Why agrochemicals companies are set for tough times ahead
2 min read 29 Mar 2023, 11:47 AM ISTIn FY24, monsoon rains and kharif crop prices will be crucial factors for the domestic agrochemical industry. While moderating inventories will help volume growth going forward, it must be closely monitored. This is because any delay in sowing could again lead to inventory build-up.
PremiumThe Indian agrochemicals industry has had a rough FY23 so far due to high raw material costs and inventory build-up in the market. These factors took a toll on revenue growth and margins, particularly in the December quarter (Q3FY23). For most companies, revenue growth was mainly price-driven, while volume growth remained muted.
Against this backdrop, shares of domestic agrochemicals companies have declined 10%-15% this past year.
Raw material prices, however, have been easing over the past few months, providing respite to companies operating in this space. Analysts expect Q4FY23 to be good for companies such as UPL Ltd, Rallis India Ltd, Dhanuka Agritech Ltd, Bayer Cropscience Ltd and Sumitomo Chemical India Ltd.
Prathamesh Sawant, research analyst, Axis Securities, said, “Q4FY23 is expected to be good as the inventory levels have started to moderate based on our checks. Sales happen in advance based on sowing in the prior season." But the outlook on FY24 is unclear, he added.
In FY24, monsoon rains and kharif crop prices will be crucial factors for the domestic agrochemical industry. While moderating inventories will help volume growth going forward, it must be closely monitored. This is because any delay in sowing could again lead to inventory build-up.
On the positive side, raw material costs are expected to remain low, with the Chinese market re-opening post-lockdown.
Also, exports might be lucrative in the coming quarters. “Demand in the global market continues to be good as of now; while there is some inventories build-up, the situation isn’t alarming (for now) as per the commentaries received from global companies," said Himanshu Binani, analyst at Prabhudas Lilladher.
Having said that, crop prices in the export market have been trending lower over the past few months. “The banking crisis now unfolding in the US and Europe could further exacerbate pressure on end-demand," said a Kotak Institutional Equities report dated 23 March.
Note that demand and supply dynamics and business operations vary company to company. But for a re-rating in the shares of agrochemical companies, the above-mentioned factors would play a key role in determining investor sentiment. “Re-rating of stocks depends on the commentary on Q4 and macro-conditions in the next few quarters," said Sawant.
While price-led growth appears to have worked well for agrochemical companies, analysts expect this to moderate in FY24. According to Prashant Biyani, vice president, institutional equity, Elara Capital, “FY23 industry growth was driven by price hikes, but FY24 growth is expected to be driven by volumes." Prices are expected to reduce due to a decline in raw material prices, he added.
Meanwhile, the fertilizer industry, too, will face an overhang in the coming quarters, particularly because of the government’s efforts to curb subsidies. “The Indian fertilizer industry faces a challenging outlook, with the government trying various means to reduce usage, including pushing nano-fertilizers and piloting a scheme (in seven districts) to cap sales of subsidized fertilizers," said the Kotak report.
