Can a strong product portfolio cushion Bayer from market vagaries?
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With Tuesday’s gain of 2.88% on NSE, the Bayer CropScience Ltd stock is back to its pre-results level. The stock had lost 9% after the company’s third quarter results missed Street estimates. Helping the rebound is a strong product pipeline and the belief that these new products will offset potential weakness in the business environment in the coming season.
Bayer CropScience plans to register 20 new products by 2020, of which four are scheduled to be launched next fiscal year. One of its peers, PI Industries Ltd, is estimated to launch one-two products per annum in the domestic market and another, Dhanuka Agritech Ltd, two-three (exclusive) products, data from Edelweiss Securities Ltd shows.
According to B&K Securities India Pvt. Ltd, Bayer is also planning to launch new trait rice seeds and a cotton hybrid. “While last 10-15 years have been spent on strengthening distribution reach and connect with farmers, Bayer is now complementing it with a strong product pipeline,” B&K Securities said in a note.
The strong product pipeline can help cushion Bayer from the vagaries of agricultural demand. It gained market share in cotton seeds despite a drop in the industry volumes in the previous summer crop season (kharif). In agrochemicals, Bayer plans to capitalize on strong traction for herbicides through new molecules. According to Edelweiss, the company aims to increase the share of herbicides in revenue from the current 17% to 40% in 2020.
The launches will complement six new products Bayer introduced over the last two years. “Consistent new product launches supported by strong pipeline will continue to drive growth,” Edelweiss said in a note. B&K Securities estimates the new products to contribute half of Bayer’s incremental growth by 2020. Currently the share of revenue generated from products introduced in the last five years stands at around 20%.
While the product pipeline looks strong, the performance so far this fiscal year has been a dampener. Revenue dropped 10% in the last quarter. In the nine months to December, revenue is up just 2%. The performance was hit by external factors like weak demand and unfavourable climatic conditions.
With the company enhancing its product portfolio, the performance in the coming season should be better than in the year gone by. That will justify Bayer’s premium valuations. Compared with its peer group multiples of 11 to 23 times, the stock is trading at around 28 times one-year forward estimated earnings per share.