BackFor agri input providers, rising crop acreages is bittersweet news
While the good news is that crop acreages are not hit, the bad news is that the cash crunch is impacting salesif this lasts long, demand destruction can be severe
Premium
The winter or rabi crop sowing has gathered pace after a setback.
The past two readings from the ministry of agriculture show crop sowing growth of 4-8% from the year-ago levels. In the first week after demonetisation, sowing dropped 0.7%.
Sowing has now been completed in more than three-fifths of the normal winter crop area. But the readings are bringing no cheer for agriculture inputs providers.
Shares of notable companies in the sector—Coromandel International Ltd, Rallis India Ltd and Gujarat State Fertilizers and Chemicals Ltd—fell in the range of 6-10% in the past month. Even the shares of companies that are not completely dependent on the Indian market, such as PI Industries Ltd and UPL Ltd, fell.
What explains the trepidation?
The 2016-17 agriculture season started on high expectations. Predictions of a normal monsoon and demand recovery expectations drove up share prices in the first half of this year.
As it turned out, dry spells and paucity of rains delayed crop sowing, impacting fertilizer sales. Sales of agrochemical companies were pushed to October and November.
Still, this did not create major disappointments as the winter crop season held promise. With rains recovering and groundwater levels improving, the winter crop season was expected to be strong. But as initial channel checks show, the cash crunch could have a significant impact on agriculture inputs sales and earnings of companies.
Investec Capital Services (India) Pvt. Ltd, in a report last month, said the currency crunch can defer agriculture inputs demand. According to the report, retailers were extending credit to farmers.
Dhanuka Agritech Ltd, which sells agrochemicals, told CNBC-TV18 that sales growth was affected in November.
Emkay Global Financial Services Ltd says the liquidity crunch affected the inventory stocking of agrochemicals by dealers and retailers.
Companies are trying to mitigate this by extending the credit period. But this comes at a cost—high working capital requirement and finance costs.
“This is likely to have an adverse impact on companies’ working capital, but demand destruction is likely to be restricted to 3-5%," Emkay says.
In fertilizers, the impact can be more pronounced as the companies are already struggling with excess inventories and will have to extend credit to farmers.
“We expect credit purchase by farmers to increase significantly in the short run, which is likely to have a negative impact on companies’ working capital," Emkay adds.
Of course, the good news is the worst-case scenario is not playing out. Crop acreages are not hit. But the bad news is the cash crunch is impacting sales. If it lasts long, then the demand destruction can be severe.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
