Near-term sales pressure for Bayer CropScience but growth may rise in FY19

Growth may pick up in FY19 on new products, normalising of inventory

The Bayer CropScience stock was down 17 per cent over the last month on weak December-quarter (Q3) results, sales growth lagging peers and expensive stock valuations. 

The crop protection and seeds company recorded a 28 per cent fall in sales over the year-ago period in Q3, making it the third quarter in the last four quarters to witness a decline in revenues. In the nine-month year-to-date period ended December, the company reported a 7 per cent fall in revenues, compared to higher single-digit growth peers UPL and Rallis. 

In 2017, the sector was affected by demonetisation, the goods and services tax (GST) and inventory pull-back. Given the 51 per cent decline in operating profit, a 225 basis points (bps) decline in margins to 4.7 per cent and a 71 per cent fall in net profit over the year-ago quarter, brokerages have cut their net profit estimates for FY18-20 by 7-9 per cent. 

After the Q3 results, the Bayer management said erratic rainfall in October, uneven distribution of rain and non-remunerative agri-commodity prices had led to farmers trading down to generic molecules from speciality molecules. This, they said, led to higher inventories, which were subsequently returned by channel partners. Fewer pest attacks also added to the decline in demand. The company lost market share in paddy, fruit and vegetables compared to players such as Rallis, which reported double-digit growth in volumes in some segments. 

 

The near-term revenue growth trajectory does not look optimistic but analysts continue to be positive on the stock. Analysts said the correction in inventory and expectations of a normal agricultural cycle could help the company get back on the growth track. Further, given the strong product portfolio, the management was positive about growth over FY19-20. 

Analysts at Kotak Institutional Equities expect the weak trend to reverse on account of new products and strong positioning across crop segments. While the company had launched a few products in the current financial year, it will launch 160 products and extensions over FY17-21. 

The Street is not ignoring Bayer’s leadership position in the domestic agrochemicals industry, but analysts at Investec Securities said the price-to-earnings valuation of 40.6 times its FY19 estimates seemed expensive, especially in the context of expected earnings per share growth of 17 per cent annually over FY18-20. Long-term investors, thus, could await further declines for better entry.