% market share in the 250cc-plus motorcycle segment, Eicher Motors-owned Royal Enfield is readying itself with a mid-term plan called RE 2.0, which is focused on expanding product portfolio, geographical reach, and non-motorcycle revenue.
• Despite its vast cash reserves, the company is not eagerly looking at acquisitions, including the likes of the Italian brand Ducati.
• It has taken them time to get production up. There is a demand for more bikes from the dealers, and international customers.
• Currently, they have a bare minimum inventory everywhere. So, retail has been very strong, the inventories are depleted entirely, and production has caught up. The supply and timing was an issue for them. But even the supply is back in order.
• In the long term, they always have had a bullish view on the mid-size segment just because people want to upgrade and there’s a premiumization trend.
• They have all the technology and have built the capability. Their commercial abilities in terms of sales, marketing, distribution, and service are very strong.
• People should not discover Royal Enfield because they put an ad listing the price of their motorcycles. They should discover them because they’ve got rides and events, they’ve seen a friend or a colleague ride a Royal Enfield, or someone’s talked about it.
• They want to be able to reach each customer differently and everything has to be premium. It’s much curated, it’s very thought through, it’s very nicely done. So, once customers get that premium experience, they don’t want to go back into a shabby experience.
• They will do an acquisition where they think they can only incrementally improve it.
• They have so much opportunity in Royal Enfield itself, so they’d just conserve energy for that. If an opportunity to do something like they have been doing with Royal Enfield over the last 10 years, then it’s something worth putting in their time and effort.
• They have a very strong filter about how they would like to monetize their brand. It has to serve its huge audience of customers and give them a better motorcycling experience.
• They’re not positioned as a cheap brand anywhere in the world. They don’t sell on price. They are an alternative brand. They offer an alternative world view to their customers. Certainly, it’s good value, it’s at a good price.
• The way they’re working on EVs is that they are not going to be the first to the market. But rather they’d study the market, understand the technology – there’s a full team at Royal Enfield who does EVs now.
• They’re constantly studying the market, riding bikes, making their mule bikes, prototype bikes, and riding them themselves, seeing what happens, seeing what they like, don’t like.

Consensus Estimate: (Source: market screener and investing.com websites)
• The closing price of EICHERMOTORS was ₹ 2,531/- as of 2nd December 2020. It traded at 48x/ 31x/ 25x the consensus earnings estimate of ₹ 52.3/ 80.4/ 101 for FY21E/FY22E/23E respectively.
• The consensus price target of EICHERMOTORS Ltd is ₹ 2,301/- which trades at 23x the earnings estimate for FY23E of ₹ 101/-
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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19 Aug

Working toward becoming a technology and IP driven organization- PIIND

Update on the Indian Equity Market:

On Tuesday, Nifty closed 1.2% higher at 11,385. Within NIFTY50, GRASIM(+6.5%), ULTRACEMCO (+3.3%), and JSWSTEEL (+3.1%) were the top gainers, while BPCL (-1.2%), TECHM (-0.9%) and CIPLA (-0.8%) were the top losers. Among the sectoral indices, REALTY (+4.0%), PVT BANK (+2.2%), BANK (+2.2%), and MEDIA (+2.2%) gained the most. PHARMA (-0.1%) was the only sector to end with losses.

Working toward becoming a technology and IP driven organization- PIIND

Excerpts of an interview with Mr. Mayank Singhal, MD&CEO, PI Industries (PIIND) published on Economic times website dated 12th August 2020:
• The companyplans to invest the Rs 20,000 mn QIP funds across different categories over the next 2 quarters. One way is into inorganic opportunities to get into complementary adjacencies- including pharmaceuticals. The other way is by acquisition of smaller blocks which could be synergistic and complementary in terms of technology.
• PIIND has 1 or 2 branded products that it plans to launch in the Indian domestic market in FY21. They also plan to commercialize 2 new products for the global contract manufacturing business.
• Over last 5-6 years, PIIND has made aggressive investments in R&D to become a more knowledge-based partner. They are working towardbecoming more of a technology and IP driven organization over next 4-5 years.
• Mr. Singhal expects India to fare well in the global shift in manufacturing. If supported through strong policies in the area of manufacturing chemical industry, India could move to the next level. India should specifically focus towards IP generation and creation which wouldbe an edge over the Chinese competition.
• In India about 50-60% of agriculture is dependent on monsoons. PIIND has 30-40% of its revenue dependent on India. Considering good monsoons currently, PIIND like all India business-based companies will do well.
• PIIND is supplying an intermediate to a Japanese client, for a drug approved for Covid-19 treatment. PIIND is also looking to supply the intermediate to Indian producers entering into the space.
• PIIND plans to grow aggressively in next 3-4 years by utilizing its competency in chemistry and technology. With that into perspective, PIIND has also recently filed 7 patent applications based on process in chemistry capabilities.
Consensus Estimate (Source: marketscreener website)
• The closing price of PIIND was ₹ 1,965/- as of 18-Aug-2020. It traded at 44.6x/ 35.2x/ 28.7x the consensus EPS estimate of ₹ 44.1/ 55.8/ 68.5 for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 2,014/- implies a PE multiple of 29.4x on FY23E EPS of ₹ 68.5.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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10 Aug

Plan to diversify and de-risk operations using QIP funds- PIIND

Update on the Indian Equity Market:

 

On Friday, Nifty closed almost flat- just 0.1% higher at 11,214. Within NIFTY50, ASIANPAINT (+4.7%), BAJFINANCE (+3.7%), and UPL (+3.5%) were the top gainers, while TITAN (-2.5%), HCLTECH (-2.1%) and INFY (-2.0%) were the top losers. Among the sectoral indices, PSU BANK (+1.0%), PVT BANK (+0.9%), and METAL (+0.9%) gained the most.  IT (-1.0%), PHARMA (-0.6%), and REALTY (-0.3%) made the most losses.

 

Plan to diversify and de-risk operations using QIP funds- PIIND

 

Excerpts of an interview with Mr.Mayank Singhal, MD&CEO, PI Industries (PIIND) aired on CNBC-TV18 dated 7th August 2020:

  • PIIND reported 41% growth in 1QFY21. Looking at 2QFY21, management expects export business to continue to grow as it is backed by a good order book.
  • For the domestic business, 1Q is about pre-placement of products. There has been a good demand with the early onset and higher levels of monsoons. Looking at present scenario, management expects domestic business to be in line with estimated growth.
  • PIIND’s latest acquisition, Isagro, started contributing to the revenues 4QFY20 onward. In 1QFY21, Isagro contributed Rs 1,000 mn to the total revenue, a growth of 13% YoY. Out of that, Rs 300 mn were exports.
  • Management expects Isagro integration to be complete by 3QFY21E. Initiative for Isagro is to make it a horticulture specialist in the distribution segment by offering different value proposition to farmers.
  • PIIND expects to commercialize 4-5 new products in FY21. New products do not have a substantial impact on revenue in the first year of commercialization. These products will do well over next 3-5 years.
  • PIIND recently raised capital via QIP. Management is looking at M&A opportunities in adjacent segments, widening technology portfolio and de-risking operations and plan to create a different organization in next 5 years.
  • PIIND was able to have a very good growth in 1QFY21 as the team anticipated certain challenges that could come arise because of China. They were able to adapt swiftly in terms of supply chain and proper management of plants. PIIND lost 10-15 days of production in the early days but is now operating at full capacity.
  • PIIND has formed 2 new subsidiaries for pharma intermediates. The discussions are in very initial phases now. Management expects to share a more detailed communication in next couple quarters.

Consensus Estimate: (Source: investing.com website)

  • The closing price of PIIND was ₹ 1,950/- as of 07-Aug-2020. It traded at 43.7x/ 35.6x/ 29.2x the consensus EPS estimate of ₹ 44.6/ 54.7/ 66.7 for FY21E/ FY22E/ FY23E respectively.
  • Consensus target price of ₹ 1,805/- implies a PE multiple of 27.1x on FY23E EPS of ₹ 66.7.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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05 Aug

Rallis: Revamped channel policies and improved price realisation drives performance

Dated: 19th July 2019

1QFY20 Results

  • Rallis reported a 9% YoY increase in consolidated revenues at Rs 6,232 mn. The Standalone revenues of Rs 3,631 mn (+3% YoY) were driven by 12% YoY growth in exports. The seeds business (Metahelix subsidiary) revenues grew by 18% YoY to Rs 2,601 mn.
  • EBITDA margins improved by 70bps YoY to 15.2%. Increase in raw material costs was offset by savings in other expenses. EBITDA was up 14% YoY to Rs 948 mn.
  • The Effective tax rate for 1QFY20 was lower at 22% v/s 28% in 1QFY19. The Consolidated PAT grew by 24% YoY to Rs 678 mn v/s Rs 547 mn in 1QFY19.  

Management Commentary

  • Despite the delayed monsoon and impacted sowings; the revamped channel policies and improved price realisation led to a satisfactory performance both the agrochemicals and seeds segment in the domestic market.
  • International Crop Protection chemical business at Rs 1,416 mn grew by 12% YoY and contributed 39% of the standalone revenues.
  • The effective tax rate was lower during the quarter due to the classification of a part of the business as agriculture income for taxation purpose.
  • Other expenses declined due to the pushover of the product launch expenses into 2QFY20.
  • The Capex plans for FY20E stand at ~Rs 2,000 mn including backward integration for 2 of the molecules.
  • The Board of Directors of the Company had approved the Scheme of Amalgamation of Metahelix life Sciences Limited (a wholly-owned subsidiary) with the Company.

Consensus Estimate (Source: market screener website)

  • The closing price of Rallis is Rs 154/- on 19-Jul-19. It traded at 16x / 13x the consensus EPS for FY 20E / FY 21E EPS of Rs 9.6 / 11.5 respectively.
  • Consensus target price of Rs 180/- implies a PE of 16x on FY21E EPS of Rs 11.5.
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