Weak prices offset strong volume results from Indian agrochemical companies
Despite volume growth in the export segment and strong demand in the domestic market, a price hike has eluded Indian agrochemical companies. Most agrochemical companies missed street estimates due to multiple headwinds. Brokers have cut profit estimates for a few and expect only a gradual recovery over the next few quarters.
Companies with a significant export share were hit harder than domestic companies. Despite healthy volume growth, pricing pressure and excessive dumping from China weighed on profitability, says IIFL Research, with export-oriented agrochemical companies such as UPL, Anupam Rasayan and Rallis continuing to face a challenging quarter.
Ranjit Cirumalla and Viral M Shah of the brokerage house have downgraded the ratings of Kaveri Seeds and Bayer CropScience citing disappointing performance and not so encouraging outlook, coupled with sharp rise in stock prices.
According to Kotak Institutional Equities, the situation is unlikely to improve in the near term. The brokerage’s Abhijit Akella and Sumit Kumar point out that falling global farm incomes due to significant price declines in key field crops are likely to weigh on demand for agricultural inputs in the coming months.
Corn, soybean and wheat prices are now at post-Covid lows, down 20-30 percent year-over-year. The USDA forecasts that U.S. farm net income will fall 25.5 percent year-over-year in 2024 to $116 billion, down sharply from $185 billion in 2022. This will likely weigh on demand for farm inputs.
The situation was clearly better in India, which allowed domestic agrochemical companies to report strong results in Q1. The revenue growth was aided by robust volumes amid increased demand. Rohan Gupta and Rohan Ohri of Nuvama Research believe that the growth has been supported by above-average rainfall across the country, which has accelerated the liquidation of inventories and subsequently led to restocking. They expect this growth momentum to continue, led by better rainfall and sowing activities across the country, benefiting domestic agrochemical companies. However, fertilizer companies have been a drag on the overall performance of domestic companies due to lower realization and higher input prices. The broker is bullish on domestic companies and his top pick is Dhanuka Agritech.
Sharekhan Research is also positive on the domestic outlook, pointing out that the performance of agri-input companies has increased sequentially. Demand for crop protection products during the Kharif season has been strong, with better sowing averages due to improved monsoon conditions. However, they expect the recovery process to be slow. While sentiment in the domestic market is positive due to favourable rainfall forecasts, normalisation of inventory and full recovery in demand is expected to take a few more quarters. While there are short-term hiccups, Sharekhan Research is positive on the long-term structural factors such as the China Plus One strategy and import substitution, which remain intact and would drive India’s global market share expansion to 7-8 per cent in the coming years from 4 per cent currently. PI Industries, Insecticides (India) and Sumitomo Chemical are the top picks.
First publication: Aug 23, 2024 | 12:43 PM IST