Bayer CropScience: Reaping Rich Rewards

Bayer CropScience: Reaping Rich Rewards

With the operations of Monsanto India merged with Bayer CropScience, the latter has begin to stockpile advantages accruing from substantial savings in the cost of compliances and marketing and distribution synergies.

Bayer CropScience Limited is the Indian subsidiary of Bayer AG and is engaged in the manufacturing of insecticides, rodenticides, fungicides and herbicides. It mainly operates in the agriculture care segment. The company offers crop solutions for various crops such as cotton, fruits, millet, mustard, pulses, rice, soybeans, sugar cane, vegetables and wheat. It also offers various pest management solutions, such as professional pest management for household or structural pests and vector management for pests that pose a threat to public health.

Some of the company’s well-known brands include Aliette, Folicur, Melody Duo, Atlantis, Basta, Laudis, Lucifer, Raft, Ricestar, Larvin, Raxil, Planofix, etc.

Industry Overview

During the year, crop production and yield in key growing regions globally have been adversely impacted by unfavourable weather conditions. According to the Grain Market Report by the International Grains Council, global grain production is estimated to have dropped by 17 million tons (MT) in FY 2018-19 to a comparative three-year low of 2,125 MT. Crop protection chemicals are essential for increasing agricultural productivity. The global crop protection industry, which reached a value of around USD 57.7 billion by 2017, is expected to reach USD 77.3 billion by 2023, thus witnessing 5.3 per cent CAGR during 2018-2023.

India is the fifth-largest exporter of pesticides with most of the exports being off-patent products. Export of pesticides is likely to grow at a CAGR of 8.6 per cent and reach USD 4.2 billion by FY 2024-25. The disruptions caused by the coronavirus pandemic indeed impacted the agrochemical industry. As a result, to ensure smooth transportation of goods, manufacturing and distribution of plant protection chemicals, seeds, and fertilisers were brought under the Essential Commodities Act by both central and state governments. 

However, district authorities were empowered to decide about the restarting or level of activities that would take place in the region depending on the outbreak of cases in their jurisdiction. This led to a slightly chaotic situation. Further, various agrochemical industries feel that manufacturing may face obstacles hindered by the shortage of demand. Despite this, during Q1FY21 and Q2FY21, the domestic agrochemical industry is expected to grow by more than 20 per cent YoY driven by significant increase in herbicide sales, pre-buying led by robust demand expectation and also price increase in generic molecules.

Financial Overview

For Q4FY20, Bayer Crop Science gained revenue of Rs 458.7 crore from operations, which is a significant increase of 82 per cent compared to Rs 252.2 crore for Q4FY19. Owing to profit progression mainly from additional topline, integration and one-time effects as well as from synergies, the company reported an operating profit of Rs 54.3 crore for Q4FY20 as against an operating loss of Rs 95 crore reported for Q4FY19. Subsequently, the company gained a net profit of Rs 31.5 crore for Q4FY20 as against net loss of Rs 57.1 crore calculated for Q4FY19.

As a result of increased channel penetration as well as a positive crop season followed by good water availability which favourably impacted the production of vegetables, fruits and corn corps, Bayer Crop Science gained a revenue of Rs 3,609.4 crore from operations for FY20 as compared to Rs 3,167.3 crore for FY19, thus clocking growth of 14 per cent. The company reported 49 per cent gain in operating profit calculated for FY20 at Rs 713.3 crore when compared to Rs 480 crore for FY19. During FY20, Bayer Crop Science’s net profit rose by 40.75 per cent from Rs 337.1 crore posted in FY19 to Rs 474.5 crore calculated for FY20. The Board of Directors of the company has declared an interim dividend of Rs 90 per equity share of Rs 10 each for FY20-21. 

Merger with Monsanto

Back in 2018, Bayer AG had announced completion of the USD 63 billion mega-deal to acquire US-based biotech major Monsanto to create the world’s biggest agro-chemical and seed company. This further allowed Bayer AG to establish a strong presence in the world’s seeds and pesticides industry. Bayer AG is considered a leader in crop protection portfolio while Monsanto has a strong hold in conventional and biotech seeds, traits and digital agricultural tools. Monsanto has a significant presence in North and South America while Bayer AG has a strong presence in Europe. The acquisition of Monsanto further provided Bayer with an opportunity to offer a wide set of solutions to farmers and expand its wings into American continents. 

The operations of Monsanto India were merged with Bayer Crop Science with the former’s products becoming a part of the latter’s product portfolio. The merger was undertaken with a view of reaping benefits in terms of substantial savings in the cost of compliances and marketing and distribution synergies. On a long-term basis, the merger is expected to boost the growth potential of Indian agriculture industry as a global producer as well as exporter of food, feed and fibre. The integration with Monsanto seems to be well on track with savings being done on employee costs, benefit to overall product portfolio as well as rationalisation in other expenses. The full benefits of this merger are expected to be seen from FY22.

Outlook

In the chemical sector, agro-chemicals are expected to have stable business despite the disruptions caused by the virus pandemic. For 2020, a normal monsoon is predicted which will boost farming activities, leading to an increase in demand for the products of Bayer Crop Science. The company’s growth is driven by high corn portfolio sales. As expected, synergy benefits from Monsanto’s portfolio have been yielding positive growth results. The company has currently shifted its focus from channel placement-driven growth to monitoring the liquidation at retail levels before placing materials. Looking forward, this move is expected to restrict unnecessary channel filling during current times when the global economy is down all along, keeping a vigil on inventory and receivables.

Bayer CropScience enjoys a unique position in the market because of its capability to offer new innovative products, technologies, processes, services and business models. As the company continues to emphasize on new business models as key driver for long-term value creation, we recommend BUY.

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