Thursday, March 13, 2014

Bayer Cropscience - Good quality but expensive for now

BSE: 506285 | NSE: BAYERCROP | ISIN: INE462A01022

I came across this company while looking for companies making household products that I know about. I had seen Baygon bottles with the signature Bayer plus sign and was sad to find out that Bayer sold the brand to SC Johnson.

This company has been around forever since 1892 - started as a pesticide maker. It was a shocker to me to find out that this company gets 60%+ of its revenue from trading operations!

Bayer globally has 19% of the crop protection market and is number 1 or 2 globally. There are 6 companies that globally control this space. 

Crop protection market in in India is 3.8Bil USD of which 50% is exported. Bayer market share of this is around 13%. Export % of sales is around 16.9% - so Indian market local share of business is 23% or so and export from india share of business is around 4.6% or so.

Sector should be kept in mind as is likely to be growing for many years due to population increases and increasing demand for food.

1. How good is the moat?

B+ category moat.

  • Products: 3 major products - Active ingredients (25%), Formulations (59%), & seeds (14%). With increasing generics product replication is becoming easier
    • Active ingredient - is the substance that is biologically active. A generic typically contains the same active ingredient as the branded product. There are few new active ingredients coming to the market.
    • Formulation - Final product that contains the active ingredient and other supporting chemicals. Final use product.
  • Brand - the brand is great but will be unable to drive pricing. The brand definitely makes it easier to make the sale.
  • Sales & distribution - team size of 3000 and reach is humongous. Replication is not possible but a bit expensive.
  • Recession performance - Agriculture is required for survival and food is not in abundance in India yet.

2. Risks

  • Large Cash on balance sheet could be invested in unproductive assets
  • Growth is not commensurate with the invested capital outlay
  • Dividend % of net profit is around 14% of operating profits after tax which is low
  • Agriculture growth in India is not much and this company is currently a net importer. Exports are unlikely as the parent may like to export from the mother plant.

3. Financials

  • Debt: ZERO. Company over the years has paid down the debt.
  • Foreign exchange exposure (FX): Imports are around 650 Crores and exports are around 491 Crores. making the net FX exporsure to be 5.8% of revenues. Fall in INR will have a negative impact on this stock but not by much.
  • CFO vs Net income - this is a problem on this stock. Given the global footprint I would have expected this to not be the case but the working capital has gone up.
  • Overall Return on invested capital (after subtracting cash) is large probably due to the large trading gross margin which is 30% and consumes little capital. I cannot test this hypothesis as the previous annual report from 2008 does not provide the revenue split.
  • No large goodwill issues

4. Soft factors

  • Promoter group shareholding is 71% or so
  • Employee relations seem to be cordial
  • Growth: Sources of growth are limited - other than increasing adoption of products, increasing market share and general growth. All 3 look hard to do but the company has done it. Overall crop protection market is likely to grow at around 10% to 12% as per reports.

5. Pricing

  • Current ex of cash trading at P/E of 17.5 times earnings. Given the growth to be limited and relatively no export opportunities I might stay away from this for now. Maybe if it was trading at around 12 times or so it might be interesting
  • Price to book is probably not the right metric for this kind of a company


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