Global & indian Market scenario
Rise in awareness about the benefits of using crop micronutrients among growers coupled with increase in farm expenditure, ease of application, effectiveness of micronutrients for crop yield & productivity, and surge in demand for biofuels are the key factors aiding the swift expansion of the global crop micronutrients industry. However, the market growth is hampered by factors such as cumbersome mining process of micronutrient reserves, availability of cheap alternatives, and presence of counterfeit products, and lack of awareness among farmers regarding dosage and proper application of micronutrients. On the other hand, investments initiatives by government and private manufacturers facilitate development activities, which are in turn expected to create opportunities for the market growth.
Agriculture in India was historically viewed as a traditional occupation mainly catered to the needs of self-consumption rather than a commercial activity to make wealth of it. The demand for food grains in the latter half of the 20th century led to the Green Revolution. Today farming is more commercialized and there is a growing awareness on the need for improved high yielding varieties, and efficient management of inputs such as water, nutrition and management of pests. It is estimated that 88% of the total available water is being currently used in agriculture. Due to the indiscriminate use of irrigation water and fertilizers, fertile soils have become water logged and saline. The use of micro irrigation techniques and fertigation is the only way to manage these resources efficiently.
Product:
- Micronutrient
- Value added secondary fertilizers
- Water soluble NPK fertilizers
- The Company is part of the growing specialty plant nutrition industry, a distinct section of crop nutrition
- Aquaculture and animal products like fish feed or milk booster
- Pesticides
- Chelates
- Researching hydroponics
More about hydroponics on https://micronutrients.akzonobel.com/applications/hydrophonics/
Business
- Widespread market all over the country especially in areas growing cereals, horticulture, plantations, oilseeds and spices.
- Perennially high working capital requirement due to need to provide credit to the customers and also maintain customized inventory in all areas of operations.
- High seasonality due to dependence on rainfall and changing cropping pattern.
- In AR FY16 The profitability from operations was adversely affected due to extremely erratic agricultural season, requiring additional promotions, excessive discounts to retain market share including higher cash discounts to recover market outstanding. By choosing to incur these costs, the Company managed to retain revenue at the cost of profitability. It was felt prudent to do so since in a highly competitive market, loss of market share would be difficult to recover.
- Flash sales in BSE were done in FY16 and got booking worth 200cr the Company has conducted similar flash sales on the state level and the average conversion of bookings to orders was approximately 75% to 80% , current digital fy18 flash sales has order book 350cr which shows good growth in business y0y
Management
- Management is candid with good disclosure & good promoter holding
- Have established a good distribution network from scratch
- Pay regular dividend
- Company has got lot of awards
- Develop a business in niche under penetrated segment
Risk
- Monsoon risk
- I just can not find barriers to entry and company can loose market share due to competition
- 20-22% raw material sourcing from outside india means rs depreciation risk though 8-10% of export mitigate this risk somewhat
- WC intensive business WCDAYS is very high
- High leverage 90% of it is short term may be due to high WC days
Investing rationale:
- I can see growth with order book in near future and better capacity utilization along with tailwinds like MSP in an election year and good monsoons this year.
- Company is available at Price/3year avg cash flow=3.8
- Long term runway also looks good
- Management has been candid, developing distribution, brands and farmer relation as well as niche products
- Management holding is good
- Cash flows superb and digital flash sales provide order book comfort and is growing
- Soil health scheme and other government initiate along with farmer awareness to provide further boost in long term
Disclosure: Tracking position (1%). This is my initial view of the business and is not a buy/sell recommendation and I may be completely wrong in analysis and I am not a SEBI registered analyst