Syngenta India: Pare down exposures

Recommendation:Pare down exposures

Aarati Krishnan

WITH a net profit of Rs 10.29 crore for the quarter-ended June 2001, Syngenta India, on the face of it, appears to have sharply improved its performance this year. But, in reality, the improvement may be largely because of the seasonal nature of operations.

Net profits for 2000-01 were at just Rs 10.7 crore. However, since Syngenta derives the bulk of its revenues from crop protection chemicals, the first half represents the peak period of sales, and the profit performance is seldom as good in the second half as in the first. In 2000-01, for instance, Syngenta India's June quarter accounted for Rs 8.46 crore of the total net profit of Rs 10.7 crore for the year.

Syngenta India was formed as a result of the demerger of the crop protection business of Novartis India from the pharma business. The demerger came into effect in April 2001, when the company was vested with the agribusiness of Novartis India. The year is Syngenta's second financial year as an independent entity.

The 22 per cent jump in Syngenta's net profits for the June 2001 quarter is undoubtedly impressive. However, this improvement has come from a substantially lower provision for taxes, rather than from the growth or improvement in Syngenta's operational contours. The company reported a marginal decline in net sales, from Rs 113.4 crore in the June 2000 quarter to Rs 112.86 crore in June 2001.

The operating profit margins showed no improvement over the previous quarter, hovering at 15.2 per cent as a proportion of net sales. Though the company managed to compress raw material costs, higher excise duties and other expenses appear to have dented profit margins. In the previous Budget, the excise duty on pesticide formulations was hiked from 8 to 16 per cent as a part of the rationalisation exercise.

During the quarter, while raw material costs fell as a a proportion of sales, Syngenta resorted to a higher degree of outsourcing as is evident from the higher proportion of finished goods purchased for trading. This could be an offshoot of the informal integration of Syngenta's operations with the two unlisted Syngenta AG subsidiaries in India _ Zeneca Agrochemicals and Zeneca Biosciences. Soon after the demerger, the companies announced that they were moving towards combining the various products under the Syngenta brand, to be marketed by a unified sales force. While Syngenta has strong insecticide portfolio with brands such as Topik, Rifit, Nuvacron and Curacron, Zeneca holds brands such as Karate and Gramoxone.

Overall, Syngenta's performance in the first quarter of 2001-02 is not very different from that of its competitors in the crop protection market. But the performance in the second quarter could turn out to be as crucial as the first. A good monsoon in the northern and western part of the country after a long dry spell could translate into a more robust topline growth than in the past. However, whether this is counterbalanced by the scanty rainfall in Andhra Pradesh, Karnataka and Tamil Nadu in the 2001 kharif still remains to be seen.

In this backdrop, the recent surge in the stock price from Rs 45 to Rs 66 over the past few weeks appears to be a little premature. At this price, Syngenta India trades at a price-earnings multiple of 19 times its 2001 per share earnings of Rs 3.36. This valuation makes it among the most expensive in the agrochemical universe. Further, unlike competitors such as Aventis CropScience India and Monsanto India, which have completed consolidation exercises last year, Syngenta India is yet to consolidate all its Indian operations within the listed arm.

The presence of two wholly-owned subsidiaries of the parent could continue to raise questions about the routing of future product launches through the listed arm. This could impinge on the valuation of the stock on the bourses. In the circumstances, given the opportunity presented by the sharp surge in the stock price, investors can pare down exposures in the stock to lock into the returns.