There are many agriculture stocks which has given tremendous return over the period when other sector stocks have not performed well. Investors in sugar stocks and other companies have reaped tremendous benefits.
Agriculture growth in India has averaged between 2%-4% over several decades so the chances of making money by buying all agriculture related companies is low as compared to other sectors like Services which has is growing at 8%-10%. This is because ultimately the companies operating in a space will mirror the returns of the segment in which they operate.
 
This brings us to the question of how agro commodities do so well after a few years. Now most agri commodities as sugar follow classic cyclical but if anyone is to believe in the India China theme of around 2.5 billion consumers being added to the demand side then all agri commodities would go through the big super cycle.
 
I just want to know name of such stocks which have given very good return over the last 6 months or are there any stock which gave good return even in the meltdown? Renuka Sugar, Bajaj Hindustan, VST Tillers, M&M, Jain Irrigation have all done well.  In the downturn I am not aware of any company that did very well.

2. Who are the promising companies in the sector and why they are promising?
 
VST Tillers and Jain Irrigation are good bets in the conventional agro space whereas, Agrotech Foods and Marico are good bets in the Food processing space. Except VST the others are not cheap currently but a company like Marico never gets very cheap for investors to buy.
 
3. Discuss fundamentals of these companies in brief?
 Farming is a fraught with a strange paradox. The year the rains are good the produce is bountiful and the prices drop and the year rains are bad the produce drops but the prices go up so the framer does not on an average lose too much depending on the rains. The operative word is “on the average”.
 
This is because the rich farmers who own large tracts of land and can mechanize their operations are able to reduce their loss in output due to irrigations systems and capitalize on the lower rains by selling at higher prices. My analysis of making money in agro stocks is to buy companies who cater to the rich farmer rather then the average farmer.  Now in trying to play this theme a few segments come to mind:
a)      Fertilizers, Pesticides and Seeds: Fertilizer is a regulated business with the Govt. fixing a ceiling on the RoCE so manufacturers can make only as much and not more. In the seeds business the best bet remains Monsanto but the company is unwilling to launch its block buster variants in India unless our patent laws become more transparent. Apart from these there are a few other bets but none of thenm really worth an investment from the long term angle.
b)      Farm Mechanization: This is a promising area since here we start catering to the rich farmer. The best bet in this area would be VST Tillers, stock is available at 6.5 times Fy10; with healthy return ratios and stable growth. The value of the company’s land in Bangalore is expected to be a significant part of its market cap. The company is the leader in selling tillers and also imports Chinese Tractors. The other bet in this space is M&M but this is not a pure Tractor play since a major part of its revenue is derived from the automobile segment as well. Jain Irrigation is a long term growth story valuations are expensive right now and should be picked up only on big declines but over the next few years this company has the DNA to scale up in terms of size and penetration.
c)      Food Processing: This is really the big potential area but there are very few options available in the listed space. Some names that come to mind are Marico, Agrotech Foods and Nestle. Though like all other companies they are not cheap but still Marico at 18 times Fy11 earnings is a good long term bet. Nestle is expensive. But at 16 times Fy10 and around US $ 100 million market cap the dark horse is Agrotech Foods Ltd the subsidiary of the US based ConAgra. ATFL could become big if ConAgra decides to launch its International Food brands in India but for the moment it just remains a promising story. ATFL is exiting its Oil trading business and getting into high end processed foods but it is too early to speculate on whether it can do what Nestle has done.

 

Vikas Kumar