Quarterly Results and Valuations in Agro-Chemicals space!
First the quartelry result of SCIL.
The last quarter was equally bad.If we look in the past, H1 contributes 65-70% business for most of the companies in this space in India due to monsoon.
In this case and for many other companies in thsi space, we have seen back to back bad results – in this context, one can safely assume that last 2-3 years were pretty exceptional years for most of the agro-chemical companies.
- Due to Covid, shortages happened , so companies increased prices as well as margins.
- Price of fertilisers & Chemicals went up
Now due to China -opening , prices are down and huge supplies are available.
This is affecting all generic companies in chemicals sector especially agro-chemicals .
On valuation front,this company seems be overvalued (PE of 51, highest among the peers)
Now bigger question is how this company should be treated ? Should we treat it as a generic-chemicals company ?
May be yes , because 80-85% products are from generic category ( they acquired two generic companies -one in 2009 and one in 2017 named excel crop).
The results also indicate that it does not have any moat , it also gets affected by price- movement and supplies of China players (companies having moat are able to maintain the prices and margins upto an extent )
No doubt,one can give slight premium due to its export business, clean balance sheet and 15% speciality products.
Even the parent company is posting bad results and that also seems to be in commodity business .
Question is how the companies like this should be valued ? A speciality company or a generic company ?
Let’s look at the peers !
PI Industry is more of CDMO business ,hence is being valued rightly.
Rallis is also a generic play , the PE level is exceptional here, it seems to be very highly overvalued …and may be that’s why the business and stock price has not done anything in last few years.
Rest of the generic companies are being traded at 15-20 PE. And this level is very high .
If we look at historical PE (10 years) of Insecticide India, Dhanuka, UPL and Shrada CropChem – they used be in the PE range of 10-17 .
Only listed pure speciality play in India is Bayer Crop Sceince , but even that is being traded at 30 PE .And historical PE for Bayer in India has been 30-35.
Hence we can say that that historically most of the generic companies in this space trade at 10-15 PE whereas in pure speciality companies like Bayer trade in between 30-35 PE.
Overall summary on the sector , we can conclude that last 2-3 years were exceptional years and now we’re back to normal times . Prices/supplies / margins of generic products would depend upon China . There is no moat in generic-companies.
Would love to hear more views.
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