We all know how deeply linked the agriculture sector and its allied activities is to India. Historically, we had been an agrarian country.

The agriculture sector is the largest employment sector. This sector employees more than 54% of the Indian population. And it also contributes almost 16% to the Gross Domestic Product of India.

If we consider India’s household expense alone, an average Indian spends half of his/her total expenditure on food. Hence, the importance of this sector cannot be ignored. Agriculture is also seen as a dual source of employment as well as food security for the vast majority of unorganized sections or low income and marginalized sections of the society.

Some trivia first: the agri- sector has seen a lot of investments from the government as well as from overseas. The Indian food processing industry has cumulatively attracted Foreign Direct Investment (FDI) about $ 8.57 billion between April 2000 and June 2018.

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In 2017, this sector witnessed about 18 Mergers and Acquisition Deal worth $ 251 million.

So, why should we invest in Agri-sector stocks?

As investors, our majority of the concerns about a sector are linked to the sector’s potential to grow and provide healthy returns in the future. So what’s there in agri-sector stocks, with most of the stocks falling in mid cap and small cap segment?

Let’s explore

1. Rural Economy growth

India’s rural economy is growing at a much higher pace. With the help of governments and industries rural economy, India has seen tremendous growth. This is simply visible by visualizing a rural place now and a time period before 5 years.

2. Agricultural sector formalization

Most of the agri-sector company had been from an unorganized sector. In the organized sector the employment conditions are fixed, like payments, assured work, regular work, etc. With a lot of industries entering into the agricultural segment, there is a paradigm shift from unorganized to organized sector. Organized sector has stable cash flows and higher earning potential.

3. Agricultural and allied activities portfolio increment

Apart from basic food production and farm chemicals related business, the agricultural sector has seen a large number of businesses being added to this segment. These new businesses include livestock, fishing, horticulture, and organic farming. All these businesses are expected to be formalized and capitalized in the near future.

We know that we are developing at a very healthy rate throughout India. The major development is happening in rural areas, especially due to these agricultural and related businesses.

Also read: Will India’s Economy Slow Down Sharply in 2019?

As an investor lets look at some of the stocks that are poised to grow healthy in this sector

5 top stocks in the field of agriculture and allied activities

1. UPL Ltd.

UPL stock

UPL Ltd provides a wide array of crop protection product and farm solutions.

Over the years this company has diversified product portfolio from agro-chemicals to seeds, post-harvest treatment solution and also in industrial chemicals. It has 35 manufacturing location across the globe, out of which 16 are in India.

The company’s performance had dipped in the year 2017-18 due to global headwinds in climatic condition for crop cultivation. But post this, the company has delivered very strong growth. The growth was experienced across various geographies like Europe, North America, etc.

The revenue generated by the company for Q2 FY 19 was 13% more. The business in the LATAM (Latin America) grew by 26% YoY, whereas in India the business grew by 8%. This growth was due to new launches was due to new products like Sweep power, Avancer glow, Delma, etc.

Strong revenue growth had driven operating profit and it is expected to be 21% in FY20.

With monsoon approaching India, this company eyes even better revenue growth from India and across the globe.

Also read: UPL Limited: secret sauce of its glory

2. DCM Shriram

DCM Shriram stock

DCM Shriram is a leading conglomerate providing farm solutions, bio seeds, sugar, chloro-vinyl, and fertilizers.

The company has delivered consistent profit growth of 22% over 5 years. The chlorine alkali business is becoming stronger with economies of scale and substantial improvement in power efficiencies. It expects to generate more revenue from the next year.

The share price of the stock has increased from ₹327 to ₹450.

DCM Shriram has also invested ₹1300 crore for expansion of sugar and chemical business.

3. Balrampur Chini

Balrampur Chini stock

Balrampur Chini is India’s one of the largest sugar manufacturing companies. It also has allied business of manufacturing and sale of ethyl alcohol, ethanol, and generation of power.

The company’s stock price had dipped sharply from Nov 2017 to Jun 2018.

However, there was price reversal seen in early July and post that the stock has seen a good upward moment. The stock is currently trading at discount and hence these stocks provide a huge potential of future possible gain.

Balrampur Chini has strong financial health indicating healthy cash-flows and sound cash management. Recently the company has reduced its debt and is poised to earn more. The company has one of the highest Return on Equity amongst its peers.

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4. Apcotex Industries

Apcotex Industries stock

Apcotex Industries is one of the leading producers of synthetic rubber and synthetic lattices.

The company has seen demand revival in recent times and also consistent export numbers have been their strength. The company has one of the largest range of emulsion polymer.

Apcotex is planning to invest almost over ₹200 crores to expand its capacity of production of nitrite rubber and synthetic latex.

The company has reduced debt on its books and is virtually debt free.

The Apcotex stock price had tanked from January 2019 due to low operating income, but this company’s stock is now facing a steep price growth.

5. Coromandel International Ltd

Coromandel International stock

Coromandel International has its line of business in the farm inputs segment comprising of fertilizer, crop protection, specialty nutrients, and organic compost.

The company has 16% market share in the segment. The promoters or the company’s shareholdings has recently increased.

The company is making tremendous efforts for backward integration in the business ecosystem, which means that it is now becoming independent of its suppliers. Also, the company is planning to increase its phosphoric acid capacity.

The demand for phosphatic fertilizers in India is large as compared to the amount of these fertilizers India produces. Increasing capacity will directly lead to an increase in sales, as demand is greater than supply.

The peer valuation parameter which is revenue per ton of production is expected to increase by 6% compound rate in future.

Also, read: Pradhan Mantri Kisan Samman Nidhi Scheme: Everything You Should Know

Dependence factors

Agri-sector related stocks, as discussed, are generally from the mid-cap or small-cap space. These sectors are susceptible to short term volatility. We investors should take a well-researched decision in selection of these stocks.

Below are the factors which are responsible for volatility in Agri-sector:

Rainfall: India’s agricultural produce is directly related to how good monsoon season India has.

Government Policies: Agricultural produce is very much exposed to change in government policies like taxes, subsidies, farm-loan waiver, etc. Changes in these policies, whether it may be positive or negative has a drastic impact on the demand of these agricultural and related sector produce.

Also, read: Will the Indian Economy Grow Faster in 2019 than in 2018?

The economy of the country: As most of the businesses in the agricultural sector are directly linked to the citizen and other agricultural businesses are linked indirectly to the citizens through businesses. Any impact on parameters like inflations, recession, etc. in the economy this sector is amongst the first on to hit.

We investors often link volatility as a negative entity. Rather, this is an opportunity for making gains too just buying and selling time in the market has to be observed. These sectors provide good arbitrage options for making large profits.

Happy Investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.