Bayer CropScience's Q3FY18 results (Neutral) - Tepid performance

Q3FY18 results

• Bayer reported tepid performance for Q3FY18. Revenues stood at Rs4.7bn, down 25.6% yoy (est: Rs7.2bn). Sales performance was adversely impacted due to erratic rainfall in the month of October which disrupted normal agricultural operations.
• Gross margins improved by 750bps to 40.7% on lower raw material costs and lower sales returns. Negative operating leverage over fixed overheads led to decline in EBITDA margins. EBITDA declined by 51% to Rs226m (est:Rs720m) , while EBITDA margins declined by 242bps to 4.7%
• Lower other income (down 86%) and higher interest costs (up 173%) led to 71% decline in PAT which stood at Rs107m (est Rs500m)

Key positives:  Increase in gross margins.   

Key negatives: Decline in revenues and profitability

Impact on financials: FY18/19E EPS cut by 9.8%/21.3%. We introduce FY20e EPS of Rs128/sh

Valuations & view

Bayer’s performance in Q3FY18 was adversely impacted due to erratic rainfall in the month of October (especially in South India which accounts for 65% of its revenues). Overall performance during 9MFY18 was adversely impacted by destocking at dealer level due to GST implementation and uneven distribution of rainfall. We believe, 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 revised target price of Rs3839.