Astec LifeSciences

Market Capitalization: 2,107 Cr	Current Price:  1,076 (26 Sep 2020)
Stock P/E: 32.6	Debt to equity: 0.4
Sales Growth (3Yrs): 20.5%	Profit Growth (3Yrs): 21.8%
ROCE: 20.4%	ROE: 21.2%
Promoter holding: 72.3%	Cash Cycle: 61 days
Asset Turnover: 1.21	Net Profit Margin: 11.6%

Brief Overview of the Company

Astec LifeSciences (Astec) was incorporated in 1994 and is engaged in the manufacture of agrochemical active ingredients (technical), bulk and formulations, intermediate products and sells its products in India as well as exports them to approximately 24 countries. The Company is engaged in agro-chemicals, including fungicides and herbicides business. The Company’s products include agrochemicals, such as tebuconazole, propiconazole, hexaconazole, difenoconazole, epoxiconazole, cyproconazole, flutriafol, tricyclazole, metalaxyl and lambda cyhalothrin, and intermediates, such as 2, 4-dichloroacetophenone, 2-chloro-4-fluoro acetophenone,  and 4-methyl phthalic anhydride. The Company’s multi-purpose production facilities are located in Dombivali and Mahad. In addition, Astec has undertaken several custom synthesis projects for customers in Europe, Japan, and the United States. The Company has a dedicated team of competent chemists who are engaged in the Company’s in-house Research & Development (R&D) activities. Godrej Agrovet holds a 62.4% stake in Astec LifeSciences.

Industry Outlook

Despite Covid-19 impacting many sectors, Agriculture and its allied sectors are in strong wicket as the future looks bright for the agrochemicals sector. Agriculture contributes around 17% of the GDP and forms the source of livelihood for more around 50% of India’s population. Indian demand continues to be robust as government policy boost has lifted agriculture-related spending. Increasing usage of agrochemicals is needed in India, given the high focus on increasing the yield per hectare, limited arable land, rising labour costs and increase in growth of herbicides and fungicides. Demand for specific agrochemical products are on the rise in key international markets like U.S., Japan, and Brazil as they de-risk their sourcing and move away from China. Further, large number of molecules are going off-patent in the next few years and this will be a large opportunity for Indian Agrochemical exporters. While the global market has been range-bound, India’s agrochemical exports has witnessed robust growth rising from US$1.5bn in 2014 to US$2.4bn in 2018. Within this, herbicides and fungicides market are witnessing even stronger growth of 28% and 14% respectively. This bodes well for Astec as it is a major player in the herbicides and fungicides market.

Business Outlook

CRAMS Scale up to Aid next leg of growth

Astec is aspiring to be a prominent player in CRAMS segment and looking to target off-patent products in the agrochemical space. There is a big opportunity in off-patent products as large volume of products go off-patent over the next 8 years. US$16bn worth of agrochemicals are set to go off-patent, of which US$6.7bn are in fungicides. In this context, the company first set to introduce the molecule captures more than 90% share of the global sales. Astec is incurring a capex of INR80 crore in setting up an herbicide plant to reduce its product concentration and dependence on triazole fungicide segment. This new plant is set to be commissioned in Q4FY21 and the company already has around 35% orders in place. The recent ongoing shift in trade patterns from China to India is likely to benefit Astec and new products in the herbicides segment should drive growth in the CRAMS space. Astec is seeing increased interest from innovators as it has recently commissioned two new products for multinationals. Further, there are several projects in the pipeline which will be rolled out over the next few years. The company will also look to backwardly integrate to reduce its dependence on China.

Dominant player in Triazole fungicides

Astec is a dominant player in Triazole fungicides. Within Triazoles, Tebuconazole and Propiconazole form a major part of the company’s enterprise business. There is continuing pressure on triazoles in Europe due to potential regulatory action that may be a constraining growth if renewals are not achieved. This is likely to benefit the competing SDHI segment as well as other fungicide segment which contains many new modes of actions. SDHI fungicides are growing faster than other segments and are preferred over triazoles. However, recently triazoles are used in combination with SDHI and this will benefit triazoles. Another significant positive is strong growth within the Russian and eastern European cereal segments, as well as growth in other developing markets such as Southeast Asia. Within Triazoles, Astec has been growing decently although the overall market growth is in low single digits as its gaining market share over its competitors. One of the main reasons for this is the purity levels offered by Astec in its Triazole fungicides cannot be matched by many of its peers globally. As a result, Astec has competitive advantage in this space as end customers rely on the high purity levels offered by Astec’s products to improve yields.

Investing for next leg of growth

Astec is setting up a new R&D centre which will help develop new processes from various chemistries like fluorine. Fluorine chemistry is core to development of new molecules and will help diversify its offerings post FY23. The new R&D centre will have the ability to do things in microreactors and high-pressure reactor systems along with hydrogenation systems. Investments in cutting-edge new systems will help develop new molecules and products and propel next leg of growth for the company.

Key Risks

• Mr. Ashok Hiremath, who is the Managing Director of the company has been selling the shares of the company and trimming his stake. He has reduced his stake in Astec from 9.7% to 7.6% over the last 2 months. More sustained selling from him could be red flag.
• Astec is looking to explore the dormant opportunity in generics market as products go off-patent. There is a risk increasing generics share in agro-chemical market may reverse due to increasing pest resistance and new innovator launches.
• Regulatory risk from local authorities as ingredients used in agrochemicals are deemed to be carcinogenic.

Key Positives

• First generation entrepreneur Mr. Ashok Hiremath who incorporated the company in 1994 is still in-charge of running the company although Godrej Agrovet acquired the company in 2015. He has been actively involved in the affairs of the company and has played a key role in scaling up Astec.
• Godrej group company acquired Astec and is the majority shareholder of the company. This can help Astec’s growth prospects and competitive position and help it win the trust and backing of innovator clients.
• Focus on niche products and working with global innovators can help the company scale up as Innovators would like to outsource the manufacturing to save costs.

Outlook and Valuation

Astec is a niche player in the agrochemical space with impeccable management pedigree combined with steady growth and decent return ratios. It is pretty evident that this kind of company will deserve premium valuation and is currently trading at around 32 PE. Going ahead, growth will come from the new herbicide plant which is set to be commissioned in Q4FY21 and new R&D centre where the company will focus on new processes and chemistries. It would be reasonable to expect decent growth in revenues and profits on the back of strong domestic growth and robust export demand as the company is well positioned to capture the generics opportunity in agrochemicals.

Disclaimer: Have personal investments in Astec Lifesciences at the time of writing this note. Information in this blog is for educational purposes only. The articles  may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purpose only.