SOW­ING HOPE

Agribusi­ness com­pa­nies recorded the high­est gains in mar­ket cap, thanks to govern­ment poli­cies. But the sec­tor still faces chal­lenges.

Business Today - - BT500 | AGRIBUSINESS - By Tripti Ke­dia

The av­er­age mar­ket cap of a num­ber of com­pa­nies in agri and al­lied busi­nesses has risen spec­tac­u­larly in the last 12 months. Be­tween last Oc­to­ber and this Septem­ber, Es­corts saw an ex­tra­or­di­nary gain of 164 per cent, rice ex­porter KRBL of 57 per cent and Kaveri Seeds, 29 per cent. (See Mak­ing Hay) “Be­fore last year, agri-based com­pa­nies got lower val­u­a­tions be­cause of the higher volatil­ity of their earn­ings,” says Deepak Jasani, Head, Re­search, HDFC Se­cu­ri­ties. All kinds of un­ex­pected fac­tors arose to ad­versely af­fect growth – for ex­am­ple, cot­ton seeds had been show­ing strong growth of over 12 per cent till 2015/16, but there­after reg­u­la­tion of Bt cot­ton prices led to a rev­enue de­cline. This year’s kharif sea­son, how­ever, the acreage de­voted to cot­ton in­creased nearly 19 per cent, from which the seed in­dus­try, too, has nat­u­rally ben­e­fit­ted. “In the past year, on the one hand, volatil­ity has re­duced, and on the other, div­i­dend yields have be­come at­trac­tive, thanks to fall­ing in­ter­est rates,” adds Jasani. “As a re­sult, in­vestors started to give agri-com­pa­nies higher val­u­a­tions.” Like cot­ton seeds, each seg­ment of agribusi­ness has its own nar­ra­tive. But there are a few com­mon rea­sons for the

boom across the en­tire sec­tor.

Af­ter be­ing choked by El Nino and other fac­tors for a num­ber of years, the mon­soons, this year and the last, have been rea­son­ably good, fall­ing just 5 per cent and 3 per cent short of the long pe­riod av­er­age, re­spec­tively. Healthy cash flows have given the bet­ter-off farm­ers enough dis­pos­able in­come to buy seeds in large quan­ti­ties, apart from farm tools, trac­tors and more, ben­e­fit­ting those man­u­fac­tur­ing them. Com­pa­nies like Mahin­dra Agri So­lu­tions and Son­alika In­ter­na­tional Trac­tors have seen great sales – Mahin­dra’s turnover, for in­stance, is poised to cross ` 1,500 crore this year.

Ut­tar Pradesh’s sugar com­pa­nies, too, have en­joyed sub­stan­tial growth be­cause of the boun­ti­ful rains. Bal­ram­pur Chini Mills av­er­age mar­ket cap, for in­stance, in­creased by 47.5 per cent be­tween Oct '15 - Sept '16 and Oct '16 - Sept '17. “With sugar pro­duc­tion ex­pected to grow 25 per cent in 2017/18, strong sugar re­cov­er­ies and prices ex­pected to re­main steady, stocks of UP-based sugar mills like Bal­ram­pur Chini, Triveni Engi­neer­ing and In­dus­tries and Dwarikesh Sugar In­dus­tries have room for giv­ing re­turns of 18 per cent a year,” says Af­shaan Sayyed, an­a­lyst at in­vest­ment man­age­ment firm, Do­lat Cap­i­tal.

Along­side, irrigation projects an­nounced by the govern­ment have boosted the prospects of com­pa­nies man­u­fac­tur­ing equip­ment for, or pos­sess­ing ex­per­tise in, the task. The Prad-

han Mantri Kr­ishi Sin­chai Yo­jana (PMKSY), launched in 2015, to ex­tend irrigation cov­er­age by har­ness­ing rain­wa­ter at the mi­cro level through the ‘Jal San­chay’ and ‘Jal Sin­chan’ schemes, has been al­lot­ted an out­lay of ` 50,000 crore for five years. Jal San­chay and Jal Sin­chan aim to de­velop com­plete irrigation sup­ply chains, wa­ter re­sources, dis­tri­bu­tion net­works and farm-level ap­pli­ca­tion so­lu­tions to achieve the ul­ti­mate tar­get of pro­vid­ing wa­ter for ev­ery farm, re­duc­ing its de­pen­dence on the rains. Yet another ob­jec­tive is en­hanc­ing use of wa­ter sav­ing tech­nolo­gies. Th­ese schemes have been al­lot­ted ` 3,400 crore for 2017/18, and aim to bring 1.2 mil­lion hectares un­der mi­cro-irrigation.

As is well known, de­spite In­dia’s pre­dom­i­nantly agrar­ian econ­omy and crores spent on irrigation in pre­vi­ous decades, only 48 per cent of the area un­der cul­ti­va­tion is ir­ri­gated. “There is now a fo­cus on drip irrigation and fast track­ing of large irrigation projects by the govern­ment, both of which are es­sen­tial,” says He­tal Gandhi, Di­rec­tor, Crisil Re­search. Var­i­ous other govern­ment schemes to raise farmer aware­ness, im­prove soil qual­ity and ex­tend ru­ral elec­tri­fi­ca­tion are also, as a ripple ef­fect, ben­e­fit­ting in­dus­try.

In Oc­to­ber, the govern­ment also raised the min­i­mum sup­port price (MSP) of six rabi (win­ter) crops – wheat, mus­tard, bar­ley, ma­soor dal, gram and saf­flower – for 2017/18, which is ex­pected to boost their acreage and pro­duc­tion. The MSP for wheat, the most widely grown of rabi crops, has been raised by 6.8 per cent, the high­est in six years. It has also al­lowed 100 per cent for­eign di­rect in­vest­ment (FDI) in food pro­cess­ing and aims to dou­ble farmer in­come by 2022 – all of which will have spinoff ben­e­fits for agribusi­ness.

“The soil health card scheme, the drive to pop­u­larise use of neem-coated urea, the e-mandi ini­tia­tive by which agri­cul­tural mar­kets can en­gage in elec­tronic trad­ing and the set­ting up of farm pro­duce cor­po­ra­tions are all steps in the right di­rec­tion,” says Gandhi. (Neem-coated urea is more ef­fi­cient than or­di­nary urea as fer­tiliser and also in­creases pro­duc­tion by re­duc­ing in­sect at­tacks.) Di­rect ben­e­fit trans­fer (DBT) schemes, specif­i­cally for farm­ers, and greater fi­nan­cial in­clu­sion for them, are also in ini­tial stages of im­ple­men­ta­tion. The num­ber of DBT schemes has al­ready gone up from 59 in 2015/16 to 140 in 2016/17, ac­cord­ing to a Moti­lal Oswal re­port, and as they ex­pand fur­ther, will sup­port bet­ter ru­ral growth.

The govern­ment also launched the Prad­han Mantri Fasal Bima Yo­jana (PMFBY) in mid-2016 to in­sure farm­ers against crop fail­ure due to nat­u­ral calami­ties, pests and dis­eases. It even cov­ers post har­vest losses for a fort­night, while keep­ing pre­mi­ums at a mod­est 1.5 to 5 per cent of the crop’s es­ti­mated value. This not only pro­tects farm­ers but also pro­vides gen­eral in­sur­ance com­pa­nies with a new area of growth, be­sides im­prov­ing in­vest­ing prospects in listed in­sur­ance com­pa­nies like New In­dia As­sur­ance, which has crop in­sur­ance as a busi­ness seg­ment. Fund houses like Moti­lal Oswal Se­cu­ri­ties have al­ready be­gun park­ing money in the in­sur­ance sec­tor.

With all th­ese ini­tia­tives, farm equip­ment com­pa­nies are also at­tract­ing in­vest­ment and ac­quir­ing higher val­u­a­tions. Mech­a­ni­sa­tion levels in In­dia be­ing low, re­liance on such equip­ment is bound to in­crease in the fu­ture to im­prove pro­duc­tiv­ity. Trac­tor com­pa­nies are wit­ness­ing im­pres­sive growth, as are irrigation equip­ment com­pa­nies like Jain Irrigation Sys­tems, more so with GST on such equip­ment be­ing brought down to 12 per cent. “Ag­gres­sive growth could be seen in this space in the near fu­ture,” says Anita Gandhi, Di­rec­tor at lead­ing stock broking firm, Ari­hant Cap­i­tal.

The food pro­cess­ing sec­tor, where 100 per cent FDI has been now al­lowed, is also a good bet for in­vestors. “They should fo­cus on the food pro­cess­ing sec­tor, since the govern­ment wants to in­crease ex­ports,” says Dha­van Shah, Re­search An­a­lyst, KR Chok­sey Shares and Se­cu­ri­ties. “Cold stor­age com­pa­nies like Gati and Gate­way Distri­parks are also a good bet.”

The op­ti­mism over agribusi­ness, how­ever, does not ex­tend to pes­ti­cide com­pa­nies, which have un­der­per­formed the mar­ket, post­ing only sin­gle digit growth. The spec­u­la­tion that the govern­ment is mulling price con­trols on pes­ti­cides has fur­ther re­duced en­thu­si­asm for their stocks. “In pes­ti­cide com­pa­nies, growth has ta­pered from 12-15 per cent year-on-year ear­lier to 8-9 per cent last year, and this year too, sim­i­lar growth is ex­pected,” says Sayyed of Do­lat Cap­i­tal. The govern­ment set­ting stock lim­its for traders along­side poor pro­cure­ment have led to the whole­sale prices of pulses dip­ping be­low MSP levels, hurt­ing farm­ers, de­spite record pro­duc­tion in 2016/17. So too, price con­trol on Bt cot­ton hit the com­pa­nies con­cerned so hard that Mon­santo threat­ened to quit the coun­try.

Yield stag­na­tion is another prob­lem, which is likely to re­sult in a drop in prices of agri­cul­tural com­modi­ties and farmer prof­itabil­ity de­spite the two good mon­soons. “De­spite good mon­soons and good sow­ing, farmer prof­itabil­ity is likely to fall by 25 per cent in the mar­ket­ing year 2017,” says Gandhi of Crisil Re­search. “Nine of the 14 states that ac­count for 70 per cent of the sown area will show a drop in prof­itabil­ity. States like West Ben­gal and Odisha will see losses for farm­ers.”

Ex­perts be­lieve farm­ers have to be bet­ter ed­u­cated in the right use of agro­chem­i­cals and adop­tion of tech­nol­ogy to over­come the prob­lem of yields. The Soil Health Card scheme also needs to be im­ple­mented more widely. Thus in­vestors need to pin­point the com­pa­nies likely to be af­fected by low yields and avoid them.

The pro­cure­ment pol­icy of the govern­ment re­mains limited. It is not ag­ile enough to shift to whichever is the bumper crop for a par­tic­u­lar year, but at the same time farm­ers are not per­mit­ted to ex­port freely. “Pulses have been ig­nored for a long time,” says Gandhi. Fi­nally, how­ever, ex­port curbs on pulses have been re­moved fol­low­ing record pro­duc­tion in 2016/17, so that farm­ers are not com­pelled to sell in the mar­ket be­low the MSP price any more. Again, lack of suf­fi­cient stor­age – es­pe­cially cold stor­age – and ware­hous­ing fa­cil­i­ties for agri­cul­tural prod­ucts lim­its farm­ers’ ca­pac­ity to hold on to them post-har­vest, forc­ing them into dis­tress sales.

Even so, agri­cul­ture and agribusi­ness are on an up­swing, with good mon­soons, MSP hikes, loan waivers and DBT schemes all help­ing to drive up farm­ers’ dis­pos­able in­comes. Ac­cord­ing to a Moti­wal Oswal re­port, the en­cour­ag­ing sec­ond quar­ter re­sults of 2017/18 of sec­tors such as fast mov­ing con­sumer goods, au­to­mo­biles, con­sumer durables and re­tail are a clear in­di­ca­tion that ru­ral In­dia is buy­ing and ru­ral growth is likely to match ur­ban growth, if not sur­pass it.

Over­all, how­ever, re­tail in­vestors need to take care. “The agri space re­quires dif­fer­ent pa­ram­e­ters to be tracked by in­vestors,” says Jasani of HDFC Se­cu­ri­ties. “Th­ese in­clude the mon­soon – its spread and in­ten­sity – as well as crop­ping pat­terns, ru­ral pros­per­ity, ru­ral spend on in­fra­struc­ture and so­cial needs, in­ter­na­tional com­mod­ity prices and im­port ex­port poli­cies fol­lowed by other coun­tries and In­dia. Fer­tiliser, seeds and agri com­mod­ity com­pa­nies can be tracked for in­vest­ments af­ter some cor­rec­tion in their prices.”

VIVAN MEHRA

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