Déjà vu for agrochemical stocks
If El Niño returns as feared, then it can crimp the crucial monsoon rains, which in turn, will impact agriculture activity
Latest News »
- Review: Nubia Z17 Mini is impressive, particularly for the camera
- Taxpayers have less than a week to link Aadhaar with PAN
- Kerala’s snake boat races to get IPL-style makeover
- Facebook in talks to produce original TV-quality shows: report
- Japanese companies invested $4.7 billion last year in India, says envoy
Until about a year ago, the agrochemical industry was beset by low demand and adverse weather conditions.
Then things seemed to ease.
But those risks are now emerging again. Shares of Rallis India Ltd and Bayer CropScience Ltd have fallen between 2% and 8% in the past month. Even shares of UPL Ltd and PI Industries Ltd, which are partly hedged because of a large overseas business, have lost 6-10% in value. The broad market has risen 1.5% during the period.
Barring Bayer, all other stocks had outperformed the BSE 500 index in the past one year.
But the correction in the past one month indicates that investors are getting cautious.
International weather forecasts point to a reoccurrence of the El Niño warm weather pattern in 2017. The forecasts are inconclusive and clarity will emerge only in May. But if El Niño returns as feared, then it can crimp the crucial monsoon rains, which in turn, will impact agriculture activity. Though rural spending is now less dependent on agriculture, the monsoons and the corresponding agricultural output still affect rural demand, Investec Capital Services (India) Pvt. Ltd said in a note.
According to Aditya Jhawar, an analyst at Investec Capital, monsoon rains influence the quality and quantum of farm investments. “Agrochemical companies are exposed to the vagaries of monsoon as the consumption of agrochemicals and the up-trading/down-trading of molecules largely depends on performance of monsoon,” he says. Bayer and Rallis, with a 70-80% exposure to the domestic market, are expected to be the worst-hit companies.
The concerns arise amid talk of a dull January-March quarter (fiscal Q4). Demand for agrochemical products is being hit to an extent by weak crop prices, low pest infestation and drought conditions in southern parts of the country. According to Emkay Global Financial Services Ltd, lower winter crop acreages in south India and higher inventory can weigh on pesticide consumption in the current quarter and result in muted revenue growth for the industry.
Of course, the March quarter is a lean season for agrochemical companies. A large chunk of sales happen in the September and December quarters. And revenue growth till December 2016 has been good (see chart). Even so, growth is lower than initial expectations and is coming on a low base of two consecutive years of sub-par monsoon rains (2014-15, 2015-16).
If current risks do not subside—deficit monsoon rains, weak crop prices and continuation of drought in several parts of the country—then revenue growth in the coming fiscal year can be hit, taking the industry back to anaemic growth levels.