We raise FY2023E/2024E EPS for Bayer CropScience (BCSL) by 5/12% to factor in better-than-expected Q4FY22 earnings as well as a generally positive outlook for FY2023, barring an expected correction in glyphosate prices. However, at a 34X/29X FY2023E/2024 E P/E, positives seem priced in, leaving us hard-pressed to find room for upside even as the business remains vulnerable to climate and crop price risks. We revise our March 2023 Fair Value to Rs 4,700 (25X FY2024E P/E) and retain Sell.
Q4FY22 earnings a surprise: At the investor meet, management stated that the sharply improved performance for Q4FY22 was driven by a favourable sales mix toward the high-margin corn hybrid seeds business, which rebounded off a weak base on the back of the launch of the promising new DeKalb 9208 hybrids. Besides, there was early buying from channel partners due to fears of Covid-related supply disruptions as well as rising prices.
Generally positive outlook for FY2023: Possible tailwinds for FY2023 include: (1) expectations of a good year for corn, which should benefit not only the high-margin DeKalb corn hybrids business but also corn-targeted agrochemicals such as Laudis; (2) likely ramp-up in sales from promising new products; and
(3) a generally favourable demand environment for agrochemicals amid crop price inflation. However, key headwinds could be: (1) an expected correction in glyphosate prices in H2CY2022; and (2) an anticipated deficit in monsoon rainfall.
Management focused on volume growth: Ever since the change in operating management nearly four years ago, BCSL has adopted a new strategy of driving wider adoption of the company’s products, with a particular focus on smallholder farmers, even at the cost of margins, if necessary. While this remains unchanged (despite some impact on margins), the one significant change we noted from commentary this time is that BCSL is not incentivising early payments by channel partners – this essentially points to lower discounts to the channel, and should support margins, albeit at the cost of increased working capital.
Retain Sell: We acknowledge that after two years of lacklustre earnings growth (adjusted EPS was flattish over FY2020-2022), BCSL seems poised for a better year in FY2023, aided by the aforementioned tailwinds. We project 19% EPS growth in the year ahead, and this may well support the stock. However, given the stock’s current valuations, we prefer other faster-growing companies that trade at fairly similar multiples, e.g. Navin Fluorine/PI Industries at 34X/30X FY2024E P/E.