Uncertain earnings for agricultural input firms despite bountiful rains
Except Rallis India and UPL, other notable agricultural input providers had a dull season till now, with Dhanuka Agritech and Insecticides India posting a mere 2% growth in revenue, while Kaveri Seed reporting a 1% drop in sales
The monsoon has gathered pace, with several regions of the country receiving excess rainfall. But agricultural input providers, whose fortunes are directly linked to farming activity, are not rejoicing. Except Rallis India Ltd and UPL Ltd, other notable agricultural input providers had a dull season till now. Dhanuka Agritech Ltd and Insecticides (India) Ltd posted a mere 2% growth in revenue, while Kaveri Seed Co. Ltd reported a 1% drop in sales.
Pest infestation and subsequent fall in crop acreages is expected to weigh on Kaveri’s cotton seed business. But as it turned out, its maize seeds business also lagged due to low commodity prices and delayed rains in some regions. Dhanuka Agritech also blamed uneven rains for a subdued performance last quarter.
Apart from the monsoon, the companies face other challenges as well. One of them is subdued commodity prices. Kaveri warns that delayed sowing and low commodity prices can weigh on maize planting next quarter especially in Andhra Pradesh, Maharashtra and some markets in the east.
The other challenge is raw material costs. Closure of capacities in China and the resultant curtailment of raw material supplies have driven up input costs. This has impacted the profitability of agrochemical companies last quarter. “EBITDA margin declined 430bps YoY to 7.4%, the lowest in the past 10 years, primarily on account of (1) lower operating leverage, (2) change in product mix, (3) failure to pass on the higher raw material prices, (4) higher cost led by rupee depreciation and (5) lower GST refund,” Antique Stock Broking Ltd said in a note on Dhanuka Agritech.
The rise in input costs is having a larger impact. Wary of a further rise in prices, companies are stocking up raw materials. On the other hand, they are forced to extend credit to retailers due to liquidity constraints at the farmers’ end. This is happening even as the companies are yet to fully recover the rise in costs. The net impact of this is stretched working capital.
To be sure, the Dhanuka Agritech management told analysts that Chinese raw material prices have stabilized, which should help them pass on the rise in input costs. However, much depends on the demand recovery and product offtake in the coming weeks.
Adding to the concern is low sowing of rice and cotton, which are high users of agrochemicals. Sowing of these crops as of last week (10 August) is down 2-4%. Importantly, paddy sowing is lagging in Karnataka, one of the large markets for agrochemicals.
Overall, even as the monsoon picture is turning less worrisome in terms of rains deficiency, the earnings outlook for some agricultural input companies is not seeing a commensurate improvement.
Editor's Picks »
- US may restrict Green Cards to aid recipients in new crackdown
- No concern on liquidity of NBFCs: SBI chairman Rajnish Kumar
- Infosys, TCS, 3 other IT firms shortlisted to implement RBI’s CIMS
- FPIs turn net sellers in September, pull out ₹15,365 crore so far
- Comcast digs deep to overcome Fox with $39 billion bid for Sky
- India’s renewable energy sector hits a milestone but loses speed
- All eyes now on share swap ratio in this mega bank merger
- Jet Privilege can actually get higher valuation than Jet Airways
- Profitability of cement firms to take a hit due to weak prices, high costs
- Pidilite’s shares hold their ground despite weak rupee and rising crude