SELL

Bayer Cropscience (BYRCS)

Fertilizers & Agricultural Chemicals MAY 29, 2019
RESULT
Coverage view: Attractive

Earnings slip, valuations remain on the tip. Bayer ended FY2019 with 1%/9%/21% Price (`): 3,885
decline in revenues, EBITDA and net income (EPS of `69) reflecting sustained weakness Fair Value (`): 3,000
in performance for the fourth consecutive year. Bayer’s relatively weaker performance
BSE-30: 39,502
compared to peers in the domestic business in recent years raises concerns on realizable
gains from the perceived superiority of its product portfolio. We cut FY2020-21E EPS by
16% and reiterate SELL with a reduced DCF-based FV of `3,000 (`3,550 previously).
C ompany data and valuation summary
Bayer Cropscience
Stock data Forecasts/Valuations 2019 2020E 2021E
52-week range (Rs) (high,low) 4,800-3,635 EPS (Rs) 69.3 95.7 113.7
Market Cap. (Rs bn) 133.4 EPS growth (%) (20.8) 38.1 18.8
Shareholding pattern (%) P/E (X) 56.1 40.6 34.2
Promoters 68.7 Sales (Rs bn) 26.9 31.5 35.6
FIIs 3.6 Net profits (Rs bn) 2.4 3.3 3.9
MFs 11.4 EBITDA (Rs bn) 3.7 5.1 5.9
Price performance (%) 1M 3M 12M EV/EBITDA (X) 34.9 24.8 21.0
Absolute (5.4) (10.6) (16.4) ROE (%) 13.0 16.3 17.1
Rel. to BSE-30 (6.4) (18.8) (26.1) Div. Yield (%) 0.5 0.5 0.6
4QFY19 earnings make a U-turn post a strong push in the previous quarter
Bayer reported a steep 57% yoy decline in revenues to `1.3 bn with EBITDA loss of `1.2 bn and a
net loss of `798 mn in 4QFY19, after a strong delivery in 3QFY19 in anticipation of a robust Rabi
season, which turned out to be a letdown. The management indicated that the company
undertook higher sales returns in 4QFY19 amid (1) weak demand in end-markets and (2) rising
concerns on credit to the distribution channel. We note that Bayer’s 2HFY19 performance was
also subdued with 4% yoy decline in revenues as compared to flat to 6% yoy growth for other
domestic ag-chem peers such as Dhanuka, PI and Rallis. Bayer’s margins were also relatively
weaker due to one-time incentive payments to the distribution channel as well as employees.
Four consecutive years of uninspiring performance with bleak results in FY2019
Bayer’s FY2019 results were also uninspiring, as has been over the past three years, with a 1%
yoy decline in revenues at `26.9 bn, 9% decline in EBITDA to `3.7 bn and a sharp 21% decline in
net income to `2.4 bn (EPS of `69.3). Improvement in gross margins by ~370 bps failed to provide
any relief, as EBITDA margins declined ~120 bps yoy to 13.9% amid a sharp jump in employee
cost and other operating expenses; a rise in tax rate to 35% from 26% further pulled down net
income. Exports increased 3% yoy, while domestic sales declined 1% yoy in FY2019 reflecting
volume trajectory. Bayer’s revenues have remained steady over the past four years, while EBITDA
has continued to decline with the company showing evident signs of weakness, particularly in
revenue growth, compared to its domestic counterparts. The management remained optimistic of
a turnaround in FY2020 and beyond amid (1) expectation of a normal monsoon, (2) uptick in key
crop prices, (3) improving off-take of new products, (4) strong demand for seeds and (5) planned
realignment and expansion of the distribution channel. The company also indicated that its
proposed merger with Monsanto India remained on track to complete by 3QCY19, subject to
necessary statutory approvals.
Cut FY2020-21 estimates by 16%; reiterate SELL with revised fair value of `3,000 Tarun Lakhotia
tarun.lakhotia@kotak.com
We cut FY2020-21 EPS estimates for Bayer by 16% to `96 and `114, respectively, factoring in Mumbai: +91-22-4336-0875

(1) moderation in revenues growth, (2) lower margins amid higher costs and (3) other minor Hemang Khanna
changes. We reiterate SELL rating on the stock with a revised DCF-based fair value of `3,000 hemang.khanna@kotak.com
Mumbai: +91-22-4336-0876
(`3,550 earlier). Bayer’s parent portfolio may certainly enable launching of new products in India
in the long run; however, the persisting disappointment in its performance in the domestic
markets over the past few years raises concerns on (1) rising competition from the local players,
who are evidently making inroads with rollout of new products and expansion of distribution
network and (2) plausible down-trading by the farmers to low-cost generic products.
Kotak Institutional Equities Research
kotak.research@kotak.com
Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Fertilizers & Agricultural Chemicals Bayer Cropscience

Exhibit 1: Interim results of Bayer CropScience, March fiscal year-ends (Rs mn)

Change (%)
4QFY19 4QFY19E 4QFY18 3QFY19 4QFY19E 4QFY18 3QFY19 FY2019 FY2018 Yoy (%) FY2020E
Sales 1,288 3,296 3,002 6,210 (61) (57) (79) 26,857 27,099 (1) 31,499
Raw material cost (678) (1,708) (1,714) (3,602) (60) (60) (81) (14,864) (16,006) (7) (17,087)
Employee cost (948) (639) (689) (804) 48 38 18 (3,212) (2,639) 22 (3,373)
Other expenses (880) (861) (762) (1,338) 2 15 (34) (5,049) (4,360) 16 (5,953)
EBITDA (1,218) 87 (163) 466 3,732 4,094 (9) 5,087
Other income/forex gain/(loss) 53 93 63 110 (43) (16) (52) 372 388 (4) 419
Depreciation and amortization (86) (82) (88) (85) 5 (2) 1 (342) (331) 3 (354)
Interest cost (3) (20) (22) (37) (85) (86) (92) (99) (113) (12) (104)
Profit before tax (1,254) 78 (210) 454 3,663 4,038 (9) 5,048
Extraordinaries — — — — — — —
Income tax 456 (28) 81 (179) (1,287) (1,037) 24 (1,767)
Net income (798) 50 (129) 275 2,376 3,001 (21) 3,281
Adjusted net income (798) 50 (129) 275 2,376 3,001 (21) 3,281
Adjusted EPS (Rs) (23.3) 1.5 (3.8) 8.0 69.3 87.5 (21) 95.7
Key ratios (%)
Gross margins 47.4 48.2 42.9 42.0 (81)bps 446 bps 536 bps 44.7 40.9 372 bps 45.8
EBITDA margins (94.6) 2.6 (5.4) 7.5 13.9 15.1 (121)bps 16.1
Tax rate 36.4 36.0 38.6 39.4 35.1 25.7 35.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Bayer’s performance has remained weak as compared to domestic peers in the recent years
Performance of domestic ag-chem segment for key companies, March fiscal year-ends, 2017-19 (Rs mn)

FY2017 FY2018 FY2019

Revenues
Bayer CropScience 28,028 27,099 26,857
Dhanuka 8,816 9,626 10,058
PI Industries (a) 8,657 8,538 9,959
Rallis (b) 14,005 14,984 16,715
UPL (a) 29,615 31,890 33,020
Growth (%)
Bayer CropScience 1.2 (3.3) (0.9)
Dhanuka 6.1 9.2 4.5
PI Industries (a) (6.2) (1.4) 16.6
Rallis (b) 8.7 7.0 11.6
UPL (a) 10.3 7.7 3.5
Gross margins (%)
Bayer CropScience 41.3 40.9 44.7
Dhanuka 43.4 41.6 38.7
PI Industries (a) 48.8 48.8 45.3
Rallis (b) 42.2 41.1 39.2
UPL (c) 53.0 54.6 62.2
EBITDA margins (%)
Bayer CropScience 14.8 15.1 13.9
Dhanuka 19.3 17.3 14.5
PI Industries (a) 19.9 18.7 NA
Rallis (b) 16.8 15.0 13.1
UPL (c) 19.2 19.9 20.5

Notes:
(a) Data pertains to domestic agri business segment.
(b) Data pertains to standalone business.
(c) Data pertains to global operations.

Source: Companies, Kotak Institutional Equities

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Bayer Cropscience Fertilizers & Agricultural Chemicals

Exhibit 3: Bayer trades at a significant premium to the domestic peers in ag-chem business
Comparative valuation of global/domestic ag-chem companies, March fiscal year-ends, 2019-21E

Price Market cap. P/E (X) EV/EBITDA (X)

(LC) (US$ mn) FY2019 FY2020E FY2021E FY2019 FY2020E FY2021E
Global companies
BASF SE 59 60,428 9.9 10.9 10.0 7.8 7.6 6.7
Bayer AG 54 56,070 9.3 7.8 6.9 9.4 7.3 6.5
Dow DuPont 31 69,121 7.5 14.4 15.1 5.1 9.3 9.1
FMC Corp. 71 9,404 11.8 12.4 10.8 9.9 10.1 9.2
Nufarm Ltd 4 1,064 13.8 14.2 9.5 8.4 6.5 5.4
Indian companies
Bayer CropScience 3,885 1,911 56.1 40.6 34.2 34.9 24.8 21.0
Dhanuka Agritech 376 256 15.9 15.3 13.8 12.2 9.7 8.4
Godrej Agrovet 515 1,416 44.9 35.1 28.2 22.4 18.0 14.8
PI Industries 1,051 2,078 35.4 26.9 22.6 25.0 19.3 15.9
Rallis India 151 421 17.9 15.5 14.2 11.7 10.7 9.2
UPL 997 7,275 26.8 17.7 15.4 18.7 10.3 8.7

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 4: DCF-based fair value of `3,000

DCF-based valuation of Bayer CropScience, March fiscal year-ends (Rs mn)
2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2036E
Net revenues 35,569 39,472 45,393 52,202 60,033 69,038 75,941 83,535 91,889 101,078 146,658
EBIT 5,522 6,249 7,186 8,264 9,504 10,929 12,022 13,224 14,547 16,002 23,217
EBIT margin (%) 15.5 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8
EBIT*(1-tax rate) 3,575 4,046 4,653 5,351 6,153 7,076 7,784 8,563 9,419 10,361 15,033
Tax 1,947 2,203 2,533 2,913 3,350 3,853 4,238 4,662 5,128 5,641 8,185
Depreciation / amortisation 388 436 501 577 663 730 802 883 971 1,068 1,550
(Inc)/Dec in working capital (897) (850) (1,277) (1,469) (1,523) (1,918) (1,470) (1,617) (1,779) (1,957) (1,879)
Capital expenditure (578) (635) (866) (996) (25) (1,149) (881) (969) (1,066) (1,173) (1,126)
Free cash flows 2,488 2,997 3,011 3,463 5,269 4,739 6,235 6,859 7,545 8,299 13,578
Year for discounting 0.8 1.8 2.8 3.8 4.8 5.8 6.8 7.8 8.8 9.8 15.8
Discounted cash flow 2,281 2,475 2,240 2,321 3,182 2,578 3,056 3,028 3,001 2,974 2,601
Key assumptions NPV calculation
WACC (%) 11.0 NPV of free cash flow 44,534
Terminal growth rate (%) 6.0 Terminal value 55,152
Capitalization rate (%) 5.0 Enterprise value 99,685
Terminal value calculation Net debt (3,283)
Cash flow in terminal year 13,578 Equity value 102,968
Terminal value 287,854 Shares o/s (# mn) 34
Discounted terminal value 55,152 NPV /share (Rs) 3,002

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Fertilizers & Agricultural Chemicals Bayer Cropscience

Exhibit 5: Summary financials of Bayer CropScience

Profit and loss model, balance sheet and cash flow statement, March fiscal year-ends, 2014-22E (Rs mn)

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Profit model (Rs mn)
Sales 32,452 37,233 27,690 28,028 27,099 26,857 31,499 35,569 39,472
EBITDA 4,193 5,155 4,346 4,136 4,094 3,732 5,087 5,910 6,685
Other income 909 879 817 701 388 372 419 585 707
Interest (48) (46) (100) (69) (113) (99) (104) (109) (115)
Depreciation (646) (253) (247) (289) (331) (342) (354) (388) (436)
Profit before tax 4,408 5,735 4,816 4,479 4,038 3,663 5,048 5,998 6,841
Extraordinary items — — — — — — — — —
Tax expenses (1,513) (1,905) (1,665) (1,569) (1,037) (1,287) (1,767) (2,099) (2,394)
Reported PAT 2,895 3,830 3,151 2,910 3,001 2,376 3,281 3,899 4,447
Adjusted PAT 2,895 3,830 3,151 2,910 3,001 2,376 3,281 3,899 4,447
Adjusted EPS (Rs) 75 105 89 82 87 69 96 114 130
Balance sheet (Rs mn)
Equity 17,423 20,329 18,394 20,567 17,783 18,834 21,330 24,296 27,679
Borrowings — — — — — — — — —
Long-term liabilities — — — 20 156 26 26 26 26
Current liabilities and provisions 6,446 7,402 5,974 7,667 7,409 10,155 11,935 13,367 14,794
Total liabilities 23,869 27,731 24,368 28,254 25,348 29,015 33,291 37,689 42,499
Net fixed assets 4,446 3,224 3,072 3,354 3,403 3,355 3,526 3,716 3,915
Investments/other long-term assets 173 130 338 307 302 3,853 3,853 3,853 3,853
Cash and cash equivalent 4,865 11,558 7,996 8,887 4,178 3,283 7,208 9,087 11,421
Current assets 14,385 12,819 12,962 15,706 17,465 18,524 18,704 21,034 23,310
Total assets 23,869 27,731 24,368 28,254 25,348 29,015 33,291 37,689 42,499
Free cash flow (Rs mn)
Operating cash flow 2,782 3,675 2,938 3,082 3,462 2,575 3,320 3,810 4,291
Working capital change (2,067) 1,829 (873) (1,509) (2,248) 955 1,600 (897) (850)
Capital expenditure (net) (1,592) 970 (369) (493) (419) (454) (525) (578) (635)
Free cash flow (877) 6,474 1,696 1,080 795 3,076 4,395 2,336 2,806
Ratios (%)
EBITDA margin 12.9 13.8 15.7 14.8 15.1 13.9 16.1 16.6 16.9
Net debt/equity (X) (0.3) (0.6) (0.4) (0.4) (0.2) (0.2) (0.3) (0.4) (0.4)
Book value (Rs/share) 452 555 520 581 518 549 622 708 807
Adjusted RoAE 16.6 18.8 17.1 14.1 16.9 12.6 15.4 16.0 16.1
Adjusted RoACE 16.2 34.2 23.4 19.5 20.0 13.5 21.0 22.5 23.7

Source: Company, Kotak Institutional Equities estimates

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disclosures

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which
the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views
about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed in this report: Tarun Lakhotia, Hemang Khanna."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.

60%
Percentage of companies within each category for
which Kotak Institutional Equities and or its affiliates has
50%
provided investment banking services within the
previous 12 months.
40% * The above categories are defined as follows: Buy = We
expect this stock to deliver more than 15% returns over
27.9% 28.9% the next 12 months; Add = We expect this stock to
30%
22.5% deliver 5-15% returns over the next 12 months; Reduce
20.6% = We expect this stock to deliver -5-+5% returns over
20% the next 12 months; Sell = We expect this stock to deliver
less than -5% returns over the next 12 months. O ur
10% target prices are also on a 12-month horizon basis.
4.4% 3.4% These ratings are used illustratively to comply with
0.5% 0.0% applicable regulations. As of 31/03/2019 Kotak
0%
Institutional Equities Investment Research had
BUY ADD REDUCE SELL
investment ratings on 204 equity securities.

Source: Kotak Institutional Equities As of March 31, 2019

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our Fair Value estimates are also on a 12-month horizon basis.

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KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

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market are subject to market risks, read all the related documents carefully before investing.
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on: Toll free numbers 18002099191 / 1800222299 and 18002099292
Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you
are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at
ks.compliance@kotak.com or call on 91- (022) 4285 8484.
Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on
91-(022) 4285 8301.
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