Agri-linked businesses: Will the rabi season keep up the momentum?
Latest News »
- Sorry, Instagram. YouTubers are the key influencers in travel
- US, Japan step up defence cooperation to counter North Korea
- Indiabulls Ventures is world’s top stock with almost 900% gain
- Asian stocks drop on Spain attack, Donald Trump turmoil
- Before Camp David talks, Jim Mattis says Afghan strategy is near
This year’s favourable monsoon has brought cheer for manufacturers of agri-machinery and inputs. The largest impact is seen in tractor sales. Mahindra & Mahindra Ltd, which has nearly half the share in the domestic tractor market, saw a 61% growth in October sales from a year ago. Escorts Ltd, another big company in agri-machinery, also fared well with a 53% jump in sales.
Other agri-machinery makers like V.S.T Tillers Tractors Ltd are gung-ho after two years of contraction in earnings. The firm also reaches out to small-scale farming units where some optimism is back, thanks to government focus on mechanization and good monsoons.
The gamut of firms whose fortunes are linked to the fancy of the rain gods includes those who make irrigation systems and crop protection products too. Jain Irrigation Systems Ltd is hopeful of 12-18% growth in FY2017 too, although September quarter results and management commentary will validate the same.
Then there are some in the unlisted universe such as John Deere and New Holland tractors that would also gain from higher sales.
Meanwhile, the stocks in this segment, which were distressed for many quarters caught investors’ attention soon after the first forecast of a near-normal rainfall this year was known by March-April. Escorts’ stock has rallied by 172% since April. Jain Irrigation’s and V.S.T Tillers’s shares have delivered good double-digit returns too. The outlook for these firms is brighter in comparison to the last two years, as higher sales of farm equipment should improve profits and margins too.
M&M’s performance, however, is also linked to the auto division. Yet farm equipment accounts for nearly 40-50% of the consolidated operating margin and hence FY2017 should see better profitability.
Macroeconomic data also supports this confidence in the farm sector and related services. The first advance estimates released by the agriculture ministry for kharif crops this year suggests record output, higher by 9% from the previous years. Higher crop output will help improve spends on agri-inputs and services.
Emkay Global Financial Services Ltd’s report on agri-inputs and chemicals stated that prices of key fertilisers have stabilized on the back of good demand. And, decline in some input costs is likely to give a leg-up to the profitability of these firms.
That said, it may take a few quarters for stability in profit margins, given that most firms may have high inventory. For instance, the recent September quarter results of DCM Shriram was less inspiring as its agri-inputs division saw a sales contraction.
The moot question is whether there is room for any further growth in stock prices. Valuations for most stocks have run up substantially. For instance, Escorts trades at 11 times FY2018 price-to-earning (estimated) multiple. Much of the heady gains in its stock price were due to restructuring and sale of loss-making business.
Others too trade at similar valuations. So there’s room for return only if sales continue to move up. The peak period for sales growth following a good monsoon is already behind us. One needs to see if the forthcoming rabi season will keep up the momentum. But, given the low base of the last two years, it is likely that year-on-year growth in the next few quarters will look impressive.