Buy this stock to play on “Doubling Farmers Income by 2022” theme
One of the key focus areas of the government is to double the farmers income by 2022. In this regard, the increase in farm productivity and mechanization are going to be the key factors. There are many listed companies which provide agri inputs and farm mechanization products. Such companies are going to benefit from this huge opportunity over the next few years.
In this context, investors can play this theme over the next few years by investing in agri related companies. We like agri inputs space which includes seeds and fertilizers etc. We believe that the best company to play this thesis is Nath Bio-Genes India Ltd (NBIL). Though investors are tracking this company, it has missed its story in the past. Each time a recovery estimated, this seed company underperformed. However, we believe that the worst is behind and the company is at the cusp of unprecedented opportunities.
In the macro context Hybrid paddy seeds account for only five per cent of all the land under paddy in India, whereas the corresponding coverage is around 70 per cent in China — an index of the vast scope for hybrid seeds in one of the largest agrarian economies of the world. The Indian seeds industry has experienced an inflection; the government indicated a maximum retail price for cotton seeds beyond which multinational companies would not be permitted to charge; it moderated the royalty outgo on cotton seeds from Rs 165 per packet of 50 grams to Rs 43; some prominent multinationals froze launches, which created an unprecedented opportunity for research-driven Indian seed companies. Nath Bio-Genes appears to be one of them for good reasons.
Research and Product Development programs at the NBIL have undergone major scientific upgradation, during the last one-decade or so. Advance breeding strategies, with novel genetic resources, gene pyramiding with molecular-aided gene tracking systems, and extensive testing of genetic stocks, breeding lines and hybrids derived thereof, are generating a range of predetermined designer products.
Nath Bio – FY18 Half yearly performance:
The company was selected by the Chinese government for a BT cotton technology transfer in 2006, coupled with BT technology sourcing from Monsanto, empowering its platform to generate unique cotton hybrids (more genes and traits) that deliver a combination of drought-tolerant, high yield and ecologically-accommodative crops. While it would have been easy-marketing low-management seed products in well-irrigated regions, Nath marketed high-management products in vulnerable rain-fed areas, empowering marginalized farmers through champion NBC 1022 cotton seed products to counter droughts, pest attacks (sucking pests), spraying costs, labor intensity and low yields.
The company selected to focus on specific segments (vegetables, cereals, fibre and oilseeds and nutritional supplements), holding out the largest sustainable opportunity and on select geographies with compacted farm clusters and lower logistic costs. The company claims to possess a portfolio of winning products — NBC 102 and 1022 in the area of cotton, Amrapali and Amoli in the okra space, with demonstrated disease resistance; NBC 1894 and 1831 in the tomato category — with demonstrated characteristics considerably superior to competition.
In recent half yearly numbers, company posted good set of numbers. The revenues have grown by 15% from Rs.101 cr to Rs.116 cr. The operating profit witnessed a strong growth of 29.4% led by superior product mix. The EBITDA margin has improved nearly 300bps yoy from 22.9% to 25.8%. The PAT has grown by 37% from Rs.17.3cr to Rs.23.7cr in H1FY18. The PAT margins also seen an improvement of more than 300bps which has increased from 17.1% in H1FY17 to 20.4% in H1FY18.
The company is focused on GMS-induced reduction in cotton seed production costs, coupled with a substantial prospective increase in cotton seed sales — an attractive volume-value play. The company (with associated companies) was awarded 100 acres to develop a mega food park where it owns 20 per cent equity; this business is expected to generate revenues starting 2018. The company is packing all its ammunition for 2018 kharif, which should be a breakout in its existence. Nath Bio-Genes could quadruple revenues to Rs 1,000 crore in five years with better profitability which will enable to create multiple times returns.