Bayer CropScience's Q2FY18 results (Neutral) - Improved performance
Q2FY18 results
- Bayer’s Q2FY18 revenues increased by 11.6% yoy to Rs12.3bn (est.Rs11.9bn) despite erratic monsoons and uneven rainfall distribution.
- Unfavourable product mix led to 200bp dip in Q2FY18 gross margin. However, lower operating expenses (down 20% yoy) led to 183bps improvement in EBITDA margins to 23.3% .EBITDA increased by 21.1% to Rs2.87bn(est.Rs1.8bn)
- Higher depreciation (up 18% yoy) and interest cost (up 29.4% yoy) led to 19.8% yoy growth in net profit to Rs1.9bn (est.Rs1.82bn)
Key positives: New product launches.
Key negatives: Decline in gross margins
Impact on financials: Earnings estimates maintained
Valuations & view
Bayer’s performance was back to growth trajectory despite erratic rainfall in key regions in the month of July and August. Growth was driven by new product launches in pesticides business and healthy traction in the cotton seed business. Overall performance in H1FY18 was adversely impacted by destocking at dealer level due to GST implementation in Q1 and uneven distribution of rainfall in Q2. In the near term (H2FY18E), we expect Bayer’s performance to improve with normalisation of inventory among dealers and healthy rabi prospects. However, the market share loss in hybrid rice sales in seed business (~15% of revenue) and reduced off-take by the parent company in exports business (~15% of revenue) will be the key challenges faced by the company. In the long term, Bayer is one of the few companies to have strong product pipeline (~20 in 2017-2021E), which should boost growth. Bayer is banking upon its strong product pipeline and established distribution reach in domestic pesticides business to overcome the challenges faced in exports and seeds business. Government has recently constituted committee to formulate policy to impose price control over generic pesticides products. With Bayer pricing the generic products that it sell at 20-30% premium over other players, any price control will adversely impact the profitability of the company. Maintain Neutral, with the target price of Rs3,775
Co. is engaged in the manufacture, sale, and export of the following products: herbicides and fungicides; insect control sprays and related devices; rubber and plastic goods; health care related medications for humans and animals; diagnostic equipment sales and installation; and organic chemicals such as dyes, dyes intermediaries, and flavor additives.
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