Agri Inputs Sector Q2 Results Preview: Strong rebound expected for domestic players: Nuvama; prefers Dhanuka, Coromandel

After a mediocre Q1FY24, domestic brokerage Nuvama Institutional Equities anticipates a robust rebound in domestic agri-input driven in Q2FY24 by an uptick in monsoons and sowing activity. Nonetheless, with significant channel inventory and inventory losses, the global agrochem scenario is still difficult.

Even though essential crop prices were uneven, Nuvama expects farmers to continue making a profit because of the strong demand for the Rabi crop as reservoir levels rise, with the exception of the south.

The brokerage favours Dhanuka and Coromandel, two domestic agricultural companies, based on steady demand and margin expansion. The brokerage predicted poor performance for UPL and Sharda Cropchem due to margin pressure. But considering valuations, stocks have bottomed out. A reduction in the subsidy for fertiliser is a short-term risk.

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"Given the current uncertainty and high channel inventory, we believe global players would continue to post weak results. However, we also anticipate that factoring in these weaknesses,stocks are bottoming out. Hence, they provide valuation comfort as the business model remains firm, not to mention that we expect a revival in FY25.

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All in all, given favourable monsoons and crop prices, we are positive on domestic agri and prefer Dhanuka (BUY), Coromandel (BUY). Avoid Rallis (REDUCE). A likely cut in fertiliser subsidy rates is a near term risk for fertiliser players,"the brokerage said.

Let's look at the brokerage's Q2FY24 expectations from the companies under its coverage.

Coromandel International

While the brokerage anticipates 7% YoY growth in fertiliser volume, declining input prices would be the main cause of lower realisation.

"We expect EBITDA margins / mt are likely to remain strong benefiting from softening RM prices and model for EBITDA / mt > 5,000/ -. Crop protection business growth is expected at 10% with EBIT margins at 14%," Nuvama said.

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Dhanuka Agritech

The brokerage suggests that robust volume growth will propel 15% year-over-year rise in total revenue. Nuvama anticipates that Q1FY24 will see a slight increase in EBITDA margins of 40 basis points year over year due to the increasing percentage of specialty volumes and high-cost inventory being liquidated, which will drive overall profitability.

Rallis India

“We expect overall revenue growth to remain muted as we assume pressure on its technical sales (B-2-B) and exports business given weak demand amid high inventory and falling prices. With muted pricing environment in technical sales, we expect margin pressure to continue. Unexpected demand pick up in seed business can boost profit,” said Nuvama.

Sharda Cropchem

The brokerage firm anticipates poor outcomes since dealers have been requesting large discounts and rebates as a result of the significant decline in product pricing, which has put pressure on margins and resulted in one-time losses.

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More negative changes in the US dollar versus the euro could lead to foreign exchange losses. The brokerage anticipates negative operating leverage and pressure on overall margins, with losses to be reported by the company.

UPL

“We expect with higher inventories globally, volume growth to remain muted while price on YoY basis are likely to be down by about 15%. As pricing remain weak and low volume, companies have to offer rebates and discounts to push sales while prices continue to remain weak leading to gross margin pressure,” the brokerage said.

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Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.