As the commentary on the domestic agriculture sector turned gloomy, shares of two agrochemical companies—UPL Ltd and PI Industries Ltd—hit new highs last week.
UPL has seen institutional investors raise their stakes in the firm. While PI Industries is yet to release the shareholding data for the March quarter, concerns about the impact of the weak agrarian sentiments on the demand for agriculture inputs are driving investors to these stocks. If the agriculture inputs demand is hit as feared, then there can be a notable drop in the profit growth of the companies in the industry, Emkay Global Financial Services Ltd said in a note.
But due to their large presence in the global markets, UPL and PI Industries are seen to be insulated from the domestic troubles to an extent. Supporting the argument is the companies’ performance in the recent past.
According to Ambit Capital Pvt. Ltd, thanks to a higher share of differentiated products, UPL, PI Industries and Bayer CropScience Ltd grew faster than their peers in the domestic market.
“In (domestic) agrochemicals, the growth rates in FY15 have been divergent so far, with certain players such as Rallis (Rallis India Ltd), Dhanuka (Dhanuka Agritech Ltd) and Insecticides (Insecticides India Ltd) growing in single digits, whilst certain players such as PI, UPL and Bayer growing handsomely at 16-18% YoY (year-on-year)," Ambit Capital said in a note.
Also, as the accompanying chart shows, UPL and PI Industries delivered the highest revenue growth in the nine months till December 2014.
The revenue growth is slower than what UPL and PI Industries registered in the year-ago period, i.e. the nine months till December 2013. But, aided by new product launches and market share gains, analysts expect UPL and PI Industries to maintain the revenue momentum in the current fiscal also, which cannot be said for other agrochemical firms. “The company (UPL) is to launch new products in FY16E and FY17E, which will have a positive impact on volume growth," said an HDFC Securities retail research note. B&K Securities India Pvt. Ltd says UPL will maintain its guidance of 12-15% revenue growth in the current fiscal year.
For PI Industries, a strong order book and the commercialization and launch of new molecules are expected to provide support to revenue growth. “Post a strong FY15, we expect 22% revenue CAGR (compounded average growth rate) over FY15-17, due to 24% revenue CAGR for custom synthesis manufacturing segment—two new molecules commercialization (per annum) and execution of $0.5 billion order book," Ambit Capital said.
These high expectations have driven up the stocks. The shares of both UPL and PI Industries doubled last year. At current fiscal earnings per share estimates, UPL is trading at 14 times price to earnings and PI Industries at around 29 times. While the valuations are not cheap, if the firms deliver strong revenue growth, the stocks can remain in demand.