Bayer CropScience Ltd (BCS) (CMP: Rs.552.

15)
Stock Note
Company Background:
Bayer CropScience Ltd (BCS) is a cropscience company having crop protection production facilities at Himatnagar and Ankleshwar (both in Gujarat) where it manufactures a variety of agrochemical like fungicides, insecticides and herbicides. It had a plant at Thane, which has been shut down and the facilities have been moved to the Ankleshwar plant. The Himatnagar plant also caters to export related agrochemicals required by its Asia-Pacific and European group companies. Post the acquisition of Aventis Cropscience Limited worldwide in 2001, BCS has become the leader in the Crop Protection business in India. BCS is a 71% subsidiary of the Euro 35bn Bayer AG, Group, which is a world leader in Agrichemicals. BCS is a leader in the Indian crop protection Sector with a market share of 17%. Other large shareholders include LIC, Birla Sun Life Insurance Company Ltd and Bajaj Aliianz Life Insurance Company Ltd, which hold 3.67%, 2.51% and 2.48% respectively in BCS. Bayer AG acquired Aventis CropScience globally in 2001 and became a global leader in crop protection, pest control, seeds and plant biotechnology. With a sizeable existence in 122 countries and 22,000 dedicated employees, BCS remains a large global player. BCS is divided into 3 business groups: Crop Protection, Environmental Science and BioScience. BCS as a global innovator and market leader in its industry believes that its technological and commercial expertise entails a duty to contribute to Sustainable Development.

December 31, 2009

Business:
Crop protection: This segment ensures a secure yield by giving protection from seed planting through to harvest. During its life cycle a crop will encounter many enemies that can even destroy an entire harvest: pests, weeds, fungi. Researchers in Crop Protection are committed to preventing this damage. BCS’s goal in this business is to secure harvests for farmers without creating a burden on the environment. Principal products and brands in crop protection Insecticides (Confidor®/ Admire®, Calypso®, Decis®, Temik®, Oberon®) Fungicides (Antracol®, Baycor®, Folicur®, Monceren®) Herbicides (Atlantis®, Basta®, Topstar®, Whip Super®) Seed treatment (Gaucho®, Raxil®)
Split of Crop Protection Sales - FY09 1% 11%

20%

68% Insecticides Herbicides Fungicides Seed Treatment

(Source: Company Annual Report)

Environmental Science and Professional Pest Control: The Bayer Environmental Science (BES) is a pioneer in the field of public health, being a major contributor in this segment since several years. The business areas covered by BES, are diverse in order to address the specific needs of the customers, covering three major segments: Vector Control, Professional Pest Control and Green Industry. The commitment of BES is to consistently deliver high quality research products for the control of insect pests of public health. Such products include pesticides to manage malaria vectors, cockroaches, rodents, termites, stored grain pests, houseflies and other pests in general. BioScience: BioScience is a part of BCS, and is a global player in research, development and marketing of high quality seeds and innovative plant-based solutions derived from modern breeding and plant biotechnology. BioScience offers an integrated portfolio of high quality seeds, trait technologies and high performance crop protection products. BioScience activities are focused on three areas: Vegetable Seeds, Agricultural Seeds and Research activities into novel plant-based solutions for agriculture, nutrition, health and biomaterials. Bayer Bioscience, headquartered in Hyderabad India has about 400 employees, and has research, production and an extensive sales network spread across the country.

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Going ahead. During the year 2008. Tamil Nadu and Haryana and plans to develop production centers in other states as well.1% in FY08 (Rs. It has a well-established network of distributors across the country that enables timely reach of seeds to farmers in remote areas. post introduction of Genetically Modified Bt-Cotton in the country. Recent product launches: Product Admire 70G Monceren 250 SC Ethiprole 10 SC Fame 490 SC Folicure 250 EC Tebuconazole 250 WG Fenamidone 10 + Mancozeb 50 WP (Sectin 60 WP) Sectin Arixe Dhani SurPass Goldmine Bt Oberon 240 SC. Its warehouses are located throughout the country. fibre and energy plants. Karnataka. Maintaining the Bayer tradition in Research & Development. there exists huge opportunity for BCS to grow its domestic business considering that penetration of pesticides in the Indian market is low compared to its Asian and Global peers. To maintain its leadership position.4% of sales in FY09 (Rs.13. BCS has been introducing 3-5 products every year. Melody Duo 66.1 cr) vs.75 WP. Chilli and Groundnut Export Grape and Potato Potatao Hybrid Rice Bt Cotton hybrid Tea. Investment Rationale Leader in Indian pesticides markets: BCS is a market leader in the Indian Agrichemical Sector with a market share of 17%.175. it has also obtained approvals for various herbicides exclusively for Export to other countries viz. In FY10 BCS has indicated the likely launches of globally renowned speciality acaricide Oberon 240 SC. New innovative products – major driver of growth: BCS's growth has been driven by its ability to introduce new products at minimal R&D costs on account of having access to its global parent's strong product portfolio. BCS is continuously strengthening its capacity to provide products and combined solutions for the production of good quality food. brinjal and apple etc. It has four seed conditioning plants (one at Toopran. Seeds constituted 14. fresh fruits and vegetables and provided the required guidance and inputs to farmers for plant protection and efficient crop management towards enhancing productivity and tapping the huge export potential.99% of sales). feed. BCS spent Rs. brinjal and apple Rice Rice Grape and Potato Rice Cotton Seeded Rice (Source: Company Annual Report) Retail Research 2 .213. 14.5 WP (Lecspro 44.Seed Production. an insecticide for use in rice. two at Medchal and another at Tolichowki) in Hyderabad.75 WP Ethiprole 40 + Imidacloprid 40 WG (80 WG) Spirotetramat 120 + Imidacloprid 360 SC (Movento Energy 480 SC) Fenoxaprop-p-ethyl 6. including a central warehouse at Toopran with 10. an insecticide for control of sucking pests in rice. in 2008. India produces approximately 16% of the world's total food grain.000 mt capacity.75 + Propanil 37. Imidacloprid 350 SC (Confidor Super). Fipronil 80 WG (Jump 80 WG). and the management has indicated that this trend would continue going forward as well.25 WP). chilli.8 cr on R&D in FY09 (0.. chilli. Conditioning and Distribution Bayer BioScience has established seed production centers in four states – Andhra Pradesh. Bayer AG has a strong R&D base.9 cr). to control mites affecting tea.9% EC (Ricestar) Year CY06 CY06 CY06 FY08 FY08 FY08 FY09 FY09 FY09 FY09 FY10E FY10E FY10E FY10E Crop Rice and Cotton Rice Rice Rice and Cotton Rice. BCS continued its initiatives in contract farming vigorously in crops like cotton. Fipronil 80 WG (Jump 80 WG) Imidacloprid 350 SC (Confidor Super) Melody Duo 66. Fentrazamide Technical and Fentrazamide 6. a fungicide for use in grape and potato. There exists under usage of agrichemicals by the Indian farmers and untapped opportunity available to the agrochemical companies. Aclonifen Technical. Striving all the time for providing innovative and effective solutions to the farmers’ pest problems. but utilises a mere 2% of pesticides. BCS secured registrations and launched Fenamidone 10 + Mancozeb 50 WP (Sectin 60 WP) – a broad-spectrum fungicide for use in Grape and Potato. BCS has evaluated 42 new molecules and mixtures for use in various agricultural and horticultural crops and pest segments in the changing and dynamic scenario.

1176. product knowledge and international trends in vector borne diseases management. storage of water in cisterns. BCS is planning to launch a state of art product “Aqua K-Othrine” which will provide a solution for need of a greener product in the market. Bayer AG is accelerating the extension of its biotech and seed business. BES division poised for growth: The Environmental Science division has been maintaining its leading position as the market leader in the segments of public health and professional pest control.225. BCS continues to sponsor major symposia and seminars to promote general awareness.184 crore). as resistance management tool. the Govt has provided for Rs. Under the agreement. The developmental pace often outstrips mitigating measures undertaken by the municipal and health authorities. aggregation of migrant labour force and over all population movement. Several techno commercial training programmes on safe use and handling of products were conducted in FY09. Hyderabad. Rs.Pursuing its philos ophy of offering new and better cost-effective solutions to farmers to manage insect pests.42 crore for medical education. aiming systematically to expand its fast-growing business in seed and plant traits in the coming years. Provision of Rs. training and research and Rs. disuse or scarce use of wells. medium and metropolitan cities. BCS wishes to further speed up the development of its successful crop protection R&D pipeline and look forward to working with GVK BIO. Almost 1.000 BioScience researchers and b reeders are working on over 50 projects. Essentially a man made problem. which eat into market share. BCS and GVK Biosciences Private. a carbamate insecticide. BCS has tied up with Pest Control India Ltd and Godrej HiCare. Innovation and R&D – key focus areas for BCS: In order to meet the challenges of food production and optimise use of agricultural resources against the background of a continuously growing world population. The intention is to more than triple sales in the BioScience segment to around EUR 1. the Company remains well prepared to stay ahead of the competition amidst the constantly strengthening safety and residue standards. BCS’s strong focus on innovation and substantial investments in Research & Development enables it to contribute significantly to global food safety and resolution of the aforesaid critical challenges. due to the R&D focus on environmentally safe products. However. BCS is evaluating a number of molecules for use in a variety of key crops. BES regularly provides technical support and training to the customers and thus greatly contributes in providing a pest free and disease free living.5 billion in research and infrastructure for its biotech and seed business between now and 2018. BCS will integrate GVK BIO capacities in the early part of its Discovery chemistry process. the growing awareness on vector borne diseases in th e Public and Government Agencies is an opportunity. Community Health Centres and Sub-Cenrtres.32 crore for Public Health Schemes and In dian Council of Medical Research (Rs. The objective is to speed up the search for promising active ingredients for innovative crop protection products. This segment is flooded with cheap generics. elevates the level of technological competence.53 crore for allopathic hospitals and dispensaries. The importance given to the public health is clear from the fact that in the Union Budget for FY10. 196. India. promoting Health & Hygiene on ready to use formulation/packs is also being planned. In this context the company is planning to invest some EUR 3. inadequate piped water supply. Following a record year in 2008. In the space spray market. Resistance to synthetic pyrethroids by mosquitoes is an opportunity to BCS to launch Bendiocarb 80% WP. Bayer CropScience internationally is currently investing the equivalent of roughly 27 percent of sales in the development of new BioScience products – a figure that puts it among the leaders in the industry in terms of research intensity. Moreover. GVK Biosciences has built world-class capabilities in early Discovery Chemistry. and assures technical service to customers through long lasting partnerships. BCS has launched several such products recently in the new chemistry segment and also has a strong pipeline. the company is likely to include fruits and vegetables (horticulture crops) too. urban malaria has emerged as major public health problem in many small.497 crore for Central Government Health Scheme. Under this division.663. the company is continuing its strategy of expansion.69 crore has been made to upgrade Primary Health Centre. developmental activities. In India. urban malaria is the outcome of rapid and haphazard expansion of the cities. which is rapidly taking shape in India. Rs.4 billion by 2018. Going ahead. Bayer keeps a stringent eye on Quality Assurance. diseases and weed menace in various crops. The innovation focus will also help the Company to further gain the competitive advantage in a stringent product patent regime. intensive agricultural research is needed. which goes beyond the regulatory requirements of safety and residue levels. Asia’s leading contract research organization. Retail Research 3 . have entered into a research cooperation in the area of early discovery chemistry. Launch of some of its products in small packs to cater the needs of niche customers.

0% 14.1056 cr (per share value of Rs. BCS has already paid Rs. it has around 132 acres having a market value on conservative basis of approximately Rs. regulatory leeway and quality offered by BCS.5 cr towards VRS expenses in FY08). Out of the aforesaid amount payable.Cr.0% % 87. BCS has agreed to pay in a phased manner rupees equivalent to Euro 160 lacs.Hidden Value: BCS has an idle land bank at Thane.7% due to high raw material prices and staff cost.Cr.1% to 7. Retail Research % 4 .42 in CY05 to 0.3% in CY05 to 35.0 900. BCS and Lanxess India Private Limited (LIPL) had entered into a Memorandum of Understanding (MOU) dated November 18.0 35. The management plans to sell this land at appropriate valuations. where it has closed one of its plant and extended a VRS scheme to its employees there (it has written off Rs. EBITDA Margins fell from 13. 1200.08 in FY09 it is likely that BCS would soon become a debt free company.267.1% in FY09. to LIPL. New products in the last recent years have been contributing ~23% to the total sales. BCS could benefit from outsourcing done by Bayer AG. Going ahead.LHS FY08 FY09 10. 2008 between BCS and LIPL.0 Rs. LIPL has exited the aforesaid land and building in a phased manner by 2009 and accordingly.0 Rs. Globally. while its contribution to the company's total sales was in the range of 11-16%.RHS (Source: Company Annual Report) Land Bank . this trend has reversed and EBIDTA margins improved to 11. which replaced the earlier MOU. However.0% 18.0% CY05 CY06 Period Domestic Revenues .Exports to garner higher revenues: BCS’s exports registered a CAGR of 24.8 cr per acre.30. 80% of sales were to the Bayer AG group companies. indicating high outsourcing by these group companies from BCS.1. with a fall in commodity prices. 1500.394 cr over CY05-FY09 on the back of new product launches. Pursuant to the Exit Agreement dated February 28. Domestic and Exports as % of Total Revenues 89. totalling a land value of around Rs.0 CY05 CY06 Period Sales-LHS OP-RHS PAT-RHS (Source: Company) 170.0 FY08 FY09 With debt equity ratio improving over the years from 0. 2004 but the transfer of ownership was not effected pending approval from the Collector of Thane.3). During CY06-FY08. As per reports.384 lacs equivalent to Euro 40 lacs in February 2008.0 600. 2004 wherein the economic interest in identified land and building at Thane was transferred to LIPL effective July 01. Also the RoCE has improved drastically from 22.3% CAGR in sales to Rs.9% in FY09.0 80. Of the company's total export revenues.0% 85. Improving profitability: BCS has posted a strong 27.0% Export revenues . BCS’s exports would be driven by the increase in outsourcing by the various Bayer group companies due to the cost advantage. Bayer AG has a revenue base of Euro 4 bn from crop protection sales.2.4% during CY05-FY09. 125.

1% 17. The PAT for BCS increased by 10.8% 90.6 26.9% to Rs.Cr.2% 7.1 % Chg 15. Any unusually large sales return could adversely impact sales and margins.4% 11.0 418.3 772.43 cr capex plan in FY10 and also intends to launch two to three products. Financial Performance Particulars Net Sales Other Operating Income Total Operating Income Expenditure Raw Materials consumed Staff Cost Other Expenditure Total Opex Operating Profit OPM % Other Income Interest Expenses Depreciation Profit before EOI and tax Q2FY10 482.5.3% 2.7 19. Hence.6% -6. slowing down of global economy.0 14. It is also working on bio-research technology as well. Quarter 1 and 2 are typically the best quarters historically for BCS based on the cropping seasons in India.6 cr.7 cr from these companies to cater to their rural markets. vagaries in season could affect the demand for agrochemicals and in turn impact our estimates. Freshfields.9% 28.4 75.6 % Chg -16.6 24.0 1238.4% 141.0% -5. It also buys finished seeds. the adjusted PAT grew by only 4. as it does not have the production facility for seeds. Tata Chemicals.2 cr in Q2FY10.0% 14.2 601..0 1.3% 6.13. The growth in sales was despite the fact that the Indian agriculture witnessed one of the worst droughts in its history.9 518.7% 23.8 88.2% -8. It earned EPS of Rs. Commendably. compared to 19.6 Q2FY09 416.Capex plans: BCS believes that in the medium to long term.7% -24. GM rice technologies could attribute significantly to increasing rice productivity.9 86.13.3 79.3 80. most of the agricultural production is rain fed and hence highly dependent on monsoon.3% to Rs.8 84.2 cr.0% Q1FY10 577.1 255.8% 5 Retail Research .7 122.0 7.5% 2.9% 21.9 cr.2 18.7 507.56.2% -1.2% 16.2 24.3% 5. § Agrochemicals are the last input in any agricultural operation and protect the final output i. However. which suffered from a poor monsoon and the price-erosion of products. etc.6 24.4% -15. ITC. § BCS faces sales returns regularly.7% 15.8 400.5 79.5 37.3% FY09 1394.1 Rs.0% -2.6 891.0 150.9 2.7 79.2 cr related to VRS. In case of India.3% 7.3. BCS also does packing and supplies active ingredients in Jammu & Kashmir for achieving tax efficiencies.8% y-o-y to Rs.5 1316.6%. a growth of 10. BCS will continue to launch a minimum of two to three products in the market every year and going forward this will also reduce their monsoon dependency as well.5 79. It will continue to concentrate on development of stress resistant products like monsoon resistant. Hence.0 88.2% in Q2FY09. availability of funds for health segment. while the interest outgo increased by 32.7% y-o-y.5 68.0 32. Q2FY10 Performance: BCS’s net sales increased by 15.5 89. The OPM for the quarter stood at 18. Q2FY10 was one of the worst quarters for the agrichem industry.3 35.4% -19.2 435. New tie-ups and orders to drive growth: BCS has tied up with rural retail operators like Haryali Kissan Bazaar.9% y-o-y to Rs.9% 16.4% 67. crop. tolerances of some pests to insecticides are some of the risks and threats seen in the Environmental Science business.88. insect resistant. Against this backdrop.9 7.9 11. BCS’s operating profit stood at Rs.7 83. to reduce the effect of unforeseen factors on BCS's products range.7 165.5 in Q2FY10. BCS has bagged an order worth Rs.4% 9.7 1148.0 304.6 1482.3 290.8 5. § BCS has ~13-14% revenues coming from exports and any adverse forex fluctuation could affect its earnings.0 19.9% 32.7 cr y -o-y in Q2FY10. including BT rice.9 FY08 1163.4% -2.5% 19. it has taken up Rs. Risks and concerns: § The entry of generics in public health segment. Pest Control of India and Godrej in its bid to further augment its sales.2% 19.6 12. Other income witnessed a drop of 24.5% 14. § Any inordinate delay in sale of land at Thane could result in dampening of the interest in the stock.1 253. as it had to provide for an exceptional item worth Rs. These new initiatives by BCS could help its growth trajectory.8% 18. BT rice is a variant that has been modified by means of biotechnology with genes from Bacillus thuringiensis (Bt) to produce toxins for resistance to insects.482.8% 10.e. The high cost of purchased goods was the key reason behind the decline in the OPM.4% 10.8% -24.5 5.3%.3. § Market need and acceptance of new technologies by farming community is essential before commercial launch of new products.9 3.0 355.2% -46.8 134.7 5. % Chg 19.6% 84.

as farmers who lost their crops in the Kharif season would like to take advantage of the elongated season.0% (Source: Company) Conclusion The conditions of the crop protection market have been quite favorable in the recent years. With the ushering in of WTO and implementation of patent regime.9 17. BCS is planning to introduce some excellent high technology products in crop protection and environment science divisions. the increased spending on agriculture. BCS reported Q2FY10 results better than the street’s expectations and compared to its peers despite poor monsoon.2 217.7% 49.4 11.1 4.4% 480.4% 51. late rainfall (in early October) has helped the country increase its water reservoir level.3 10.8 16.0 10.5 39.3 37.3% EPS 22. the company has been launching 2-3 new products every year and expect the same trend to continue in the future.6 15.5 11.3 13.8% 32.9 0.9% 9.0 10.8 8.6 7. increasing demand for vegetables. Due to this. Good commodity prices.9 39.0% 28.2% 12.4% 4.3 23. the Rabi season could see good sowing.8% EPS 31.5 1670.1 7.9% 94.0% 0. going ahead.0% 4.2 33.8 8.6 15.0 * = Consolidated FY09 numbers.0% 30.6% -4.4 365.1 (Source: Company.0% 0.9% 6.4 44.0 195.2 14.0 4.0 55.8% 19.2% 10.7 3.4 FY09 1394 165.2 530.2 230.2 Nagarjuna Agrichem 605.9 Sales OPM%PATM% H1FY10 342.0 18.6 16.0 150.2 81.4 16.0 1.1 12.3% 94.6 10.5 -6.5 6. BCS has guided for double-digit growth in FY10. continued introductions of innovative products by BCS and possibility of land sale at Thane could keep interest alive in the stock.0 10.6% 0.9 1.5 85. Capitaline Database) Excel Crop Care* 730. labour shortage and government focus on food security have supported the market growth.6 18.6 35. provided that prices remain stable.4 2.4% 385.0% 18.1% 127.6 0.0 35. though the stock is currently not cheap (compared to smaller local peers) at 17.1% 14.4 23.1 68.2% 5.7 4.1% 338.7 FV 5.1 12.1% 53.1 4.9 11.5 -! 3.5 0.7 7.0 9.3% 12.5 -100. Based on quick estimates.8% 150.2 137.9% 28.3 0.2% 8.7 15.4% 38.5 0.8 12. We feel that the stock could be bought at the current levels in a small way and added aggressively on falls in the Rs.9% 7.4x FY11(E) EPS. BCS has 42 molecules under testing for launch.6% 4.8% 49.9% 198.5 6.4% 92.649-688 (17-18x FY11(E) EPS) over 1-2 quarters.1% 13. HDFC Sec Research) Retail Research 6 .8 0.9 23.8% 56.0% 1059. Farmer’s positive mind-set to invest in profitable crops and low overall channel inventories has further added to the positive sentiments.0 1.0% 0.0% 121.9% 23.1 53.1 19.8% 23.0 33.9 7.9 39.0 86.2% 12.4 258.4 Rallis India* 836.7 BCS 1394.8 27.449-490 band for a target of Rs.0 10.2 39.1 4.4% 0.1 19.2 43.1 1.0 5. We expect new product launches to be a key driver for BCS’s domestic business.8% 18.2x FY10(E) EPS and 14.0 101. However. We have not assigned any separate value for the land sale at this point.1 10. the monsoon has been below normal in India (21% deficient).2 4.0% 15.2 1.4 89.3% 8.1 19. It also expects Bt Rice to be a significant contributor to its revenue.9 23.7% 11. Company Sales OPM% PATM% FY09 10.5 17. BCS has its export revenues from Bayer AG Group companies and these are set to increase given the cost advantage and quality offered by BCS.8% 12.2 114.6% 314. Overall.4 Monsanto India 390. H1FY10 numbers for Excel Crop Care & Rallis India = Standalone # = P/E calculated on annualised EPS Estimates Particulars Operating Income PBIDT (before other income) PBIDTM% PAT PATM% EPS PE (x) * = Quick Estimates FY08 1163.6% 0.1 FY10* 1624. and brought it at the long-term average.9 10.4 39.7% 92.0% -8.3% 56.0 BV CMP P/E P/BV D/E FY09 FY09 H1FY10# FY09 FY09 127.2 FY11* 1798.EOI PBT PBTM % Tax Effective Tax Rate % PAT PATM % EPS Equity Capital 3.6 927.1 17.2 17.0 79.6% 11.8 0.7% 14.6% 6.4 (Source: Company.2 Meghmani Organics* 791.8% 23.6% -4.

com Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. Opp.venkatraman@hdfcsec. This document is not to be reported or copied or made available to others. This report is intended for Retail Clients only and not for any other category of clients. any company mentioned in this document. Mumbai 400 042 Fax: (022) 30753435 Website: www. Near Kanjurmarg Station. ”Alpha”.Analyst: Sneha Venkatraman (sneha. Institutional Clients Retail Research 7 . It should not be considered to be taken as an offer to sell or a solicitation to buy any security. but not limited to.com Email: hdfcsecretailresearch@hdfcsec. The information contained herein is from sources believed reliable. Kanjurmarg (East).hdfcsec. We may from time to time solicit from. Office Floor 8. and buy and sell securities referred to herein. We do not represent that it is accurate or complete and it should not be relied upon as such. including. or perform investment banking. We may have from time to time positions or options on. or other services for.com) RETAIL RESEARCH Fax: (022) 3075 3435 Corporate Office : HDFC Securities Limited. Crompton Greaves. I Think Techno Campus. Building –B.

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