Agrochemical companies are adopting a cautious approach as they confront several challenges in both domestic and international markets. However, some recent developments, including the International Grain Council (IGC) raising its grain production outlook and increasing minimum support prices (MSP) on some crops in India, offer some positives for the sector.
Nevertheless, in the near term, heightened competition for generic agrochemical manufacturers from China and declining prices of raw material intermediates are keeping the earnings outlook subdued.
Falling global crop prices, higher channel inventories, and a delayed monsoon, besides uncertainties around the distribution of rainfall, are among key concerns for the sector, according to analysts.
The performance of agrochemical manufacturers was weak in Q4. The high cost of raw material, high channel inventories and ingress of low-priced Chinese generics affected the performance of domestic agrochemical firms, analysts at Centrum Institutional Equities said.
The opening up of China led to increased supplies of agrochemical intermediates, which in turn, meant regular and steep fall in raw material prices. Companies carrying high-cost raw material inventory witnessed margin pressure and had to resort to raw material provisioning. In addition, weak demand from Latin America (Latam region) and North America impacted exporters, and their earnings, said Himanshu Binani, research analyst at Prabhudas Lilladher.
Earnings before interest, taxes, depreciation, and amortization (Ebitda) margins for agrochemical companies (excluding UPL Ltd) in Q4 FY23 were at 13%, slightly lower than the 13.4% in Q3, and significantly lower than the 17.1% a year earlier, according to data from Centrum Institutional Research.
UPL had seen a higher impact on operating performance due to lower realization in post-patent products with a ramp-up of supply from China, analysts said.
Analysts expect the margin pressure to continue for the agrochem sector. Substantial inflows for generics from China at lower prices may impact the portfolio of generic players in the kharif season, too, said Centrum analysts. Additionally, the likely hood of El Nino can exacerbate the environment, they added.
Binani said raw material provisioning is not yet over, and the impact will be seen during the ongoing quarter. The adverse impact of unseasonal rains on rabi crops, cyclonic activity leading to delayed monsoon, and concerns over rainfall distribution in central and western parts of India are resulting in companies taking a cautious approach in the first half of FY23, said Binani.
Even HSBC Securities and Capital Markets (India) Pvt. Ltd analysts said the outlook will remain weak until September-October, given the inventory in the system, but some production in China has started moderating.
The increase of 7-8% on average MSPs for kharif crops announced by the government for 2023-24 augurs well for India’s rural economy. Pushan Sharma, director of research at Crisil Market Intelligence and Analytics, said crops such as paddy, cotton and pulses would benefit, and better realizations and farmer income can improve the use of agrochemicals.
However, the analysts say that for now the focus is on how the monsoon season pans out looking at threat from El Nino. Sharma at Crisil too said that the prices for crops post-harvest in October remain a key monitorable and will depend on how south-west monsoon pans out. Monsoon this year is already delayed, and its spatial and temporal distribution remains a critical aspect to monitor, added Sharma.
The IGC (International Grain Council) has raised its total grain outlook upwards for the marketing year 2023-24 (July 2023-June 2024) with global grain production likely to touch a record high in marketing year 23-24.
Moreover, IGC grains and oilseeds index (trade-weighted measure of international price movements) also indicates firm pricing, said analysts at JM Financial Institutional Research. Hence, with a robust outlook for both grain production and firm pricing, JMFL analysts expect a positive outlook for innovative agrochemicals given generic agrochemicals have been facing tough competition from China.
Not surprising that PI Industries, having a large portfolio of innovative products, scaled 52-week highs on Thursday. However, others like UPL Ltd and Rallis India have seen their stock prices correct 10-25% during last six months..