Agrochemical maker gets a corn seed boost, weathers adverse climate; time to add to your portfolio?

Drug and pesticide maker Bayer Cropscience — a subsidiary of Germany's Bayer AG — reported a strong set of results for the quarter ended June 30 driven by robust volumes in its corn seeds unit. But analysts are divided whether a rally in the stock — following the earnings announcement — will continue amid persistent weather-related challenges in the near term. 

Bayer Cropscience results: A summary 

Bayer Cropscience reported 8.6 per cent year-on-year growth in net profit to Rs 328.5 crore for the first quarter of the current financial year while its revenue expanded 4.3 per cent to Rs 1,739.6 crore. The company's cost of material consumed stood at Rs 896.7 crore as against Rs 875.9 crore for the corresponding quarter a year ago, according to a regulatory filing. 

The company said it continued to manage costs proactively and to invest in targeted growth opportunities, boosting its profit before tax, which expanded to Rs 406.1 crore from Rs 382.3 crore a year ago. The company clocked strong growth in sales and liquidation of its crop protection portfolio despite the impact of delayed monsoon, according to a statement. 

Bayer Cropscience said corn seeds continued to yield strong results with volume growth driven by portfolio and better acreages in the kharif season. The company's EBITDA margin — a key measure of profitability — improved by 70 basis points to 24.4 per cent. 

The earnings report powered a spike in the Bayer Cropscience stock, which rose by Rs 266.3 — or 5.8 per cent — to settle at Rs 4,858.1 apiece on BSE. 

Can Bayer Cropscience shares sustain the rally?

"The stock staged a strong move on Tuesday probably because finally there are some positive results coming in from the sector... Most agro-chemicals stocks have been under-owned in the recent past but it is highly doubtful if such a rally will continue in Bayer," AK Prabhakar, Head of Research at IDBI Capital Markets, told Zeebiz.com. 

Here's how Bayer Cropscience and some of its peers have fared in the past few weeks:

Agro-chemical producers have been struggling against slower revenue growth owing to lower prices of glyphosate, an active ingredient in many herbicides.  

In July, rival UPL reported an 89.9 per cent fall in net profit for the June quarter to Rs 102 crore over a 17.2 drop in revenue to Rs 8,963 crore, missing analysts' estimates by a wide margin amid dwindling demand. According to Zee Business research, the company was estimated to report a quarterly net profit of Rs 272 crore and revenue of Rs 9,511 crore. 

Prabhudas Lilladher maintained an 'accumulate' rating on Bayer Cropscience, citing a decent quarterly performance despite adverse climatic conditions. The brokerage held its target price for the stock at Rs 4,720 apiece, which was breached on Tuesday. 

According to Prabhudas Lilladher, the worst appears to be largely behind in terms of raw material costs, as the prices have started to witness an uptick. "However, near-term weather challenges coupled with higher channel inventory in the domestic market and pricing pressure in glyphosate are likely to weigh on the stock performance," the brokerage said, in a research report on Monday. 

Besides Bayer Crop, the brokerage has coverage on 10 other stocks in the space: 

Technical outlook 

"Bayer Crop is in a corrective phase on a broader timeframe. However, recently, the counter has gained some buying traction from the low of Rs 4,350-odd levels and soared well above its significant exponential moving averages on the daily chart," said Osho Krishan, Senior Analyst-Technical and Derivative Research at Angel One.  

"The bullish gap of Rs 4,636-4,605 is likely to cushion any blip, while strong support lies around Rs 4,438 from a short-term perspective. On the flipside, immediate resistance could be seen around the recent swing high of Rs 4,900-4,920, only a decisive breach above which could trigger fresh addition for a further rally," Krishan told Zeebiz.com.  

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