Bayer CropScience Ltd Management Discussions.
1. OVERVIEW OF INDIAN AGRICULTURE
India has 157.35 million hectares under cultivation, making us the second largest holder of agricultural land in the world. All 15 major climates of the world exist in India, with 20 agri-climatic regions in total. Indian agriculture is the second largest employer in the world with 265 million Indians engaged in farming. In rural India, 60% of the workforce works in farms and depends on agriculture as their only source of livelihood. Currently, India is one of the two largest producers of major agricultural commodities such as rice, vegetables, fruits, cotton and sugar. Agricultural export constitutes 10 percent of Indias exports and is the fourth-largest exported commodity. In 2018, the agriculture and allied sector contributed 15.87% of Indias gross value added (GVA) amounting to र 26.92 lakh crores. Yet, the importance of Indian agriculture is on the decline. On one hand, the countrys population is increasing; on the other hand, farmers are grappling with decreasing arable land, limited natural resources and climate change. 80% of Indian farmers are smallholders and the challenges for smallholder farmers are even more pronounced due to fragmented landholdings, poor water availability and a lack of access to new technologies. Thats why any meaningful solution to solve problems in Indian agriculture needs to revolve around targeted support for smallholders, through contemporary crop protection solutions, high yielding seeds and modern breeding. We also need collaboration with key stakeholders including the government, industry, farmers and the society to transform Indian agriculture and make it globally competitive.
Food Grain Production in 2018-19:
According to the 2nd Advance Estimates released by the Department of Agriculture on February 28, 2019, Indias food grain production was estimated at 281.37 million tonnes for 2018-19 compared to 277.49 million tonnes in 2017-18. The rise is comparatively 15.63 million tonnes than the previous five years (2013-14 to 2017-18) average production of food grain. The higher crop production could be attributed to normal monsoon rainfall in most major crop-producing states. In 2018-19, rice production was estimated at 115.6 million tonnes, 4.59 million tonnes higher than the production of 111.01 million tonnes in 2017-18. The production of wheat in 2018-19, was estimated at 99.12 million tonnes compared to 97.11 million tonnes in the previous year. However, production of nutri/coarse cereals was estimated lower at 42.64 million tonnes compared to 45.42 million tonnes in 2017-18. Total pulses production during 2018-19 was estimated marginally higher at 24.02 million tonnes. Oil seeds production was estimated at 31.5 million tonnes, sugarcane production at 380.83 million tonnes and cotton at 30.09 million tonnes. Total Pulses production during 2018-19 was estimated at 24.02 million tonnes which is marginally higher by 0.08 million tonnes than the previous years 2nd Advance Estimates of 23.95 million tonnes. However, the production of pulses during 2018-19 is higher by 3.77 million tonnes than the five years average production of 20.26 million tonnes. Production of Cotton was estimated at 30.09 million bales (of 170 kg each), which is lower than the production of 33.92 million bales in the 2nd Advance Estimates of 2017-18.
Given the importance of the agriculture sector, the Government of India, since the last five years has focused on the sustainable development of agriculture in the country. Key among its initiatives was the ambitious goal to "Double farmers income by 2022." To ensure assured income support to marginal and small farmers, the Government announced the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) scheme in the Union Budget 2019. This programme will provide direct income support of
6,000 every year to vulnerable landholding farmer families, with cultivable land of upto two hectares. An outlay of
र 85,000 crores has been proposed for the scheme which is estimated to benefit 12 crores farmers.
The Government also increased the Minimum Support Price (MSP) so as to fulfill the aim of doubling farm income.
A fund of र 60,000 crores is also being allocated to the Mahatma Gandhi National Rural Employment Guarantee Act
(MNREGA). As per media reports, Indias agriculture budget has doubled in the past five years to a whoppingर 57,600 crores in 2018-19.
2. INDUSTRY DEVELOPMENT
The south-west monsoon, which delivers about 70 percent of Indias annual rainfall, is critical for the farm sector. The India Meteorological Department (IMD) had forecast a normal monsoon for 2018, pegging the countrywide rainfall at 97% of the long period average (LPA). However, the cumulative rainfall in the country during the monsoon season (June to September 2018) was 9% lower than the LPA. The intermittency, pan-India rainfall coverage and distribution of monsoon left the farmers in a difficult situation. September ended with a shortfall of more than 23% and was the driest monsoon for the month since 2015. This affected the consumption of crop protection products. The Crop Protection industry grew positively mid-single digit with major growth coming from Pulses, Vegetables and Rice. Except Herbicides, outperforming business units were Fungicides, Insecticides and Seed growth.
The Environmental Science (ES) unit, which currently operates in two business areas in India: Vector Control and Professional Pest Management (PPM) showed a good growth trend for 2018-19. Vector-borne diseases such as dengue, malaria, zika and chikungunya continued to affect communities across India. The Public Health market in India is driven through the practice of larviciding, indoor residual sprays and space-spraying. The government and health authorities procure chemicals through tenders, which is a lengthy process that is slowly modernizing with tender submissions moving online and the introduction of the Government e-Marketplace (GeM) initiative. Globally, Bayer is a signatory to the ZERO-by-40 declaration to eliminate malaria from the planet by 2040, in partnership with the Innovative Vector Control Consortium and the Bill and Melinda Gates Foundation. We expect that public-private partnerships will be important also in the context of India to eliminate malaria and control dengue and other vector-borne diseases. In the PPM segment, termite control, which is one of the fastest growing segments, is starting to see renewal with a slow increase in pre-construction activity. In the long-term, the PPM business holds good potential for growth in both commercial and residential segments.
3. REVIEW OF FINANCIAL AND OPERATIONAL PERFORMANCE
The Companys Revenue from Operation was र 26,857 Millions in 2018-19 as compared to र 27,490 Millions in 2017-18.
The Company reported Profit for the year ofर 2,376 Millions.
Bayer CropScience Limited enjoys a unique position in the market because of its capability to offer new innovative products, technologies, processes, services and business models. Innovation has always been a cornerstone in Bayers product offerings. In the year 2018-19, the Company successfully launched 12 new products: 7 in the Crop Protection 4 in Hybrid Seeds and 1 in Environmental Science. The new offerings in Crop Protection include Regent Gold, an insecticide for controlling vector Thrips in cotton;
VELUM prime, a nematicide for healthy plants; Infinito, a fungicide for control of late blight in potatoes; Ambition, a crop supplement for enhancing crop performance; EverGol xtend, a fungicidal seed treatment product to control seed & seedling rot diseases; Alion plus, a herbicide for foliar and pre-emergence control of weeds in tea plantations and COUNCIL active, an early post-emergent herbicide for transplanted as well as wet DSR rice. Within the Hybrid Rice Seed segment, the new products include Arize AZ 6741, an early-duration hybrid with extra-long slender grains & high yield potential; and Arize AZ 6565, a long-duration hybrid with long slender grains, excellent milling characteristics & high head rice recovery. Within the Hybrid Millet Seed segment, the new products include Proagro PA 9285, a medium-duration hybrid with excellent grain quality, high yield potential, good fodder quality & tolerance to diseases like blast and downy mildew; and Proagro PA 9180, a full-duration hybrid with bold grains best suited for eating purpose. The new offering from Environmental Science, Aqua-K-Othrine, is an innovative space spray for management of adult mosquitoes. Aqua K-Othrine uses water as a diluent insteadofdiesel,therebyprovidingsignificantoperational cost advantage to operators, and also creating positive environmental impact. This launch also represents Bayers first product introduction in the space-spray segment in 20 years!
Over the last few years, Bayer is working on providing customer-centric solutions to Indian farmers by working closely with them to understand their needs even better. In 2018-19, we strengthened our Bayer Labhsutra program, which aims to increase per acre earnings and qualitative yield for farmers. Bayer has extended the scope and number of demonstrations across multiple crops and geographies, but more importantly also commercialized the concept in the form of Labhsutra Kits in some key geographies. As of 2018, Bayer Labhsutra demonstrations were carried out in nearly 2000 plots.
Another key customer focused initiative; the Food Chain Partnership expresses our belief that together with our partners in the food chain we can build relationships that benefit everyone. Bayer provides farmers with innovative crop protection products, high-quality seeds, and services, as well as advisory on the optimal use of products and applications. Ultimately, farmers benefit through better market access, more secure income, better technological solutions, higher yields and cost-effective, sustainable use of agrochemicals. In 2018-19, Bayer had 73 Food Chain Partnership projects covering
16 crops and benefitting more than 89,000 farmers. With its Food Chain Partnership projects, Bayer also helped farmers get certified and gain relevant knowledge and skills to successfully market their produce. In 2018-19, Bayer conducted
13 BayG.A.P. training programs for 520 Indian farmers to help them learn good agricultural practices.
With an objective to provide holistic and innovative solutions for smallholder farmers in developing economies, Bayer, International Finance Corporation (IFC, a member of the World Bank Group), Netafim and Swiss Re Corporate Solutions launched the Better Life Farming (BLF) alliance on April 20, 2018. In India, the global alliance was launched on July 23, 2018, along with additional local partners: Yara Fertilisers, DeHaat and Big Basket.
The BLF alliance runs two successful projects in India covering 1,600 green chilli farmers over 2,625 acres in Uttar
Pradesh and 500 tomato farmers covering 500 acres in Jharkhand. The firstproject commenced in December 2016 with 20 green chilli farmers across 20 villages in Uttar Pradesh. The second project started in June 2017 with 37 tomato farmers. Chillies and tomato were chosen after conducting a baseline study to identify regions where local crop yields were significantly lower compared to Indias average national yield. Participating farmers received advisory on the use of good agricultural practices. As a result, farmers were able to double their yields and triple their farm incomes. In February 2019, the BLF alliance introduced an agri-entrepreneurship model for smallholder farmers. This will empower rural youth to be a part of the agri value chain and create local employment opportunities. The model will be run through the "Better Life Farming Centers" where agri-entrepreneurs will enable transfer of technology on topics such as seeds, crop protection, crop nutrition, drip irrigation, mulching, etc. They will also deliver services such as market linkages, access to inputs and crop advisory. Each center will cover a group of 500 farmers from five to six nearby villages.
Currently, seven Better Life Farming Centers have been set up in Varanasi. By the end of 2019, the number of centers in Uttar Pradesh and Jharkhand will be scaled up to 100. Product Stewardship forms an integral aspect of our business operations. Every field/farm begins with a safety training and awareness about safe & responsible use of crop protection products. Under the training programs, Bayer helps farmers learn more about identifying and purchasing authentic seeds and crop protection products, safe & responsible use of products and proper use of Personal Protection Equipment (PPE) while spraying. In 2018-19 - 4,95,990 training were imparted under Bayers safety training and awareness programs across India. Further, Bayer engaged with RAWE (Rural Agriculture Work Experience) students and academia through its "Bayer Safe Use Ambassador" program. These students are currently in their seventh semester of their curriculum leading to graduation in agriculture from colleges of State Agriculture Universities. 2018 being the second year for "Bayer Safe Use Ambassador" program, 616 students from 5 institutions participated voluntarily and contacted 7430 farmers and helped farmers understand ways to use crop protection products responsibly with a focus on operators safety, consumer confidence and environment sustainability. Other stakeholders like the State Department of Agriculture, Krishi Vigyan Kendras and Local self-governments including NGOs also contributed to the program.
In 2018-19, the Environmental Science unit maintained its position as the market leader in the areas of Vector Control and PPM. The ES business increased sales by 32.9% in comparison with the previous year, and recorded the highest revenue for the ES business in 12 years. All segments showed strong growth due to clear operational focus on individual business areas. ES continued to sponsor major symposia and seminars to promote general awareness, product knowledge, safety measures and share best practices in PPM and vector borne disease management. In September
2018, the ES business partnered with ASSOCHAM to organize the first "National Dialogue on Protecting Communities:
Vector Control in Action" at New Delhi, which brought together over 150 members from the government institutions, non-governmental organizations and the private sector. Additionally, Bayer organized a special session at the 14th International Conference on Vector Control" conducted by the National Association of Vector-Borne Diseases (NAVBD) in January, 2019. At this conference, NAVBD also presented the Bayer Environmental Science Award to two scientists with distinguished contributions in the field of vector control in India.
4. OPPORTUNITIES, RISKS, CONCERNS AND OUTLOOK
The central challenge for Indian agriculture is low productivity, which is evident in modest average yields. According to an FAO (Food and Agriculture Organization) study, food energy requirements for South Asia will be about 2700 calories per capita per day by 2025. In India, the current food grain availability is 525 grams per capita per day, whereas the corresponding figures in China and USA are 980 grams and 2850 grams respectively. Due to an improvement in per capita income, if per capita consumption is 650 grams, the food grain requirement will be about 390 metric tons of food grain by 2025. Although low productivity is a challenge, it also presents an opportunity for our industry.
With key resources such as arablelandandwatergrowingscarceandfluctuatingweather patterns becoming the new normal, technology can make a huge difference. China used hybrid seed varieties to beat the climatic vagaries and achieve a turn-around in rice production. Hybrid rice seed varieties can adapt to low rainfall, poor soil conditions and can offer farmers up to 50 percent incremental yields. Despite the availability of such science-based solutions, the adoption rate for hybridization in India stands at a dismal 6%. This presents a huge opportunity for players in the hybrid seeds segment.
Another significant problem that Indian farmers face is poor price realization even when there is a bumper harvest.
A bumper harvest causes prices to crash. And in the absence of proper storage and processing infrastructure, plenty of produce has to be sold at sub-optimal prices while the input costs for farmers keep pace with overall inflation. This creates both a debt trap for farmers and disenchantment with farming. Here too, two technology enabled solutions can help. The first calls for public-private partnerships in creating efficient farm-to-fork supply chains. The second requires crop diversification based on science and a systematic analysis of future global production trends. Intelligent diversification protects consumers from price shocks and allows farmers to hedge their risks.
Water is one of Indias most scarce natural resources. India uses 2 to 4 times more water to produce a unit of major food crop compared to China and Brazil. Hence, it is imperative that the country focuses on improving the efficiencyof water use in agriculture. Irrigation investments must shift to adopting technologies like sprinkler, drip irrigation and rainwater harvesting. In order to facilitate this shift, the new irrigation technologies need to be accorded infrastructure lending status and both the center and states need to increase public spending for adoption and deployment of micro irrigation.
Addressing Indias multiplechallengesinagriculturerequiressignificantupgradation of the countrys national agriculture research and extension systems. Indias National Agricultural Research System (NARS) comprising the Indian Council of Agricultural Research (ICAR), other central research institutes, and national research centers set up by ICAR, together with state agricultural universities played a key role in Indias Green Revolution. However, in more recent years, Research & Development (R&D) in agriculture has been plagued by a severe lack of investment.
Agricultural R&D is crucial to sustain agricultural productivity growth in the long-term. As per the Economic Survey, in 2017-18, the actual expenditure of the Department of Agricultural Research and Education/Indian Council of Agricultural Research increased from र 5,393 crores in 2010-11 to र 6,800 crores during 2017-18. The compounded annual growth rate of expenditure has been 4.2 percent over the years, which augurs well for the industry. To ensure growth, India also needs better quality molecules, safer chemistries and a range of innovative products.
Agriculture is a big driver of the Indian economy, but the agriculture sector needs to be seen as an exciting industry rather than an industry that depends on subsidies and hand-outs. Innovation in seeds and crop protection can go a long way in addressing the productivity problems affecting Indian agriculture. It will also help farmers fetch good commodity prices which will encourage farmers to spend on qualitative inputs for achieving higher yields and a more favorable return on investment. Bayer with its products, offerings, distribution reach and strong network of more than 3,500 field officers is well geared to support Indian farmers.
On the Environmental Science front, the market has generally recovered from the macro-economic shocks over the last two years, and the PPM industry is expected to grow in 2019-20. The residential segment is expected to show rapid growth as consumers, particularly in urban markets, become more aware about the benefits of pest control services and start to demand safe and effective solutions. Additionally, our termite segment sales has significant potential for growth, both in pre-construction as well as post-construction. The biggest concern for the ES business is the plethora of generics dominating the PPM segment, including those, which have been discontinued in several parts of the world. Inertia to switch is also a concern, however, we strive to educate and inform relevant stakeholders of the environmental and stewardship benefits of switching to the newer products that Bayer offers. The Public Health business is geared for high growth with continued government expenditure to protect against vector-borne diseases, particularly through public-private partnerships. However, since a large portion of this business comes from tenders, it is difficult to achieve predictable growth.
5. CORPORATE SUSTAINABILITY
Responsible business practices are the foundation of the Bayer Groups sustainable alignment. We can identify and mitigate risks at an early stage by implementing this alignment in the areas of compliance (e.g. anti-corruption and responsible marketing), human resources policy, product stewardship, health, environmental protection & safety, and supplier management. This is one of the key requirements for societys acceptance of our business. On this basis, we aim to contribute to overcoming global challenges with our innovations, and in doing so develop additional business opportunities.
The central theme of Bayers social commitment is innovation. As education is an important catalyst in achieving sustainable societal prosperity, Bayer has been making efforts in promoting science and technology in many far-flung rural areas where educational infrastructure is in a poor shape. Vocational skill development is also a key part of our focus. Many of our initiatives aim to enhance skills that would help young people become employable. Our Community Development programs being implemented in various parts of the country place emphasis on enhancing awareness about health, hygiene and skill development.
An important part of our sustainable development initiatives are aimed at making a contribution to one of societys greatest challenges - food security. We focus on providing support to farmers in their efforts to increase yields while at the same time protecting the environment and improving the quality of life. Bayer is committed to protecting the environment and is constantly working to reduce environmental impact and find innovative product solutions that improve resource and energy efficiency that fits in with our mission - "Bayer: Science for a better life." The details about the Corporate Social Responsibility projects for the financial year 2018-19 are provided in the Directors Report.
6. INTERNAL CONTROL SYSTEMS
The Company has appropriate internal control systems for business processes with regards to its operations, financial reporting and compliance with applicable laws and regulations. The Audit Committee approves the internal audit plan and internal audits are conducted at regular intervals across various locations and processes in line with the approved plan. Audit observations and follow-up actions are discussed by the Internal Audit team of the Company as well as the Audit Committee.
7. CAUTIONARY STATEMENT
The statements in the "Management Discussion & Analysis Report" describing the Companys objectives, expectations and forecasts may be forward looking within the meaning of applicable securities laws and regulations. The actual results may differ from those expressed or implied, depending upon the economic and climatic conditions, government policies and other incidental factors.
For and on behalf of the Board of Directors
|Duraiswami Narain||Ulrich Stefer|
|Vice Chairman & Managing Director and||Executive Director &|
|Chief Executive Officer||Chief Financial Officer|
|(DIN: 03310642)||(DIN: 07447177)|
|Mumbai, May 27, 2019|