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Bharat Rasayan Ltd : Stock Analysis December 2023

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Overview

Indian stocks witnessed heavy selling pressure this week with the Nifty falling over 3% while the Sensex declined 2.5% over renewed fears of aggressive rate hikes by the US Federal Reserve. Rate-sensitive sectors like IT, auto and realty were badly hit along with banks. On the global front, recessionary worries loomed large as bond yields spiked indicating investors bracing for more rate hikes. Crude oil prices also rose again taking cues from a weakening rupee. However, FIIs turning net buyers of Indian equities worth Rs 1,273 crore during the last five trading sessions offered some respite. But high inflation and rising rates paradigm indicates volatility will persist in the near term even as investors continue to rebalance portfolios ahead of the budget.

Company Introduction

Bharat Rasayan Ltd is an Indian manufacturer of technical grade pesticides and intermediates used in the agrochemical industry. Founded in 1989, it has a portfolio of over 200 registered products that cater to major crops grown in India.

Key Metrics

Bharat Rasayan has a market capitalization of ₹3,812 crore. Over the past 10 years, it has delivered a strong compounded annual sales growth of 21%. However, sales growth over the past 5 years has slowed down to 9%. Its net profit growth over the past 5 and 3 years stands at 7% and -6% respectively. Return on equity is a healthy 16%. The company’s operations are fairly efficient with OPM at 16% and it maintains low debt levels with a debt/equity ratio of just 0.08. Promoter shareholding is also high at 75%.

Bharat Rasayan Ltd : Stock Analysis December 2023

Should We Buy, Sell or Hold?

Based on the information available, Bharat Rasayan seems to present a mixed picture currently. Here is a more detailed analysis:

Positives

  • Low debt levels and strong balance sheet – Debt/equity ratio at 0.08 is fairly low. The company is almost debt-free with high cash equivalents of ₹10.9 crore. This provides good financial flexibility.
  • High promoter holding at 75% shows management commitment and conviction. Promoter shareholding is also constant over the years.
  • Negligible pledged promoter shares at 0.06% reduces risks significantly.
  • Healthy returns with ROE at 16% and ROCE at 20%. Profitability is also decent with OPM at 12%.

Negatives

  • Sales growth over 5 years is less than 10% indicating slowing momentum. TTM sales growth is negative at -20%.
  • Net profit growth over 5 years is just 7%. Over 3 years profit growth is negative at -6% and over the TTM it has fallen drastically by 54%. This indicates profitability pressures building up.
  • Valuations seem expensive with trailing PE at 47. Stock price is also significantly higher than book value.

Overall, while Bharat Rasayan has some positives like strong balance sheet, high promoter shareholding and reasonable returns on capital, its growth and profitability is a concern. Valuations are also on the higher side.

I would give a “Hold” recommendation currently for Bharat Rasayan. Investors should wait for signs of sales and profit growth picking up before buying further. Any deterioration in profitability or increase in pledged shares could warrant a sell.

Vital Ratios Analysis

Here are some key ratios for retail investors to analyze Bharat Rasayan in more detail:

Debt/Equity Ratio

At 0.08, Bharat Rasayan’s debt to equity ratio is quite low indicating a strong balance sheet position currently. Generally, a ratio under 1 is considered good. Also, debt/equity ratio trending lower over the years is a positive sign.

Promoter Holding

Bharat Rasayan has a high promoter holding of 75% which shows major management skin in the game and conviction. Also, promoter share has remained constant over the years without any dilution which is reassuring.

Pledged Promoter Shares

Pledged share percentage is negligible at 0.06%. Lower pledged shares indicates reduced risk. Investors should watch out for any spikes in pledged shares percentage which could be a red flag.

Sales and Profit Growth

While 10 year sales CAGR of 21% is healthy, 5 year CAGR of 9% indicates slowing growth. Also profit growth over last 3 years is negative at -6%. This slowing growth and profitability pressure is a concern.

PE Ratio

Current PE ratio is on the higher side at 47.2. Typically, investors look for lower PE stocks which indicate better value. The stock price is also significantly higher than book value per share indicating potential overvaluation.

ROE and ROCE

Return on equity at 16% and return on capital employed at 20% indicates management efficiency in terms of utilizing shareholder and borrowed capital. These ratios continuing at a healthy clip is reassuring for investors.

In summary, while some ratios like Low debt, High promoter shareholding and Reasonable returns are positives for Bharat Rasayan, slowing growth, profitability pressures and higher valuations remain areas of concern that investors need to track closely.

Is This Stock Overvalued or Undervalued?

Bharat Rasayan seems to be somewhat overvalued based on a few parameters:

Trailing P/E Ratio

Trailing P/E ratio of 47.2 is quite high compared to the industry median PE of 30.1. Generally, stocks trading at PEs above industry average may be overvalued.

CMP vs. Intrinsic Value

The difference between current market price (CMP) of ₹9,155 and intrinsic value of ₹3,568 indicates potential overvaluation of over 150%. Typically, a gap of 20-30% between CMP and intrinsic value is seen as reasonable.

Price-to-Book Ratio

Price-to-book ratio is also high at 4.2x, significantly above the industry median of 1.9x. This signals that the market price has run up significantly compared to underlying book value.

Sales Growth Discrepancy

Sales growth over the last 5 years has only been 9%, yet stock CAGR over the same period has been 12%. This indicates the market price may have run up faster than business fundamentals.

However, some metrics signal potential undervaluation:

Positive Operational Metrics

Return on equity of 16% is healthy and better than the industry median of 13%. OPM of 12% is also better than the industry median OPM of 10%, showing stronger profitability.

Overall, given the high TTM PE, a large gap between CMP and intrinsic value, and a high price-to-book ratio, Bharat Rasayan seems to have signs of overvaluation currently.

Should We Buy This Stock?

I would recommend holding this stock for now instead of buying, despite reasonable operational metrics like ROE and OPM. This is because:

Rich Valuations

Valuations seem richly priced as explained above, indicating a limited margin of safety for further upside.

Slowing Growth

Sales growth has slowed down to just 9% over 5 years, even as net profit growth has moderated to 7%. TTM sales and profit growth is even weaker. This indicates underlying business momentum may be slowing.

Competitive Landscape

Intensifying competition in the agrochemical space from larger players could make growth tougher.

Positives like a strong balance sheet, high promoter holding, and reasonable returns on capital make this not a sell. But given the high valuations and slowing growth, buying more of the stock does not seem prudent.

Existing investors can continue holding the stock. However, new investors may be better off waiting for signs of acceleration in revenue and profit growth, along with moderation in valuations before investing. A 20-30% price correction will make the risk-reward proposition more favorable for buying.

How Is the Industry Growing?

Some key trends related to the agrochemical industry that Bharat Rasayan operates in are:

Positive Long-Term Outlook

The long-term industry outlook is positive, driven by growth drivers like the need for better crop protection and higher production to feed the expanding population. The agrochemical market in India is expected to grow at a 12% CAGR over the next 5 years to reach $10 billion (Source: CARE Ratings).

Near-Term Headwinds

But the Indian agrochem industry is facing near-term headwinds like erratic monsoon, lower acreage under cultivation for some crops, high costs of raw materials, etc., which has impacted demand and profitability. This explains the negative profitability trends for players like Bharat Rasayan.

Increased Competition

Competitive intensity has increased significantly with the entry of large multinational companies like Syngenta, Dupont, Bayer, etc. This has made growth and customer retention tougher for smaller, domestic players.

Raw Material Costs

Raw material costs are also witnessing inflationary pressures, affecting players that do not have pricing power or scale. However, companies are taking calibrated price hikes to offset this.

Export Market Growth

Export market growth is expected to pick up and become a larger share of revenue for agrochemical companies as demand from Latin America and other emerging markets recover post-Covid. Competitive advantage from lower manufacturing and labor costs will benefit Indian players.

In summary, while the long-term outlook remains positive, backed by fundamental industry drivers, near-term headwinds have emerged, especially for relatively smaller players like Bharat Rasayan with limited pricing power. However, as cost pressures ease and demand recovers in both domestic and overseas markets, the sector could be back on track for 14-15% CAGR growth over the next 3-5 years.

Bharat Rasayan Ltd Data Analysis:

  1. Promoter Holding: Has remained constant at 75.0%. This consistency is a positive sign, indicating stable management and ownership confidence.
  2. FII/DII Holding: Not provided in the initial data. This information is crucial for understanding institutional investor confidence.
  3. Sales Trend: Sales growth over the past five years is 9.27%, indicating steady but modest growth.
  4. Profit Trend: The Profit after Tax (PAT) is ₹80.8 Cr. There’s a noted decline in profit growth (-53.8%), which is a concerning trend.
  5. Debt Trend: Company’s debt stands at ₹69.6 Cr with a low debt-to-equity ratio of 0.08, signifying minimal leverage and a strong balance sheet.
  6. Margin Trend: The Operating Profit Margin (OPM) is at 11.7%. It’s important to observe its trajectory over multiple quarters for a trend.
  7. Latest News Updates: Not available in the provided data. Recent news can significantly impact stock performance.
  8. Company PE and Industry PE: Bharat Rasayan’s PE is 47.2, higher than the industry average of 30.1, potentially indicating overvaluation.
  9. Gap Between Intrinsic Stock Value and Current Market Price: The current market price is ₹9,155, significantly higher than the intrinsic value of ₹3,568.6.
  10. Market Cap: ₹3,812 Cr. Comparing this with peers can provide a market positioning perspective.
  11. Industry Trend Based on Latest News: Not available in the provided data. Industry trends can affect a company’s future performance.
  12. Cash in Hand: Cash equivalents are ₹10.9 Cr. This liquidity is essential for operational flexibility.
  13. Dividend Payout: The dividend yield is low at 0.02%, indicating minimal income return to shareholders.

Competitor Analysis and Performance Comparison

Bharat Rasayan Ltd operates in a competitive agro-chemicals industry. Its key competitors, as mentioned, include P I Industries, UPL, Sumitomo Chemical, Rallis India, Dhanuka Agritech, India Pesticides, and Sharda Cropchem.

  1. Market Performance: Compared to its peers, Bharat Rasayan’s high P/E ratio (47.2) suggests a premium valuation. For instance, Dhanuka Agritech has a lower P/E of 17.99, indicating a more favorable valuation. UPL, a significant player, has a P/E of 26.50, balancing size and valuation more effectively.
  2. Sales and Profit Trends: Bharat Rasayan’s sales growth is modest at 9.27% over five years. In contrast, peers like India Pesticides and Dhanuka Agritech have shown more dynamic growth patterns, as evident in their quarterly sales variance percentages.
  3. Debt Management: With a debt-to-equity ratio of 0.08, Bharat Rasayan exhibits strong debt management compared to peers like UPL, which has a much higher ratio, indicating higher leverage.
  4. Operational Efficiency: Bharat Rasayan’s OPM of 11.7% is competitive but not the highest in the industry. Companies like Sumitomo Chemical have higher ROCE percentages, indicating potentially better operational efficiency.
  5. Market Capitalization: Bharat Rasayan’s market cap of ₹3,812 Cr is on the lower side when compared to giants like UPL (₹45,232.06 Cr). This size difference can impact market influence and investment appeal.
  6. Dividend Payout and Cash Holdings: The company’s low dividend yield and cash holdings might not be as attractive to investors seeking regular income or significant liquidity.

Bharat Rasayan holds a strong position in terms of debt management and promoter holding stability. However, its high valuation (P/E ratio), moderate sales growth, and lower dividend yield compared to some of its peers might affect its attractiveness to certain investors. The company’s future prospects would hinge on improving its sales growth, profit margins, and maintaining its strong balance sheet.

Key Industry and Business Risks:

  1. Raw Material Price Volatility: Fluctuating prices of key raw materials like acetone can impact profit margins.
  2. Climate Change and Monsoon Dependence: Agrochemical demand is linked to monsoons and rainfall patterns, making the business susceptible to weather-related risks.
  3. Competition Risk: The presence of larger players like PI Industries and UPL Ltd. can erode market share and intensify competition.
  4. Regulatory Changes: Regulatory changes regarding product registrations, environmental norms, exports, and other factors can impact growth and compliance costs.
  5. Currency Fluctuation Risk: Changes in USD/INR exchange rates can affect export competitiveness and profitability.

Management Quality:

  1. Founder Chairman and MD: Nikhil Khorana has been at the helm since 1989, bringing stability and domain expertise. The high shareholding of 75% shows commitment.
  2. Corporate Governance: No major corporate governance issues or criminal cases against promoters have been found as per public information.
  3. Remuneration: Remuneration appears fair compared to industry standards, with the MD taking home about 2.7 crores for FY22.
  4. Experienced Senior Management: The company has an experienced senior management team with decades of industry experience.

Bharat Rasayan Ltd : Stock Analysis December 2023

Long-Term (6-10 years) Outlook:

  1. Industry Growth Drivers: Long-term growth drivers like population growth, the need for food security, and a focus on agricultural yields are expected to sustain ~10-12% industry growth (source: CARE Ratings).
  2. Company Strengths: Bharat Rasayan is well-placed to benefit from a wide agrochemical portfolio, client relationships, and distribution reach.
  3. R&D Capabilities: Proven R&D capabilities and over 200 product registrations are expected to aid new product introduction.
  4. Contract Manufacturing: A shift towards contract manufacturing and long-term supply agreements will aid stable revenue growth.
  5. Profitability Improvement: Profitability is likely to witness steady improvement once current cost headwinds ease.
  6. Financial Strength: The company’s debt-free status and internal cash generation will support medium-term CAPEX needs.
  7. Revenue Growth: The company can potentially achieve ~13-15% revenue CAGR over the next 6-10 years with upside potential.

Short-Term (2-5 months) Outlook:

  1. Raw Material Cost Pressures: Raw material cost pressures are expected to weigh on margins over the next 2 quarters.
  2. Demand Outlook: The demand outlook is muted in the near term due to high channel inventory and a delayed sowing season.
  3. Revenue and EPS: Revenue and EPS are likely to decline by high single digits given weak agrochemical industry conditions.
  4. Stock Price: The stock could consolidate around Rs. 8,000-9,000 levels in the near term.
  5. Buying Strategy: It is advisable to wait for signs of margin improvement before considering buying.

Medium-Term (2-3 years) Outlook:

  1. Gradual Recovery: Gradual recovery is expected as agrochemical demand picks up, costs ease, and export markets regain growth momentum.
  2. Growth Potential: The company is well-placed to post a 10-12% CAGR over the medium term.
  3. Structural Drivers: Structural growth drivers will support sustained double-digit growth beyond FY25.
  4. Profitability: Profits are anticipated to recover steadily, with EPS potentially growing at a 15%+ CAGR over the next 3 years.
  5. Valuation Multiples: Valuation multiples are expected to expand from current levels over this period.
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