The central government has decided to fix MSPs at least 150% of the cost of production for all kharif crops for 2018-19. Photo: Bloomberg
The central government has decided to fix MSPs at least 150% of the cost of production for all kharif crops for 2018-19. Photo: Bloomberg

Weak kharif season ups earnings challenges for agrochemical companies

  • Insufficient rainfall in several parts of the country has delayed sowing, which was down 6.8% as of last week, as compared to this time last year
  • A monsoon failure can accentuate earnings challenges for agricultural input providers, notably Rallis India and Dhanuka Agritech

Rallis India Ltd reported an impressive 23.8% rise in June quarter net profit. The company’s international business drove the earnings. Thanks to good demand for its key products, export revenue grew 12%, topping the 8.8% rise in total revenue.

But performance in India, its key business area, lagged, with revenue falling 2% from the year-earlier quarter.

Another agrochemicals firm, Dhanuka Agritech Ltd, which largely focuses on the domestic market, reported a subdued performance for the June quarter with revenue growing a mere 3%. The constrained performances underscore the weak progress of the monsoon.

Insufficient rainfall in several parts of the country has delayed sowing, which was down 6.8% as of last week, as compared to this time last year. Water availability is low, driving farmers to shorter-duration crops. Crop sowing can revive on the recent improvement in rainfall, though the progress of the monsoon remains the key variable.

“According to the India Meteorological Department projections, rainfall will likely revive toward the end of July. Any failure of the monsoon to show a significant recovery by then would not only hit sowing but also productivity of the already sown crop," Elara Securities (India) Pvt. Ltd said in a note.

A monsoon failure can accentuate earnings challenges for agricultural input providers, notably Rallis India and Dhanuka Agritech.

Recent channel checks by Prabhudas Lilladher Pvt. Ltd in Rajasthan revealed weak demand for herbicides. Loaded with inventories, retailers are loath to take on fresh stock. Unless demand picks up, reducing inventory, agrochemical companies will find it hard to push fresh stock.

This can weigh on sales in the crucial crop season. Importantly, subdued demand will make it difficult for agrochemical companies to pass on the rise in input costs.

The June quarter did reflect cost pressures. Gross margins at Rallis India and Dhanuka Agritech contracted from earlier quarters and managements warned about the difficult market scenario.

“The (Dhanuka) management says that owing to uncertainty related to raw materials available and prices, gross margin in FY20 could at best return to last year’s 38%. Channel inventory also has increased, which would further dent the chance of price hikes in kharif crops," added analysts at Elara Securities.

Rallis India is better placed, with more than a quarter of its revenue coming from exports. Further, it is refocusing on both the domestic market and exports, stepping up capital expenditure. While execution is crucial, recovery in the domestic market remains the key variable for the company’s earnings.

“Though the company is doing well in exports and eyeing the opportunity there, weakness in domestic markets and lack of blockbuster products are our key concerns," analysts at Edelweiss Securities Ltd said in a note on Rallis India.

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