By Suhani Adilabadkar

The agrochemicals industry is not only a crucial agricultural input industry, but also an important foreign exchange contributor for India - the country is the fourth largest agrochemical producer globally after the US, Japan and China. This industry derives 50% of its value from exports and is expected to touch $7 bn by 2020, growing at 8% annually.

A normal monsoon is predicted this year, good news for the industry, and indicating that agrochemical stocks will report strong growth. Companies like Pi Industries, Dhanuka Agritech, Shivalik Rasayan and others have gained sharply as this industry has grown. Astec Lifesciences has also been exhibiting strong growth momentum over the past four quarters and its stock price has gained 20% over the past one year.  

Quick view

• Astec Lifesciences has been reporting strong and steady performance over the past four quarters. Revenue jumped 42% YOY and PAT jumped 400% YOY in the current March quarter of FY18.
• The company is mainly into manufacture of fungicides and has positioned itself as a niche fungicide player of Triazoles.
• Godrej Agrovet has a controlling stake in the company.
• The industry as a whole will benefit from agrochemicals worth $4 bn going off-patent by 2020, leading to higher export growth.

Astec Lifesciences, established in 1994, manufactures agrochemicals and pharmaceutical intermediates. It is mainly into manufacture of fungicides and has positioned itself as a niche fungicide player of Triazoles.

The firm has a strong presence in Azole fungicides, which is a Rs. 1000 crore business in India. The company is also into the contract manufacturing business, and offers off-patented chemicals to domestic marketers and also exports to the USA, Europe, South East Asia, West Asia, and Latin America.

In 2015, Godrej Agrovet acquired a controlling stake in the company enhancing its momentum to expand its contract manufacturing business and maintain its leadership in triazole fungicides.

Overall industry scenario: high growth, but many dependencies

The agrochemicals industry is dominated mainly by insecticides which account for about 60%, followed by fungicides and herbicides contributing 18% and 16% respectively. The domestic industry is dominated by Bayer, Rallis India, BASF India, Gharda Chemicals , Syngenta India controlling almost 80% of the market.

The Indian agrochemical industry shrunk during FY14-16 as Latin America which accounts for about one third of total exports saw a slowdown and a domestic drought. The industry is thus dependent both on domestic agricultural sector with

respect to rabi & kharif output and also on the seasonal agricultural cycles of importing countries. The exports constituting half of industry revenues are expected to grow at a CAGR of 16% to touch $4 bn by FY19-20, increasing its share to 60%.

Apart from high exposure to exports, the industry also faces challenges such as a significant dependence on monsoons, unpredictable pest attacks and high inventory & seasonal nature of demand.

Strong financial performance in Astec

Astec Lifesciences has been reporting a strong performance over the past four quarters. Revenue jumped 42% YOY and PAT exhibited phenomenal growth of about 400% YOY in the current March quarter FY18.

EBDITA doubled with a margin of 24.26% in Q4 FY18 against 18.54% same period previous year, improving by a phenomenal 572 basis points YOY. On an annual basis, after seeing a decline in FY16, Astec Lifesciences rebounded on every parameter with revenue rising 21% and PAT growing 200% YOY.

The company’s 5 year CAGR stands at 17% & 42% for Revenue & PAT respectively as on March FY18. Apart from the sturdy performance on income & profitability front, long term debt equity ratio is almost nil.

It can be argued that Astec Lifesciences can command higher valuation compared to its peers due to its sturdy financial stability and strong promoter shareholding which has been increasing steadily over the past four quarters and stands at 67.31% as on March 2018 compared to 65.54% March 2017.

Room for export and domestic growth

Agriculture is still considered as the backbone of Indian economy with its 18% contribution to GDP and employment to about 52% population. The agrochemical industry as a whole will also benefit from agrochemicals worth $4 bn going off-patent by 2020 leading to higher growth in exports. In the current scenario, Chinese government’s clampdown on its agrochemical industry due to environmental issues reducing imports and Make In India initiative will provide long term stability to the industry.

In addition to all of this, the major growth driver is the current low consumption of agrochemical/crop protection products in India which is about 0.6 kg/ha compared to 3 kg/ha global average signifying high industry growth prospects. Low processing costs for setting up manufacturing hubs, huge opportunity for contract manufacturing and high availability of technically skilled labour for research and development adds to this list.

Astec Lifesciences, an important spoke in the indian agrochemical industry will benefit from both double digit trajectory in exports and stable domestic industry growth. The company with its strong promoter backing and sturdy financial fundamentals can be considered a strong stock for long term investors.