It does. Definitely for those who hold specific agriculture stocks. vikas kumar finds why and how…
What would be your reaction if somebody advises you to buy agriculture stock? You will, at best, term him eccentric. Stay for a while and recheck your facts and figures. Had you bought some of the agriculture stocks by Diwali last year and held it for a year- it would have doubled or trebled your portfolio. Sounds incredible! But believe it or not it is true.
Stock price of a company is directly reflected with the future cash generation ability. Many of the agriculture stock prices rose astronomically due to rising commodity prices amidst expectations of lower crop production due to bad monsoon. Imbalance in the global demand and supply situation has also helped them to boost revenues. Due to increasing sugar prices many companies such as Shri Renuka Sugars, Bajaj Hindustan and Bannari Amman have delivered high returns in the last six months.
This is a fact that agriculture sector growth in India has hovered between 2%-4% over several decades so the chances of making money by buying all agriculture related companies is quite low as compared to sectors like Services which have been growing at 8%-10%. This is because ultimately the companies operating in a space will mirror the performance of the specific segment in which they operate. Then pertinent question is how a range of agriculture stocks managed to perform well?
This brings us to the question of how agro commodities do so well after a few years. Now most agri- commodities such as sugar follow the classic cycle 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. “With the increasing per capita income and rise of middle class, food consumption pattern has drastically changed and this is bound to be reflected in the share prices of companies.” says RameshArora, Managing Director, Kumar Share Brokers Limited.
Basant Maheshwari, CEO, theequitydesk .com, explains the paradox nicely to B&E, “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.”
Many analysts believe that it may be quite premature to conclude that the rally in agri-specific stocks will be sustainable in the near future. Moreover, prospects of various sub-sectors within agriculture vary dramatically. In Fertilizers, prices are government controlled so there is obviously a limit to the return on capital employed. In seeds, the best bet still remains Monsanto. But the company is unwilling to launch its block buster variants in India unless our patent laws become more transparent. Food-processing is a big potential area but there are few options available in this space. “Marico at 18 times FY’11 earnings is a good long term bet. Nestle is expensive. But at 16 times FY’10 and around $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” says Maheshwari.
However, this is where the true opportunity lies. Once number of companies will increase to 50-100 in the sector attractiveness of the shares will vanish. This is akin to the situation in 90’s when technology revolution in the country was taking shape and companies like Infosys and WIPRO gave tremendous return to shareholders. However, as the industry matured ability of the shares to deliver high profits diminished. Agriculture sector might be sluggish but those who believe that certain companies will certainly do better will reap benefits.
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2009
What would be your reaction if somebody advises you to buy agriculture stock? You will, at best, term him eccentric. Stay for a while and recheck your facts and figures. Had you bought some of the agriculture stocks by Diwali last year and held it for a year- it would have doubled or trebled your portfolio. Sounds incredible! But believe it or not it is true.
Stock price of a company is directly reflected with the future cash generation ability. Many of the agriculture stock prices rose astronomically due to rising commodity prices amidst expectations of lower crop production due to bad monsoon. Imbalance in the global demand and supply situation has also helped them to boost revenues. Due to increasing sugar prices many companies such as Shri Renuka Sugars, Bajaj Hindustan and Bannari Amman have delivered high returns in the last six months.
This is a fact that agriculture sector growth in India has hovered between 2%-4% over several decades so the chances of making money by buying all agriculture related companies is quite low as compared to sectors like Services which have been growing at 8%-10%. This is because ultimately the companies operating in a space will mirror the performance of the specific segment in which they operate. Then pertinent question is how a range of agriculture stocks managed to perform well?
This brings us to the question of how agro commodities do so well after a few years. Now most agri- commodities such as sugar follow the classic cycle 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. “With the increasing per capita income and rise of middle class, food consumption pattern has drastically changed and this is bound to be reflected in the share prices of companies.” says RameshArora, Managing Director, Kumar Share Brokers Limited.
Basant Maheshwari, CEO, theequitydesk .com, explains the paradox nicely to B&E, “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.”
Many analysts believe that it may be quite premature to conclude that the rally in agri-specific stocks will be sustainable in the near future. Moreover, prospects of various sub-sectors within agriculture vary dramatically. In Fertilizers, prices are government controlled so there is obviously a limit to the return on capital employed. In seeds, the best bet still remains Monsanto. But the company is unwilling to launch its block buster variants in India unless our patent laws become more transparent. Food-processing is a big potential area but there are few options available in this space. “Marico at 18 times FY’11 earnings is a good long term bet. Nestle is expensive. But at 16 times FY’10 and around $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” says Maheshwari.
However, this is where the true opportunity lies. Once number of companies will increase to 50-100 in the sector attractiveness of the shares will vanish. This is akin to the situation in 90’s when technology revolution in the country was taking shape and companies like Infosys and WIPRO gave tremendous return to shareholders. However, as the industry matured ability of the shares to deliver high profits diminished. Agriculture sector might be sluggish but those who believe that certain companies will certainly do better will reap benefits.
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2009
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