Bayer Cropscience is the market leader in the domestic agrichemical market. It has a dominant presence in insecticides that kill pests like insects, mites and rodents; fungicides that destroy fungus and herbicides that kill weeds growing alongside crops. Here are Bayer's growth drivers:
Blue-blooded pedigree. The biggest competitive advantage is its parentage. Bayer AG, the parent, is a 150-year-old Germany-based pharma and chemical company (and incidentally developer of Aspirin) with a market cap of Euro 88 billion. The listed Indian subsidiary sells agrichemicals imported from its parent or group companies.
Outsourcing gains. Over the years, Bayer has moved away from manufacturing towards greater outsourcing of products. Bayer now does not need to invest resources, capital and time to manufacture but rather in R&D and marketing. In keeping with this global strategy, the Indian subsidiary sold off its active ingredient manufacturing plant in Ankleshwar in May 2014.
Asset Light. With its outsourcing strategy, Bayer is turning asset light. Return on assets has jumped from 142 per cent in FY10 to 475 per cent in FY14. Bayer is also debt free with cash balance of ₹486 crore as of March 2014 that amounts to five per cent of its current share price.
Opportunities in hybrid rice. India is primarily a rice producing country accounting for 42 per cent of total foodgrains produced. However, high-yielding hybrid rice is still to cover most part of the country. Of the 40 million hectares under rice production, high yield rice is cultivated on only two million sqft. Hybrid seeds yield 15-20 per cent more output. Bayer has an almost 50 per cent market share in the hybrid rice seeds market. This is an enviable position with opportunities abound.
Risks. The biggest risk is monsoons. In addition, hybrid rice costs upto 30 per cent more than conventional seeds and therefore has had slower acceptability in the market.
Outlook and valuation. Bayer is one of the finest companies in the agrichemical space you can find in the country. The outsourcing model is showing results and its leadership in rice hybrids puts the company ahead of most of its competitors. Bayer has reported annual operating profit growth of 28 per cent in the last three years. At the current price, Bayer trades at 0.73 times its PEG ratio. Buy.