Detailed Analysis of Top-5 Agrochemical Stocks
As per the IBEF report, India’s Chemical Industry is broadly classified into 6 categories namely: Bulk Chemicals, Specialty Chemicals, AgroChemicals, PetrcoChemicals, Polymers, and Fertilizers. Chemical Industry in India is highly diversified which covers more than 80,000 products. The market value of the Chemical & Petrochemicals Sector in India is estimated to be around $178 billion (2019). The Chemical Industry is expected to grow at a CAGR of 9.3% by 2025. The agrochemicals market is expected to witness a 8% CAGR to reach US$ 3.7 billion by FY22 and US$ 4.7 billion by FY25.
As of 2019, India ranks 4th in the largest production of agrochemicals. The USA, Japan, and China are the top leaders in the production of Agrochemicals. Agrochemical Sector can be broadly categorized into Insecticides, Pesticides, Fungicides, Herbicides, and others.
Key Drivers for the Agrochemical Sector as per the reports of Department of Chemicals and Petrochemicals are:
- Huge Domestic Market
- High dependency on the agriculture sector
- Lower per capita chemical consumption in comparison to western countries.
Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on a quantitative basis. No suggestions are being made to directly go and invest in the top-scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top-scoring companies in this analysis and take investment decisions based on risk profile.
Detailed Review of Top-5 Agrochemical Stocks
Companies selected for Analysis:
We have selected the following Top five Agrochemicals companies according to their Market Capitalisation for our Quantitative Analysis.
Market Capitalization of Top-5 Agrochemical Stocks:
- UPL- Rs. 45,494 Cr.
- PI Industries- Rs. 34,793 Cr.
- Bayer CropScience- Rs. 22,370 Cr.
- Coromandel International – Rs. 22,084 Cr.
- Sumitomo Chemical India- Rs. 13,477 Cr.
The procedure of Analysis and its Interpretation
- These 5 Companies are analyzed on the following 13 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
- Here, 1 means that the company has scored the lowest points and 5 means the company has scored the highest points.
- In the end, we have added all the points together and companies are ranked accordingly.
Parameters of Quantitative Analysis:
- PE of a company means that how much investors should pay for the stock based on their current earnings.
- A company with a lower PE Ratio is considered better and vice versa.
- Coromandel International is the company having the cheapest valuation with a PE ratio of 15.69 and hence awarded with 5 points and first rank.
- While PI Industries is trading at premium valuation with a PE ratio of 51.99 and therefore given 1 point only.
- EV/EBITDA measures Enterprise Value (EV) to the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA).
- Since this industry is a capital-intensive industry, looking at the EV/EBITDA ratio also becomes important.
- Here, again Coromandel International remains the topper among the peers with an EV/EBITDA ratio of 10.91 and hence given full points.
- Again, PI Industries with the highest EV/EBITDA ratio of 35.06 receives the last rank.
3) Return on Capital Employed:
- RoCE indicates how better the company is generating the profit over the capital employed.
- The more the RoCE of the company, the better it is considered.
- Return on Capital Employed (RoCE )is one of the return ratios commonly used in fundamental analysis. RoCE is Earnings before Interest and Taxes (EBIT)/ Total Capital Employed (Debt + Equity).
- RoCE plays a crucial role in the analysis of any capital-industry and so is equally important in this industry as well.
- In this case, also, Coromandel seems efficient in generating a good amount of profits from its capital employed. The company is having a ROCE of 26.3% and hence acquires the first position.
- UPL scores the lowest point on account of the lowest Return on Capital Employed of 9.6% among all.
4) Return on Equity:
- RoE signifies how well the company generates the return on shareholders’ investment.
- A company with higher RoE is considered good and vice versa.
- RoE can be calculated as Net Income/Total Shareholder’s Equity.
- Yet again, Coromandel secures the first position on account of the highest Return on Equity (ROE) of 27.8% and thereby also receives full points.
- The second best ROE has been posted by Sumitomo Chemical India of 20% and hence gets 2nd position. Bayer CropScience with an ROE of 19.8% gets 3 points.
- UPL delivers poor performance in this return ratio as well. It is having an ROE of 14%, least among all, and hence scored and ranked accordingly.
5) Debt-to-Equity Ratio:
- Since the AgroChemical industry is a capital-intensive industry, it might have certain debt, which makes it more important to evaluate this ratio.
- The debt-to-equity ratio is a leverage ratio that measures the debt of a company against its total shareholder’s equity.
- Accordingly, lesser is the debt, better it is for the company, and vice-versa.
- Bayer CropScience and Sumitomo Chemical India are virtually debt-free companies, having no debt and hence both of the companies receive 5 points each.
- PI Industries ranks second with a D/E ratio of 0.2 and Coromandel gets 4th position.
- UPL with a D/E ratio of 1.94 scores only 1 point.
6) Interest Coverage Ratio:
- The interest coverage ratio is Earnings before Interest and Taxes (EBIT)/ Interest expense.
- Interest Coverage Ratio indicates the ability of companies to pay interest from their operating profit.
- The higher the Interest Coverage Ratio of a company safer it is considered for the company and vice versa.
- Being a capital-intensive industry, Bayer CropScience and Sumitomo Chemical India remain debt-free companies and also post higher Interest Coverage Ratio of 43.3 & 38.6 respectively. With the highest Interest Coverage Ratio, Bayer CropScience is given 5 points while Sumitomo is awarded 4 points.
- UPL continues to perform poorly in Leverage Ratios as well. The company is having an Interest Coverage Ratio of 2.1 which is very low and hence ranked last.
7) Pledged (%):
- A little amount of promoter’s stake has been pledged by Coromandel International i.e. 0.01%, thereby ranked last and provided one point only.
- All other companies are not having any pledged share and hence all of them are awarded full points and first rank as well.
8) Institutional Holdings (FII + DII):
- Participation of Institutional holding in the company act as a checklist parameter for retail investors especially in the case of small companies.
- Hence, where Institutional Investors are having a significant stake in any company is considered to be a good company as it highlights the assurance of big investors in the company.
- Institutional Holdings have the highest stake of 52% in UPL, which helps UPL to gains 5 points and first rank.
- Next to UPL, Institutional Investors have also their great interest in PI Industries with a 40.83% stake and Coromandel International with a stake of 26.19%.
- Sumitomo Chemicals fails to impress the institutional investors and hence is rewarded only 1 point. Institutional Investors are only having a 7.76% stake in this company.
9) Operating Profit Margin:
- Operating Profit Margin can be calculated by dividing Operating Profit by Total Revenue. It is sometimes also called EBIT (Earnings before Interest and Tax) Margin.
- This is another important ratio to look after in any capital-intensive industry.
- In 9MFY21, PI Industries has registered the highest Operating Profit Margin (OPM) of 23.2% and therefore given 5 points and first rank. This high OPM can also be the reason behind PI Industries stock trading at a premium valuation.
- While UPL and Bayer CropScience with OPM of 22% & 20.7% are ranked 2nd and 3rd respectively.
- Coromandel International has the least OPM of 15.5% among all and thereby receives 1 point only.
10) Sales and Net Profit (PAT) Growth- 5 years CAGR:
- In terms of Sales Growth on 5 Years CAGR basis, Sumitomo Chemical India tops the list with the highest sales growth of 28%.
- UPL with sales growth of 24.2% in last 5-years gains 2nd position. PI Industries have only delivered sales growth of 9.9% and hence provided with 3 points and 3rd rank as well.
- Sales Growth of Bayer CropScience remains in the negative figure of -0.6%. This company for negative sales growth is awarded last rank and one point only.
- In terms of PAT growth on 5 Years CAGR basis, Sumitomo Chemical again performs exceptionally among others with sales growth of 42.6%. The company is ranked first and given full points.
- Coromandel International has reported sales growth of 21.5% in the last 5 years and hence given 2nd rank and 4 points.
- Despite negative sales growth, Bayer CropScience generated PAT growth of 4.4%, but underperforms all other players and gets only 1 point.
11) Sales and Net Profit (PAT) Growth- 3 Years CAGR:
- In Sales Growth on 3 Years CAGR basis also, Sumitomo obtains the topmost position with an appreciable sales growth of 44.8%.
- UPL has also performed well enough in the last 3 years and has registered 29.9% sales growth on a CAGR basis, therefore receives 2nd rank. PI Industries with Sales Growth of 13.% in last 3 years gets the third position.
- Bayer CropScience with a Sales growth of 8.8% obtains last position and only 1 point.
- While in PAT growth in the last 3 years on a CAGR basis, Sumitomo Chemical has again outperformed its peers on a large scale. It is having sales PAT growth of 47.8% and therefore gains first position and full points.
- Coromandel International and Bayer CropScience have recorded double-digit PAT growth of 30.7% and 17.7% respectively.
- In this scenario, PI Industries have performed poorly by delivering PAT growth of -0.2% in the last 3 years and thereby scored and ranked accordingly.
12) Inventory Turnover Ratio:
- Inventory Turnover Ratio is Cost of Goods Sold/ Average Inventory. Average Inventory is (Starting Inventory + Ending Inventory)/2.
- It gives us an idea of the shelf life of the company product and also gives an overview of how the company is stocking up its inventory as well as how many times the company has sold its inventory in a given period.
- The higher the Inventory Turnover Ratio, the better it is for the company and vice versa.
- Almost all the companies are having an Inventory Turnover Ratio of the same level but PI Industries manages to grab the first position with the highest Inventory Turnover Ratio of 5 and therefore is rewarded with full points also. Next to PI, the second-highest Inventory Turnover Ratio is recorded by UPL of 4.9%.
- Sumitomo Chemical India with the lowest Inventory Turnover Ratio of 3.8 is given one point and fifth rank.
13) Cash Conversion Cycle:
- It signifies the effectiveness of the company to recover cash from its clients.
- UPL has the lowest Cash Conversion Cycle of 44.3 days which is a good sign for the company. The company is given first rank and 5 points as well.
- Sumitomo has reported the highest cash conversion cycle of 116.7 days.
14) Final Score:
- The above quantitative analysis presents Sumitomo Chemical India as the winner among the Top-5 Agrochemical Companies. Sumitomo has scored 51 points in our quantitative analysis.
- Next to Sumitomo is Coromandel International which has received 48 points and UPL with 46 points.
- PI Industries and Bayer CropScience have scored 44 and 43 points respectively. These companies have been ranked 4th and 5th rank as well.