Heavy showers could rain on agrochemical firms' parade in Q2

The sector's revenue fell 2.5% year-on-year, and operating margin declined 40 basis points to around 13.3%, according to India Ratings & Research. One basis point is 0.01%.

Agrochemical companies fetching higher domestic revenue share saw increased volumes aided by robust domestic demand. This led to better operational efficiencies and fixed cost absorption.

On the other hand, companies with a comparatively higher export share saw a contraction in margins, despite some volume improvement due to the weak pricing environment, it said in a note dated 6 September.

Generally, robust rainfall and higher crop sowing bode well for seeds and pesticide consumption, aiding demand outlook for agrochemical companies. But this time, despite the steep pick-up in the rainfall momentum seen in July and August, the September quarter (Q2FY25) could be lackluster.

In a report on 4 September, HSBC Global Research said it expects moderate growth for agrochemical companies in Q2 (lower than 10% year-on-year revenue growth) due to factors, including regional skew of rainfall causing pesticide spray misses and change in cropping pattern, mainly shift from high pesticide consuming cotton to other crops.

In fact, the management of Dhanuka Agritech Ltd recently told analysts at Kotak Institutional Equities that excessive rainfall across large parts of India has impacted the usage of agrochemicals and would lead to a slowdown in growth in Q2.

Additionally, in the international market, inventory challenges and volatile demand conditions are playing spoilsport. For instance, UPL Ltd management in Q1FY25 earnings call said that it encountered difficulties from international market pressures, particularly due to oversupply and pricing issues from China.

 

PI Industries Ltd saw slower growth in exports with the performance of new products being relatively subdued. Rallis India Ltd’s management mentioned in the Q1 call that demand recovery remains slow because key markets such as Brazil and the US saw volume growth, but pricing remains weak due to oversupply from China.

This pain is likely to persist for at least three more months, it added. But, this problem is not restricted to only Indian companies. International agrochemical companies also continue to face challenges due to high global inventory and muted demand. Companies such as FMC and BASF also reported dull revenue growth in the June quarter.

Silver lining

The second half of FY25 is anticipated to be relatively better as excess channel inventory may start getting liquidated, thus resulting in normalization of inventory levels. But the pace of recovery would be modest. Plus, the risk of Chinese dumping still looms.

In this backdrop, it remains to be seen whether the slow pace of revival puts the capital expenditure plans of agrochemical companies in a limbo. As per Centrum Broking’s estimates, capex growth for agrochemical companies in FY25 would be just 9% year-on-year. In comparison, other chemical companies are likely to see an impressive 24% capex growth in FY25.

Meanwhile, in the last six months, there has been an increased traction in agrochemical stocks, especially those deriving relatively higher business from domestic operations. For instance, shares of Dhanuka Agritech and Sumitomo Chemicals have risen by over 50% each.

Expectations of an above normal rainfall is said to have garnered investors’ attention in these stocks as domestic agrochemicals demand is said to have high co-relation with the forecast/progress of monsoon.

Remember in FY24, domestic agrochemical demand took a beating as crop output was hurt by El Nino conditions. This led to earnings downgrades. In the current backdrop, despite hopes of marginal recovery in the second half of FY25, valuations of many agrochemical stocks are trading above historical averages.

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