Saturday, September 12, 2009

Buy - Bayer CropScience

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Bayer CropScience (BCS), a subsidiary of Bayer AG Group, which is a world leader in agrichemicals, enjoys 23% market share in the Indian market. We believe that there exists substantial opportunity for company to grow its domestic business considering that India consumes an average 0.48kg of pesticides per hectare (ha) compared to 4.5kg/ha in the US and 10.7kg/ha in Japan. For FY2010E, we estimate BCS to register muted sales owing to the prevailing drought-like conditions though exports would be stable. On exports front, around 80% of BCS's export revenues come from Bayer AG’s group companies. If Bayer AG outsources 10% of its requirements from its global subsidiaries, BCS stands to benefit immensely.

Pertinently, BCS registered strong 20.5% CAGR in export revenues during CY2005-FY2008. On financials, we estimate BCS to improve its EBITDA margins in FY2011E to 13.1% from 11.1% in FY2009 while registering robust RoE of 24% on the back of its ongoing restructuring exercise. BCS has shut its Thane plant (around 108 acres), which could come up for sale. At Rs 349, the stock is quoting at 9.5x FY2011E EPS. Our SOTP Target Price is Rs 501 with a Target P/E of 10x for its core business and 50% discounted value of the Thane land (Rs101/share post tax). We recommend a Buy on the stock.