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Business News/ Markets / Stock Markets/  Domestic agri-input players sustain momentum despite headwinds in south, says Nuvama; Dhanuka remains its top pick
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Domestic agri-input players sustain momentum despite headwinds in south, says Nuvama; Dhanuka remains its top pick

Global agrochemical players like UPL and Sharda CropChem may face challenges due to inventory destocking, while domestic agribusiness players like Dhanuka are favoured. Domestic fertiliser companies like Coromandel risk smaller margins due to surging input costs, said the brokerage.

Persistent demand environment driving modest growth for domestic agri-input players, but low water levels and crop switch may negatively impact agrochemical market, says Nuvama. Photo: Hindustan TimesPremium
Persistent demand environment driving modest growth for domestic agri-input players, but low water levels and crop switch may negatively impact agrochemical market, says Nuvama. Photo: Hindustan Times

In its Agri Inputs sector update report, domestic brokerage Nuvama Institutional Equities stated that the persistent demand environment is driving the domestic agri-input players' continued modest growth. Low water levels in southern India, however, and the anticipated switch from paddy to other crops may negatively affect the market for agrochemicals.

Additionally, longer credit terms, increased cash discounts, and a sharper focus on collections can negatively impact working capital and margins. Global players' weak commentary, meanwhile, suggests that inventory levels remain high.

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Also Read: Agri input companies report mixed Q2 results amid global slowdown; Dhanuka, Coromandel among top picks by Nuvama

Global players like UPL and Sharda CropChem would face challenges as a result of inventory destocking, according to the brokerage, which favours domestic agribusiness players like Dhanuka. As input costs surged in October and November, domestic fertiliser companies like Coromandel risked having smaller margins.

The brokerage added that it thinks global players will continue to report subpar results because of the present uncertainty and high channel inventory. In regards to CY23 results, the majority of global players have issued a profit warning.

"Despite valuation comfort in global agrochem, we prefer domestic agrochem with Dhanuka (BUY) being our top pick. Fertiliser players face a risk of margin pressure; hence, we recommend avoiding Coromandel (HOLD). Avoid Rallis (REDUCE) given its weak fundamentals and loss of market share. Given global weakness, we would stay away from Sharda (HOLD) and UPL (BUY)," said the brokerage.

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Despite southerly headwinds, domestic agri continues to grow

According to the brokerage, the domestic agricultural players are expected to maintain their current growth momentum due to stable prices for agricultural commodities, potential support in rural India ahead of the general elections and increased government spending, a healthy yield of kharif crops, and moderate prices for agricultural inputs.

The brokerage anticipates that the amount of land planted to paddy will probably change to corn and groundnuts as a result of the government's announcement of crop holidays and discouragement of paddy sowing. Because paddy is a crop heavily dependent on agrochemicals, reduced paddy acreages may have negative effects on the region's use of these chemicals.

Also Read: Orient Electric share price likely to see over 16% upside, says Nirmal Bang; here's why

Companies focus on collections, offer higher cash discounts

"Our channel checks reveal most companies are focused on collections and have increased cash discounts while doing out attractive schemes, leading to total discounts of 10–12% to accelerate collections, which are 3–6% higher than last year.

However, competitive intensity has increased with some players offering higher credits. Most players have increased credit terms by 15–45 days, which are offset by higher CD.

We expect this to have some impact on margins or working capital of the industry. Players such as UPL, Swal, etc are aggressive on collections while players such as Best Agro, Adama, Syngenta, BASF and Rallis are extending credit," the brokerage explained in its report.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 22 Dec 2023, 02:47 PM IST
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