Weak Q3, downgrades may weigh on Bayer

With focus on volume growth and price cuts, there’s pressure on margin

A weak operating performance in the December quarter led to earnings downgrades for Bayer Cropscience. While revenue growth at 7.5 per cent over the year-ago quarter was better than the Street’s estimate, it was the miss on the margins and profit front that led to the downgrades.

The pressure on profitability is reflected in the 542basis point contraction in the gross margin. This is the fourth consecutive quarter of YOY gross margin decline. The dip is due to the lower share of higher-margin corn seed sales, higher share of industrial business, and downward price revision in a few brands. The price cuts were made to contain the loss of market share and boost volume growth.

Though the company increased the price of herbicide glyphosate, it was not enough to offset the pressure on profitability. Prashant Biyani of Prabhudas Lilladher expects the company to take another round of price hikes in FY22, which can support gross margin going ahead.

The impact on the operating profit margin in the December quarter was higher with the metric down 750 basis points to 11.5 per cent due to an increase in other expenses and higher employee costs.

Revenue growth was led by the crop protection segment, which registered double-digit growth. The uptick was led by sub-segments of herbicides and fungicides. What offsets the gains in the segment was the sharp sales dip in seeds. The insecticide segment, too, suffered lower sales due to adverse weather conditions.

The decline in corn seed sales, according to analysts at IIFL Securities, was driven by a sizeable reduction in corn acreages due to low prices of corn. While the recent rally in international corn prices is positive, the company will have to contend with a higher year-ago base in the next couple of quarters.

While net profit estimates have been cut 9-13 per cent in FY21, the reduction in FY22 and FY23 was 5-8 per cent. Given the weak results and downgrades, the stock has lost 10 per cent since its highs in January. It is trading at 32x its FY22 estimates; investors should await consistency on the revenue and margin fronts before considering the stock.