The average market cap of a number of companies in agri and allied businesses has risen spectacularly in the last 12 months. Between last October and this September, Escorts saw an extraordinary gain of 164 per cent, rice exporter KRBL of 57 per cent and Kaveri Seeds, 29 per cent. (See Making Hay) "Before last year, agri-based companies got lower valuations because of the higher volatility of their earnings," says Deepak Jasani, Head, Research, HDFC Securities. All kinds of unexpected factors arose to adversely affect growth - for example, cotton seeds had been showing strong growth of over 12 per cent till 2015/16, but thereafter regulation of Bt cotton prices led to a revenue decline. This year's kharif season, however, the acreage devoted to cotton increased nearly 19 per cent, from which the seed industry, too, has naturally benefitted. "In the past year, on the one hand, volatility has reduced, and on the other, dividend yields have become attractive, thanks to falling interest rates," adds Jasani. "As a result, investors started to give agri-companies higher valuations."
Like cotton seeds, each segment of agribusiness has its own narrative. But there are a few common reasons for the boom across the entire sector.
After being choked by El Nino and other factors for a number of years, the monsoons, this year and the last, have been reasonably good, falling just 5 per cent and 3 per cent short of the long period average, respectively. Healthy cash flows have given the better-off farmers enough disposable income to buy seeds in large quantities, apart from farm tools, tractors and more, benefitting those manufacturing them. Companies like Mahindra Agri Solutions and Sonalika International Tractors have seen great sales - Mahindra's turnover, for instance, is poised to cross `1,500 crore this year.
Uttar Pradesh's sugar companies, too, have enjoyed substantial growth because of the bountiful rains. Balrampur Chini Mills average market cap, for instance, increased by 47.5 per cent between Oct 15 - Sept 16 and Oct 16 - Sept 17. "With sugar production expected to grow 25 per cent in 2017/18, strong sugar recoveries and prices expected to remain steady, stocks of UP-based sugar mills like Balrampur Chini, Triveni Engineering and Industries and Dwarikesh Sugar Industries have room for giving returns of 18 per cent a year," says Afshaan Sayyed, analyst at investment management firm, Dolat Capital.
Alongside, irrigation projects announced by the government have boosted the prospects of companies manufacturing equipment for, or possessing expertise in, the task. The Pradhan Mantri Krishi Sinchai Yojana (PMKSY), launched in 2015, to extend irrigation coverage by harnessing rainwater at the micro level through the 'Jal Sanchay' and 'Jal Sinchan' schemes, has been allotted an outlay of `50,000 crore for five years. Jal Sanchay and Jal Sinchan aim to develop complete irrigation supply chains, water resources, distribution networks and farm-level application solutions to achieve the ultimate target of providing water for every farm, reducing its dependence on the rains. Yet another objective is enhancing use of water saving technologies. These schemes have been allotted `3,400 crore for 2017/18, and aim to bring 1.2 million hectares under micro-irrigation.
As is well known, despite India's predominantly agrarian economy and crores spent on irrigation in previous decades, only 48 per cent of the area under cultivation is irrigated. "There is now a focus on drip irrigation and fast tracking of large irrigation projects by the government, both of which are essential," says Hetal Gandhi, Director, Crisil Research. Various other government schemes to raise farmer awareness, improve soil quality and extend rural electrification are also, as a ripple effect, benefitting industry.
In October, the government also raised the minimum support price (MSP) of six rabi (winter) crops - wheat, mustard, barley, masoor dal, gram and safflower - for 2017/18, which is expected to boost their acreage and production. The MSP for wheat, the most widely grown of rabi crops, has been raised by 6.8 per cent, the highest in six years. It has also allowed 100 per cent foreign direct investment (FDI) in food processing and aims to double farmer income by 2022 - all of which will have spinoff benefits for agribusiness.
"The soil health card scheme, the drive to popularise use of neem-coated urea, the e-mandi initiative by which agricultural markets can engage in electronic trading and the setting up of farm produce corporations are all steps in the right direction," says Gandhi. (Neem-coated urea is more efficient than ordinary urea as fertiliser and also increases production by reducing insect attacks.) Direct benefit transfer (DBT) schemes, specifically for farmers, and greater financial inclusion for them, are also in initial stages of implementation. The number of DBT schemes has already gone up from 59 in 2015/16 to 140 in 2016/17, according to a Motilal Oswal report, and as they expand further, will support better rural growth.
The government also launched the Pradhan Mantri Fasal Bima Yojana (PMFBY) in mid-2016 to insure farmers against crop failure due to natural calamities, pests and diseases. It even covers post harvest losses for a fortnight, while keeping premiums at a modest 1.5 to 5 per cent of the crop's estimated value. This not only protects farmers but also provides general insurance companies with a new area of growth, besides improving investing prospects in listed insurance companies like New India Assurance, which has crop insurance as a business segment. Fund houses like Motilal Oswal Securities have already begun parking money in the insurance sector.
With all these initiatives, farm equipment companies are also attracting investment and acquiring higher valuations. Mechanisation levels in India being low, reliance on such equipment is bound to increase in the future to improve productivity. Tractor companies are witnessing impressive growth, as are irrigation equipment companies like Jain Irrigation Systems, more so with GST on such equipment being brought down to 12 per cent. "Aggressive growth could be seen in this space in the near future," says Anita Gandhi, Director at leading stock broking firm, Arihant Capital.
The food processing sector, where 100 per cent FDI has been now allowed, is also a good bet for investors. "They should focus on the food processing sector, since the government wants to increase exports," says Dhavan Shah, Research Analyst, KR Choksey Shares and Securities. "Cold storage companies like Gati and Gateway Distriparks are also a good bet."
The optimism over agribusiness, however, does not extend to pesticide companies, which have underperformed the market, posting only single digit growth. The speculation that the government is mulling price controls on pesticides has further reduced enthusiasm for their stocks. "In pesticide companies, growth has tapered from 12-15 per cent year-on-year earlier to 8-9 per cent last year, and this year too, similar growth is expected," says Sayyed of Dolat Capital. The government setting stock limits for traders alongside poor procurement have led to the wholesale prices of pulses dipping below MSP levels, hurting farmers, despite record production in 2016/17. So too, price control on Bt cotton hit the companies concerned so hard that Monsanto threatened to quit the country.
Yield stagnation is another problem, which is likely to result in a drop in prices of agricultural commodities and farmer profitability despite the two good monsoons. "Despite good monsoons and good sowing, farmer profitability is likely to fall by 25 per cent in the marketing year 2017," says Gandhi of Crisil Research. "Nine of the 14 states that account for 70 per cent of the sown area will show a drop in profitability. States like West Bengal and Odisha will see losses for farmers."
Experts believe farmers have to be better educated in the right use of agrochemicals and adoption of technology to overcome the problem of yields. The Soil Health Card scheme also needs to be implemented more widely. Thus investors need to pinpoint the companies likely to be affected by low yields and avoid them.
The procurement policy of the government remains limited. It is not agile enough to shift to whichever is the bumper crop for a particular year, but at the same time farmers are not permitted to export freely. "Pulses have been ignored for a long time," says Gandhi. Finally, however, export curbs on pulses have been removed following record production in 2016/17, so that farmers are not compelled to sell in the market below the MSP price any more. Again, lack of sufficient storage - especially cold storage - and warehousing facilities for agricultural products limits farmers' capacity to hold on to them post-harvest, forcing them into distress sales.
Even so, agriculture and agribusiness are on an upswing, with good monsoons, MSP hikes, loan waivers and DBT schemes all helping to drive up farmers' disposable incomes. According to a Motiwal Oswal report, the encouraging second quarter results of 2017/18 of sectors such as fast moving consumer goods, automobiles, consumer durables and retail are a clear indication that rural India is buying and rural growth is likely to match urban growth, if not surpass it.
Overall, however, retail investors need to take care. "The agri space requires different parameters to be tracked by investors," says Jasani of HDFC Securities. "These include the monsoon - its spread and intensity - as well as cropping patterns, rural prosperity, rural spend on infrastructure and social needs, international commodity prices and import export policies followed by other countries and India. Fertiliser, seeds and agri commodity companies can be tracked for investments after some correction in their prices."