(Vipul  Sharma/Mint )
(Vipul Sharma/Mint )

Agrochemicals exporters widen their valuation gap vis-à-vis domestic plays

  • FY19 ended on a weak note for most agrochem firms, with sales in India hit by sluggish demand, large inventories
  • The varied performance is explained by the exposure to international markets

Of the six notable agrochemicals stocks, just two, PI Industries Ltd and UPL Ltd, earned money for investors in the past year. Both gained a significant 40-45%. The rest, including Rallis India Ltd, Dhanuka Agritech Ltd, Insecticides (India) Ltd and Sharda Cropchem Ltd, fell between 4% and 33%.

As such, the valuation gap between the two sets of companies has widened further.

The divergence in returns underscores their financial performances. PI Industries, UPL and Sharda Cropchem clocked 14-25% revenue growth in FY19. For others, revenues ranged from 4% to 11%.

The varied performance is explained by the exposure to international markets. PI Industries, UPL and Sharda Cropchem derive most of their revenue from exports. They benefited from a reduction in inventories and the recovery in global agrochemicals. The exception is Sharda Cropchem, which, despite seeing decent revenue growth, posted weak earnings due to cost pressures. Profits of the company slipped 7.6% in FY19.

According to Edelweiss Securities Ltd, Sharda Cropchem expects to maintain double-digit revenue growth in FY20. But raw material cost pressures are undermining profitability, dimming the earnings outlook.

In comparison, a larger proportion of in-house manufacturing cushions the impact of higher raw material costs at PI Industries and UPL. Further, double-digit revenue growth is expected to continue in FY20 due to a recovery in global demand for agrochemicals. PI Industries expects its revenue to rise 20-22% in FY20, driven by the commercialization of new products. In FY19, PI Industries’ revenue surged 25%.

The outlook for other agrochemicals firms is not that rosy. FY19 ended on a weak note, with sales in India hit by sluggish demand and large inventories. The weak performance is reflected in the valuation gap between PI Industries, UPL and others. While the PI Industries’ stock quotes at 23 times FY21 consensus earnings, UPL trades at 14 times. Other stocks quote at about 12 times one-year forward earnings estimates.

The valuation gap offers a catch-up opportunity. But this is contingent on a recovery in the domestic agricultural economy, which is uncertain.

To top it, the monsoon is progressing slowly. Besides, farm sentiment is tied to crop prices, which have not been encouraging so far. The expectation is that the government’s thrust on agriculture will provide the requisite fillip to farm activity. Yet, much depends on policy formulation and implementation. “We anticipate good times for agri-input players, owing to government support to farmers in the form of direct-income transfers and fertilizer subsidies. Overall, while globally-focused companies offer better growth assurance, they are fairly valued," analysts at Edelweiss Securities said in a note.