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Home >Markets >Mark To Market >Agri-input firms set for strong Q4, input costs need watching

Agri-input manufacturers remain in a sweet spot, reaping gains from two consecutive good monsoon seasons. After a strong kharif crop that led to higher rural income, a good monsoon ensured adequate water reservoir levels, ensuring healthy acreage for the winter, or the rabi crop.

This led to higher use of agri-inputs as seeds, crop protection solutions, fertilizers and nutritional products. This is likely to boost the performance of agri-input manufacturers during the March quarter. Apart from a good domestic performance, sales in the export markets are also expected to be healthy. Rising international foodgrain prices are expected to help exporters of agri-inputs. The change in Latin American weather conditions that pushed demand from Q3 to Q4 is also seen helping the companies in Q4. Note that Q4 is historically a strong quarter for exports to the US and Europe in any case.

Favourable conditions
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Favourable conditions

“In our coverage universe, we expect agri-chemical companies to report 11% year-on-year (y-o-y) revenue growth, driven by export-oriented companies such as PI Industries Ltd (up 33%), Rallis India Ltd (up 19%) and UPL (up 9%)," said analysts at Emkay Global Financial Services Ltd. While prospects in the international and domestic markets remain strong, performance will be helped by the low base of last year due to the covid-led lockdown in March 2020.

With revenues likely to grow well, investors need to watch out for the margin trajectory, given rising input costs. Nevertheless, analysts are expecting margin improvement owing to better product mix and operating leverage. “We still expect margins for firms under our coverage to improve by 155 basis points (bps) y-o-y as most of these companies are likely to pass on higher input costs to the customers," said analysts at Sharekhan.

However, a key thing to watch in management commentaries would be the quantum of price hike taken to mitigate the rise in raw material costs, said analysts. Exporters and those undertaking contract manufacturing are much better placed to pass on the rising cost pressure compared to companies focused on the domestic market. Overall earnings are to set to improve in Q4 with analysts at Sharekhan estimating 13% y-o-y growth for companies under their coverage universe. The key factor to watch moving forward will be the predictions on the next monsoon season. This remains important for keeping the Street sentiments elevated. The prospects of companies hinge on normal and evenly distributed monsoon that ensures healthy agricultural activities.

“While good monsoon over FY20 and FY21 triggered a strong momentum for agri-input players, the recent prediction by Skymet of a normal monsoon in ensuing kharif, too, bodes well for sustaining growth in the domestic agri space" said analysts at Edelweiss Securities Ltd. Good reservoir levels however are likely to lend support for the next kharif season that starts in May-June.

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