Investments of last decade paying off for UPL, PI Ind: IDFC

Vijayaraghavan G, agri analyst at IDFC Securities from the sidelines of IDFC Investor Conference spoke on the outlook for agri stocks like Jain Irrigation, Kaveri Seed, UPL and PI Industries. He is bullish on UPL and PI Industries because the investments made by the companies in the last decade have now started to pay off and will continue to play out for the next 5-8 years. For both the companies balance sheet metrics will only improve going forward.With regards to Kaveri Seed, investors still need to wait to do bottom fishing in it. Although the downside for the stock is limited, there are no upside triggers yet.Below is the verbatim transcript of Vijayaraghavan G's interview with Ekta Batra & Mangalam Maloo on CNBC-TV18.Ekta: What is your view on a stock something like Jain Irrigation? It has been in news for a lot of fund raising etc that they have announced in the past couple of weeks. What is your sense on the stock?A: The company has gone through its own issue with the balance sheet and the working capital management. So business wise there has not been an issue, it has been the balance sheet, which has been plaguing the overall profit performance for the company, which they are trying to repair now. So obviously I don’t have coverage on Jain Irrigation. So I would refrain from commenting on it.Mangalam: Kaveri Seeds has been a ranked underperformer, down 46 percent for this year itself. We spoke with the management and they did say that they have cleared all the dues to Monsanto up till 2015 as per their agreement, what do you think is a kicker or trigger for Kaveri Seeds going forward?A: This year the performance has been impacted because of two reasons. One is monsoon related. The cotton acreage has been down on a year-on-year (Y-o-Y) basis and because of this poor rainfall, farmers also have done down-trading because of which there has been lower sales of hybrid seeds for other crops as well.Obviously the other issue has been the royalty, which they have to pay for Monsanto wherein most of the large seed companies have taken a stance that they want to pay as per the state government's notification. So till FY15, most of the cotton companies have cleared the dues as per the agreement that they have got into Monsanto. Only for FY16, they got into tussle with Monsanto regarding the royalty payment issue. So this is now under litigation.However, purely from a business perspective, for them this year they have seen a decline in cotton seeds sales volume, which should improve from next year onwards because some of the market share gains that they have planned for will play out over the next two years. Some of the new products, which they have launched in cotton has been gaining traction and there has been a good response among farmers.Even in the non-cotton crop segment, hybrid corn and hybrid rice has been doing pretty well for them. So, all the three crop segments will do well for them from next year. In my view from a topline growth point of view, whatever the decline that we have seen in Kaveri will be one of and they will be able to get back to the growth trajectory from next year onwards. So it is only the earnings, which we have to see based on the outcome of what is going to be from the royalty issue that they have been facing with Monsanto.Overall topline we don’t see any risk and bottomline will depend upon the outcome of the issue with Monsanto. So this stock I would suggest that people should wait to do bottomfishing until the stock price fall in the recent 55 percent in the last six months largely factors in this negativities but still it lagged triggers for next six months. So I would wait for the clarity to emerge in the royalty issue and then would like to chip in the stock.Ekta: How much lower do you think that Kaveri could go from Rs 400 level?A: Last six months the stock has fallen 55 percent. So this largely factors in the negativity. So the downside is limited in this stock for now. So I would say 10 percent is a maximum downside that you can see in this stock but the problem is the upside. So the upside for that you would lag trigger for now which in my view -- when the issue gets resolved then only you will see the stock price performing as long as these uncertainties lingers around, so you will not see an upside in the stock.Mangalam: You have an outperform rating on both UPL and PI Industries. Both the stocks have surged about 25-30 percent from the start off this year itself, how much more do you see an upside on these counters?A: For UPL, I see there is more than 20 percent kind of an upside from these levels and even PI will be a compounder of 12-15 percent from these levels. So both these businesses if you see the investments that they have made in the last decade is set to pay off for them and it had just started paying off in the last three years. I expect that this will play out over another next five-eight years as well so it is a long-term compounding kind of a story.In case of PI, the business model that they have built around in both in the domestic market and exports business completely led by innovation -- which is like new products in domestic market and partnering with the innovator companies in the exports business. It is going to play out for over next five years which is visible in their order book build up in their exports, business and new product pipeline in the domestic business.So that is how PI Industries will see growth of 12-15 percent on the topline and 18-20 percent earnings compounded annual growth rate (CAGR) for next three years.Even in case of UPL, this company has over the last 10 years has done a lot of acquisitions, which has helped them gain market access across the world. So now they have access close to 70 percent of the global agrochemical market, which is tough to replicate for any other company now because getting distribution access and registration in some of the markets is very tough, which UPL has done in the last ten years.So acquisitions have now started paying off for the company. Now that they have started focusing more on organic growth even the working capital and other balancesheet metrics are set to be much more stable and we will see only improvement going forward. So at 12 times UPL looks attractive as well. Despite last 6-12 months, for agrochemical industry it has been very challenging times but even in that time UPL has delivered a volume growth of 12-15 percent. So that shows the robustness in the business model that they have built over the last 10 years.