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  • Sep 19, 2022 - Agritech is Changing the Future of Agriculture. Top 5 Stocks Benefitting from this Change

Agritech is Changing the Future of Agriculture. Top 5 Stocks Benefitting from this Change

Sep 19, 2022

Agritech is Changing the Future of Agriculture

One of the signs of ace investors is that they predict a sector's growth opportunities way before the sector starts reaping the benefits.

The top investing gurus in India make hay while a layman might just be sufficed with a chunk.

Like how the late Rakesh Jhunjhunwala purchased shares of Praj Industries sometime before the ethanol blending policy was out. Praj Industries turned out to be one of the biggest gainers on the bourses after the government announced its ethanol blending policy.

The opposite also holds true. Top investing guru stay clear of stocks which seem loss making. Like way before Zomato fell valuation guru Aswath Damodaran had predicted the true value of Zomato is just Rs 41. Hence, he clearly was saved from the onslaught of losses.

Predicting a market trend before it becomes a trend is very important for successful investing.

Keeping this in mind, we at Equitymaster, bring to you a sector that might be the next big trend in Indian share markets.

No, it's not electric vehicles or the opportunity in green hydrogen space.

We're talking about the agriculture sector.

Experts believe the technological revolution in agriculture sector might be the biggest revolution after the green revolution.

Recently, India saw a sharp growth in the agriculture industry. Using advanced technology to increase productivity, reduce costs, and help farmers has changed the face of Indian agriculture sector.

50% of the total employed population is employed in the agriculture sector. Hence, change in the agriculture sector will bring a massive change in the overall market scenario.

The scenario has already started to change. The number of agriculture and agri related startups have grown rapidly in the past five years.

Agritech is getting noticed widely and solutions are welcomed with open arms in India as smartphones have penetrated villages.

Basically, as the word suggests, agritech is a combination of agriculture and technology. It refers to the use of technological innovations in agriculture to increase yield, quality, efficiency, and profitability.

Owing to the changes and development in the sector, a lot of venture capital (VC) funding is flowing into the agriculture sector. Total VC funding in this sector crossed the US$ 3 bn mark, out of which US$ 1 bn came in the year 2021 alone.

Hence, in the coming times, the agriculture sector will remain in focus. In these circumstances, it becomes important to focus on the stocks that are leading the change in the agriculture sector and yet are fundamentally strong.

Let us talk about five such companies that are making the most of the buzzword Agritech and leading the charge.

These companies could be the perfect backdoor entry into India's massive agritech megatrend.

#1 Dhanuka Agritech

Dhanuka Agritech is one of India's leading agrochemical companies.

Formerly known as Dhanuka Pesticides, Dhanuka Agritech manufactures a wide range of agrochemicals. The company has established itself across major crops (rice, cotton, soybean, and vegetables) and geographies (south and west).

The company's production facilities are located at Sanand in Gujarat, Jaipur in Rajasthan, and Udhampur in Jammu & Kashmir.

Dhanuka Agritech's revenues are increasing steadily. Over the past five years, its total revenues have grown 11% on a CAGR basis.

The company also has high-profit margins. The lowest operating profit margin reported in the past five years was 11%, which is quite high in itself.

The operating profit margin and net profit margin have grown by 10% and 11%, respectively, in the past five years.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 9,787 10,270 11,452 14,212 15,114
Growth 9% 5% 12% 24% 6%
Operating profit 1,823 1,673 1,986 3,030 2,973
Operating profit margin 19% 16% 17% 21% 20%
Net profit 1,262 1,126 1,413 2,106 2,089
Net profit margin 13% 11% 12% 15% 14%
Source: Equitymaster

In June 2022, the agrochemicals firm introduced two new products - herbicide and fungicide - in India for maize and tomato crops.

The two products - Cornex and Zanet - have been launched in Maharashtra and will soon be made available in other parts of the country.

What bodes well for Dhanuka are its long standing tie ups with global innovators and strong R&D. The company also has a capacity expansion plan in place towards growth and backward integration.

For more details, check out Dhanuka Agritech's factsheet and quarterly results.

#2 UPL

UPL, formerly United Phosphorus, is an Indian multinational company that manufactures and markets agrochemicals, industrial chemicals, chemical intermediates, and speciality chemicals, and also offers crop protection solutions.

Headquartered in Mumbai, Maharashtra, the company engages in both agro and non-agro activities.

The agro-business is the company's primary source of revenue and includes the manufacture and marketing of conventional agrochemical products, seeds and other agricultural-related products.

The non-agro segment includes the manufacture and marketing of industrial chemicals and other non-agricultural related products. These are fungicides, herbicides, insecticides, plant growth and regulators, rodenticides, industrial and speciality chemicals, and nutrifeeds.

It provides sustainable agriculture solutions using technology.

UPL's revenues are growing over time. During covid-19 period, its growth had slowed down. However, in the financial year 2022, revenues saw a sharp jump.

On a CAGR basis, its revenues have increased by 27% in the past five years.

The operating profit margin and net profit margin have grown by 23% and 20%, respectively, in the past five years.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 213,100 257,770 419,430 455,830 547,510
Growth 28% 21% 63% 9% 20%
Operating profit 92,660 109,330 170,130 195,980 241,680
Operating profit margin 43% 42% 41% 43% 44%
Net profit 20,300 15,610 21,750 34,530 43,030
Net profit margin 10% 6% 5% 8% 8%
Source: Equitymaster

UPL is planning to become bio science company that focuses on active use of technology for sustainable agriculture. It has critical data on farming patterns that it plans to use in collaboration with companies around the world to develop R&D led digital solutions in the Bioscience sector.

On 15 September 2022 UPL acquired a 26% stake in Clean Max Kratos, which is into renewable energy.

Clean Max Kratos would develop and maintain a hybrid 28.05 MW solar and 33 MW wind power project under the captive model as envisaged under the electricity laws.

This project will enable UPL to increase its renewable energy usage to 30% of its total global power consumption from the current level of 8%.

Last month ORO Agri and UPL entered into a collaboration to co-distribute a bio solution. This bio-solution can be used for crop protection against various pests and diseases.

For more details, check out UPL's factsheet and quarterly results.

#3 India Pesticides

India Pesticides is an R&D-driven agrochemical producer of technical with a developing formulation business.

It manufactures herbicides, fungicide technical, and active pharmaceuticals ingredients (APIs). It is the sole Indian manufacturer of several technical i.e. Folpet, Thiocarbamate, and Herbicide.

The company's focus on R&D and agri technology makes it very interesting. India Pesticides is to the off-patent agro chemical sector what Dr Reddy's and Cipla are to Indian pharma generics.

For the financial year, 2022 India Pesticides reported a total income of Rs 7,293 m. In 2018, the total income was Rs 2,507 m. Thus, income has grown by over 31% in the past 5 years.

In the same period operating profit and net profits have grown at a rate of 39% and 48% respectively. The financials show a stellar performance.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 2,507 3,460 4,897 6,554 7,293
Growth NA 38% 42% 34% 11%
Operating profit 580 706 1,037 1,895 2,186
Operating profit margin 23% 20% 21% 29% 30%
Net profit 328 439 707 1,345 1,583
Net profit margin 13% 13% 14% 21% 22%
Source: Equitymaster

The total debt of the company has reduced significantly in the past five years. Its total debt in the financial year 2022 stood at Rs 143.5 m.

For more details, check out India Pesticides' factsheet and quarterly results.

#4 Godrej Agrovet

Godrej Agrovet is an Indian company which operates in the animal feed and agribusiness sectors. The company is part of the highly diversified Godrej group.

It is one of the biggest players in the animal feed business in India, producing over 10,57,000 tons/year of animal feed and nutrition products. Their products service the dairy cattle, broiler chicken, layer chicken and aquaculture sectors.

Godrej Tyson food is the joint venture of Godrej Agrovet with Tyson Foods of the USA. Set up in 2008, the company operates large-scale poultry farms and other meat processing facilities to cater to the Indian meat market.

The agri-inputs business is a niche player in innovative agrochemicals, with a strong market share in plant growth promoters, soil conditioners and cotton herbicides. It is also one of the largest producers of oil palm developers in India.

The financials of Godrej Agrovet paint a healthy picture. Its revenues have been increasing gradually. The covid-19 effect can be seen in the revenues of the financial year 2020-21.

However, in the financial year, 2021-22 revenues have seen a high jump. The total revenue stood at Rs 83,869 m which is 20% higher compared to the pre-covid period.

On a CAGR basis, the net profit and operating profits have both increased by 8% in the past 5 years.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 52,174 59,709 70,115 63,072 83,869
Growth 5% 14% 17% -10% 33%
Operating profit 4,749 5,090 5,353 6,033 7,451
Operating profit margin 9% 9% 8% 10% 9%
Net profit 2,350 3,372 2,876 2,973 3,689
Net profit margin 5% 6% 4% 5% 4%
Source: Equitymaster

As a part of setting a foot into the agritech sector, Nadir Godrej of Godrej Agrovet invested as an angel investor in an agritech startup Loopworm.

Loopworm is an agri biotech firm that uses organic waste to produce novel bio based products. It is currently developing alternative sustainable protein & fats for shrimp feeds, poultry feeds, and pet foods.

For more details, check out Godrej Agrovet's factsheet and quarterly results.

#5 Kaveri Seed

Established in 1986, Kaveri Seed is into researching seed production processing packing and marketing of various high-quality hybrids seeds. It has set up a processing plant in Bellary in Karnataka.

Currently, the company is engaged in the production and marketing of agri-inputs. The key subsidiaries of the company include Aditya Agritech (engaged in marketing and distribution of hybrid seeds) and Kaveri Microteck (engaged in developing micronutrients).

Way back in 2014 it had acquired Genome Agritech to extend its operations in the agritech sector.

Kaveri Seed's revenues have seen ups and downs over time. However, its profit margins have remained very high over the past years.

The lowest net profit margin over the past years is 21% which is very high in itself. It shows that Kaveri Seed runs into a highly profitable business.

On a CAGR basis, its net profit has increased by 22% in the past five years.

Financial Snapshot

Particulars (Rs in m) FY18 FY19 FY20 FY21 FY22
Total Income 8,433 8,525 9,759 10,821 10,113
Growth 14% 1% 14% 11% -7%
Operating profit 2,455 2,546 2,988 3,438 2,438
Operating profit margin 29% 30% 31% 32% 24%
Net profit 2,114 2,174 2,599 3,112 2,128
Net profit margin 25% 26% 27% 29% 21%
Source: Equitymaster

Kaveri Seed has reduced its debt by 85% in the past three years. Its total debt for the year ending March 2022 was Rs 10.8 m.

For more details, check out Kaveri Seed's fact sheet and quarterly results.

Investment Takeaway

Changes are exciting and scary.

Changes in a sector come with hopes of high growth and huge profits but, they also come up with a possibility of huge risk.

For example, not many would have believed that EVs would be a real thing and that there will be a time when the entire world would be using EVs at some point in the future. Today, that's a reality. But there are risks alongside, such as burning EVs, costs, etc.

The above mentioned stocks offer growth opportunities but are also under the threat of being washed away by competition.

The global agriculture sector stands under the roof of revolution. Now, since India is an agricultural cultural country, the whole world is eyeing India for rapid developments in the agriculture sector.

It does not take Sherlock Holmes to see that India has the best environment for developing the agritech sector. But it is equally true that India lags behind in technological developments.

This make India an attractive place for global agritech investors. But if these investors come to India what about local companies that are foraying into agritech sector?

Will these company be able to come with competitive products? Or will the agritech sector meet the same fate as smartphones?

However, as of now India is like to nectar of agricultural sector for the honey bees of investors. Hence companies are slowly investing more into Indian agricultural sector.

In April 2022, Mankind Pharma announced its plan to set foot into the agritech sector. It plans to invest Rs 2 bn in the coming two to three years.

It has set up a new arm Mankind Agritech. It will variety of crop care solutions to Indian farmers, including weedicides, insecticides, fungicides, plant growth regulators and biologicals.

Speaking of Mankind Pharma, it is aiming for an IPO. It will be the biggest IPO of the pharma sector.

Hence, before investing in the sector that promises change, an investor should properly analyse whether the promised change. will it actually happen? And will that change be profitable?

Happy Investing!

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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