Watch Out for Upside in Agritech Stocks

When Covid brought his contracts to a grinding halt, Thule found help from an unexpected source.

Thule's smartphone allowed him to access a digital certification course offered by Pidilite. The company that is a leading maker of adhesives and sealants allowed Thule to upskill himself at a nominal charge.

Becoming a Champion Applicator for Dr Fixit products, allowed Thule to build his profile on the websites of home improvement startups.

Eventually these got him bigger and better contracts once the effect of the pandemic started fading.

Thule is among thousands of painters, carpenters, and painting contractors, who have been trained by Pidilite over the years.

Needless to say, Thule became a willing endorser of Pidilite's products to his clients.

This is a strategy that has worked wonders for Pidilite's business for years.

What Pidilite did for carpenters and painting contractors, Polycab did for electricians.

In other words, in both cases, it was not the final consumer (home owner) but the intermediary that was in focus.

And the latter turned out to be the key agent of change in the company's business profile.

In both cases, the intermediaries drove the sales of the companies with the help of technology led aids.

So, I looked for other instances of such technology led intermediary relationships in other sectors as well.

I recently came across an agritech company with a Principal Engineer. The executive is an IoT (internet of things) expert working on cross-functional initiatives.

He has led the enterprise IoT platform at the company with a focus on enabling IoT workflows in smart farming.

This is to maximise efficiency, throughput, and revenue in domains ranging from breeding and research to global supply chains.

Under his guidance, the agritech company trains farmers on smart farming tools.

Digital farming tools help farmers work smarter by combining their expertise and knowledge of their land with modern, digitally enabled tools.

The tools collect and organise more data, provide them with actionable insights that allow for better decision making.

As the world's population grows and factors such as climate change, urbanisation and soil degradation limit the amount of arable farmland, agricultural productivity will need to increase to safeguard food supply in the long term.

Digital tools and data help the agritech company deploy its resources efficiently and sustainably. They also enable farmers to get the most out of their fields while using less land and fewer inputs (fertilisers and pesticides).

Digital technology's ability to connect and leverage data with incredible speed is evident every time we conveniently bank online, seamlessly schedule and pay for a ride, or easily track the delivery of a product.

So, the agritech company I am referring to, uses the same technologies to connect and leverage data about agri products.

This is to bring significant advancements to agriculture for the benefit of farmers.

Also, the company is acutely aware of the need to promote water-efficient cropping patterns in the light of the growing water crisis.

For instance, rice remains a major crop in India. However, the crop's heavy water consumption puts immense pressure on water resources.

In response, the agritech company has introduced a seeding mechanism which promises a 30% reduction in water consumption compared to traditional methods.

Reaching out to small-scale farmers, guiding them along the operational value chain, offering other aspects of best farming practices, and connecting farmers with the ultimate buyers of their produce are the main components of the company's strategy.

Now, why the focus on companies with focus on such technology led intermediation?

Well, in the constantly evolving world of artificial intelligence (AI), businesses are far more prone to disruption than ever before.

So it's necessary to evaluate if the managements are recognising and preparing for such disruption.

During the 2019 Berkshire Hathaway Annual Meeting, Warren Buffett wasn't worried about artificial intelligence (AI).

However, the veteran investor foresaw a sweeping change in businesses. He explained how at Berkshire such sweeping changes are dealt with...

• We had 80 percent of the people working on farms in 1,800. And if there hadn't been a lot of changes, and you needed 80 percent of the people in the country producing the food and cotton we needed, we would have a whole different society.
  
  So, we welcome change. And we certainly want to have managers that can anticipate and adapt to it. But sometimes, we'll be wrong. And those businesses will wither and die. And we'd better use the money someplace else.

So, be it the production of sealants or fast-moving electronic goods or agri products, choosing a management that has keen eyes for both technology and intermediary is meaningful.

In few cases the strategy may not work. But stocks that deliver could make a huge difference over the years.

The stocks of Pidilite and Polycab have multiplied 11 times and 7 times respectively over the past decade and since listing.

This agri tech stock, with the help of its smart farming community, could potentially achieve no less in terms of creating shareholder wealth in future.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)