Sunny Days Ahead For Agriculture Sector In India

In a country which dominantly resides in the rural region and has over 58 per cent of the rural households dependent on agriculture for livelihood, the agriculture sector becomes instrumental for development of the economy. At current prices, about 20.4 per cent of the gross value added in 2016-17 was contributed by the primary sector, including agriculture, livestock, forestry and fishery. The country’s agricultural produce and their exports have witnessed a strong demand in the markets over the years. At present, India is the largest producer of milk in the world with a contribution of over 19 per cent, and it is one of the top shrimp exporters, which is expected to reach USD 7 billion by 2022. India is the world’s largest producer of spices, world’s second largest producer of fruits and an upcoming export major of instant coffee

Agriculture sector constitutes nearly 10 per cent of the country’s total exports. However, despite India’s coveted position in the world's agriculture produce, the sector remains plagued with outbreaks of pests, storage and transport difficulties, debt failures, market volatility and mounting price pressures on the farmers. Issues dogging the agriculture sector remain at the fringe and the woes of farmers'remain unaddressed andunresolved and, as a result. there were around 6867 farmers' suicides in 2016 in just five states of India, including Madhya Pradesh, Maharashtra, Karnataka, Telangana and Tamil Nadu. The sector is struck by global and local market volatility and the global explosion in foodgrains production is constantly increasing the price pressures on the farmers. Over the last one year, the country has witnessed frequent and overwhelming protests by farmers. The rise in farmers' agitations has largely propelled the current government to further introduce more effective policies and measures.

The government has introduced a string of initiatives to aid the sector. In the wake of promoting innovation and entrepreneurship in the sector, the government has introduced a new AGRI-UDAAN programme to incubate start-ups in the sector and enable them to reach potential investors. Another significant initiative ‘Pradhan Mantri Krishi Sinchai Yojana’ (PMKSY) was launched by the government with an investment of Rs50,000 crore for the development of irrigation sources to address the critical issue of drought. The government also launched the ‘Pradhan Mantri Fasal Bima Yojana’ to provide crop insurance to the farmers in the event of damage to crops. Further, The Government of India signed a loan agreement of USD 318 million with Government of Tamil Nadu and the World Bank in December 2017 for the ‘Tamil Nadu Irrigated Agriculture Modernisation Project’. India also signed an agreement with Colombia in December 2017 for cooperation in the fields of agriculture and fisheries.

The agriculture sector, which is considered as the backbone of our country's economy, has attracted significant investments from the domestic as well as foreign investors over the years.The food processing industry recorded an FDI of USD 8 billion during the same period. During 2013 to 2016, the agriculture sector recorded an FDI inflow of USD 250.48 million and has been on a consistent rise.

While there is a pressing need to address the technological lag in the agriculture sector, the government has begun taking small steps towards capitalising on technology to benefit the sector. In December 2017, the Ministry of Agriculture and Farmers' Welfare introduced a mobile app to alert farmers about diseases affecting the livestock. A soil health mobile app was also launched to aid the farmers, along with distributing around 100 million soil health cards during 2015-17. A new platform named ‘e-RaKam’ and National Agriculture Market (eNAM) was launched by the government to efficiently sell the agriculture produce and take advantage of the massive growth in the popularity of online food delivery industry.

The government has also allotted Rs2,000 crore for the computerisation of Primary Agricultural Credit Society (PACS) and Rs6,000 crore for doubling the capacity of food processing sector and development of mega food parks under SAMPADA. Furthermore, the government allowed 100 per cent FDI in food product e-commerce and marketing food products under the automatic route.The steady developments in the sector and the focus of the government on farmer issues have largely refurbished the hopes of the stakeholders of the agriculture sector.

The Budget 2018 came as a boon for the sector promising a minimum support price (MSP) at 50 per cent above the cost of production of agriculture produce, which is expected to bring a major relief to the farmers. The biggest gainers of the MSP are likely to be the small farmers engaged in growing coarse grains in many states, including Rajasthan, Maharashtra and Karnataka, where the farming of coarse grains accounts for large portions of cultivated lands

Achin Goel

Head - Wealth Management and Financial Planning, Bonanza
If we look at the budget, there had been great emphasis on entire rural infrastructure support , MSP pricing, emphasis on support of horticulture, aquaculture as additional businesses to farmers, water irrigation to farms, fertilizers pesticides, etc

To support this by facts, tractor sales are up for all frontline tractor manufacturing companies like M&M, Escorts,and VST Tillers. The government's focused approach to encourage farm mechanisation and growth in infrastructure segment is expected to drive demand for tractors

Ajitesh Mullick, VP Retail Research, Religare Broking Ltd

"Budget focus on farmers may see sentiments turning firm for agriculture sector in coming months"

As stated by the government, its focus will shift from 'Ease of Doing Business' to 'Ease of Living' for poorest of the poor. This has been precisely been the case for the Union Budget for 2018-19. There has been a greater focus on the agriculture sector this year. The government had been quite concerned about the plight of farmers related to falling agriculture prices. The decision to hike the Minimum Support Price (MSP) by a huge percentage is a significant step in increasing farmer income in the coming years. 

The decision to hike MSP, e-marketing for agriculture products, roads for all villages, along with increased allocation for the sector are expected to provide very strong boost to growth of this sector. 

However, all the plans need to be implemented properly for effective results. A rise in agricultural income for farmers would mean a higher price realisation for them for their produce. This could result in higher price of agri commodities – leading to some upward pressure on the inflation aspect. Also, considering the fact that the supplies of agri commodities are expected to remain good due to the record production last year and two consecutive years of good rains, it would need some proper handling of the situation to ensure both farmers get good prices and consumers too do not get strongly adversely affected by any rise in the prices

To ensure farmers get better remuneration for their produce, we expect the government to take further steps in the coming months. With main focus on farmers, the coming months may see sentiments turning firm for the agri sector. The crude oil prices have been rising for quite some time now, resulting in rise in petrol/diesel prices. Any firmness in dollar as against rupee will be good for the exporters. We expect the exportable items like guar, spices like Jeera, turmeric and Dhaniya to recover from a long term point of view (after initial weakness). Also, oil complex sector and fibre sector could see some good bounce-backs from these levels in the long term.

The overall impact of the budget on the agriculture sector is likely to have moderate bullish impact on prices.

Thereby, the cultivators of bajra, jowar, maize, pulses, oilseeds and other kharif crops will be major gainers with the support prices up by one and a half times of the input cost. In the state of Rajasthan, about 58.4 lakh hectares of land is used to grow coarse cereals, which are largely subjected to erratic rainfall and extreme temperatures. Similarly, about 21.33 lakh hectares of land is used for the cultivation of coarse grains in Maharashtra and 21.46 lakh in Karnataka, where these crops are subject to similar problems. Furthermore, the cultivators of pulses including moong, moth bean and urad will also gain from the boost in support prices. Additionally, the commodities suffering from a hike in retail prices, including potatoes, onions and tomatoes were allocated a fund of Rs500 crore in the budget for easing their supply.


The budget has further allocated funds worth Rs20,000 crore to the Agricultural Produce Market Committees (AMPCs) for the development of about 22,000 rural agriculture markets for providing employment in the rural regions. The government is also actively seeking avenues to expand agricultural exports of the country, which stands at USD 30 billion at present.

According to the finance minister Arun Jaitley, the export of agricultural commodities will be liberalised by the government to reach its full potential of USD 10 billion. The government’s inclination towards infrastructure development even in the rural regions, increasing the support price of crops abundantly, diversification of crops and the promise of bringing in the use of technology in the sector along with other positive policy developments will increase the agriculture GDP and result in rapid growth of agriculture markets and the contribution of rural India in the larger demand growth as well. The policies are expected to trim risks for the farmers and result in value addition through processing and diversification of income.

The sector is gradually moving towards the attainment of the government’s aim to double the farmers’ income by 2022 with the support of relevant policy measures and financial allocations. The Government of India is aiming to increase the average income of a farmer household at current prices from Rs96,703 in 2015-16 to Rs219,724 by the year 2022-23.

Over the last one year, certain agriculture stocks have given outstanding returns on the bourses, including Kilpest India, which surged by over 392 per cent, Bharat Rasayan up by 87 per cent and Insecticides India which rose by 43 per cent, while S&P BSE Sensex recorded around 20 per cent surge during the same period

Most of these companies also recorded a notable rise in their net profit over the past one year. Bharat Rasayan had posted an increase of over 60 per cent in its net profit in the year FY17, while Insecticides India’s net profit had surged by over 47 per cent, Kilpest India recorded over 21 per cent hike and Rallis India over 110 per cent rise in its net profit during FY17.

Going forward, companies such as Dhanuka Agritech, PI Industries and Kaveri Seeds and urea manufacturers including Chambal Fertilizers and Coromandel International may also witness traction, both financially and on the bourses. The policy measures focusing on raising the farm produce are likely to directly benefit agro-chemicals, seeds and fertilizer businesses, apart from benefiting other agri-related businesses and the rural economy.


The budget has further allocated funds worth Rs20,000 crore to the Agricultural Produce Market Committees (AMPCs) for the development of about 22,000 rural agriculture markets for providing employment in the rural regions. The government is also actively seeking avenues to expand agricultural exports of the country, which stands at USD 30 billion at present.

Conclusion

Even though the farmers are yet to realise the benefits of the favourable policy measures, India is broadly headed towards generating a better momentum for the agriculture sector. The increased investments in the sector is affirmatively expected to yield larger gains for the farmers as well as the agriculture related companies. The increased investment in agriculture infrastructure including irrigation, warehouse facilities and cold storage is likely to reap the most returns in the coming years. While the exports are expected to increase in the near future, India is also expected to become self-sufficient in pulses on the back of development of early-maturing pulses and increased MSP. We can safely say that there are better days ahead for the Indian agriculture sector.

Insecticides India

Insecticides India Ltd (IIL) is engaged in the manufacture of agro-chemicals, pesticides and technical products for agriculture purposes. Its segments include formulated pesticides and technical pesticides. The company caters to both domestic and international markets. IIL’s products are available in over 120 formulations and approximately 20 technicals

CMP : Rs815.55
BSE CODE : 532851
Face Value : Rs10
BSE Volume : 1990

Here’s Why:
Exports to offer huge growth potential
Strong product pipeline for next year
Robust financials

IIL has strong research skills through its JVs with MNC players. The company plans to take advantage of the government’s thrust on 'Make in India' by enhancing its existing manufacturing facility at Dahej. In the first phase, the company will spend Rs300 mn for expanding the present plant for forward integration. In the second phase, the company has earmarked Rs1 bn for setting up Unit 2 at Dahej to launch new technical products/intermediary capacity

On the financial front, the net sales of the company increased by 10.61 per cent to Rs175.93 crore in the third quarter of FY18, as against Rs159.05 crore in the same quarter of the previous year. The company’s PBDT increased 62.86 per cent to Rs18.81 crore in the third quarter of FY18 on a yearly basis. The company’s net profit also increased drastically by 79.37 per cent to Rs9.65 crore in Q3FY18, as against a net profit of Rs5.38 crore in the third quarter of the previous year

On an annual basis, the company’s net sales increased 12.07 per cent to Rs1107.38 crore in FY17 on a year-on-year basis. The company’s PBDT increased 45.81 per cent to Rs95.96 crore in FY17, as against Rs65.81 crore in the previous fiscal. The net profit of the company rose 47.98 per cent to Rs58.14 crore in FY17 as against Rs39.29 crore in the previous fiscal.

On the valuation front, the company maintained a PE ratio of 19.97x. The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 13.35 per cent and 16.54 per cent, respectively. The company has a debt-toequity ratio of 0.51x and price-to-book value of 3.02xIIL plans to launch at least 10 new products in FY19, which will lead to a significant margin improvement over FY18-19. Margins will expand further in FY19 on the back of the rising share of technical segment and a superior product mix. The company also plans to capitalise on the opportunity in the exports segment and aims to double the sales by FY19. We recommend our reader-investors to BUY the stock

KSB Pumps

CMP : Rs800
BSE CODE : 500249
Face Value : Rs10
BSE Volume : 613

Here’s Why:
Favourable monsoon
Thrust provided by Budget 2018
Healthy financials

KSB Pumps is among the industry leaders in the pumps segment domestically, with a strong presence in the industrial (power) and agricultural segments. The company is engaged in the manufacture of power driven pumps and industrial valves. KSB had made an initial investment worth Rs6.3 crore in MIL Controls, its associate company. KSB is engaged in manufacturing high precision critical industrial control valves and is reaping rich benefits out of it.

The company has no exposure to the project/EPC business in India, whereas it has a strong focus on its products business. This keeps the company's working capital cycle under control. The company recently received orders worth Rs413 crore from Nuclear Power Corporation of India for supply of primary coolant pumps and electric motors along with auxiliaries and accessories.

India witnessed near normal monsoon in 2017. The IMD experts have predicted a normal monsoon in 2018 as well. This may result in robust farm production, which will increase farm income and boost rural demand, thereby benefiting all farm mechanisation companies, including KSB Pumps.

On the financial front, the net sales of the company increased 24.05 per cent to Rs200.47 crore in the second quarter of FY18, as against Rs161.60 crore in the same quarter of the previous year. The company’s PBDT increased 37.82 per cent to Rs25.80 crore in the second quarter of FY18, as against Rs18.72 crore in the same period last year. The company’s net profit also increased impressively by 57.39 per cent to Rs11.61 crore in Q2FY18, as against a net profit of Rs7.37 crore in the second quarter of the previous year

On the valuation front, the company maintained a PE ratio of 43.7x as against its peers Elgi Equipments (59.80x) and Kirloskar Brothers (55.09x). The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 10.77 per cent and 12.90 per cent, respectively. The company, with a debt-to-equity ratio of 0.01x is virtually debt-free. KSB has also been maintaining a healthy dividend payout of 29.15 per cent

The budget promises to raise the minimum price offered to farmers for crops, while also directing state governments to purchase extra solar power generated by farmers using solar-pow powered pumps. Also, the incremental capex execution by downstream oil and gas companies for modernisation and upgradation of refineries provides a robust outlook for the engineered pumps segment, which KSB stands to benefit from.

The above factors, coupled with a strong brand recall, bodes well for the company. We recommend our reader-investors to BUY the stock.