AgroPages-India: another round of earnings cuts awaits agrochemical companies-Agricultural news

As the monsoon season draws to an end, a pall of gloom is settling on agrochemical firms. These companies, which faced subdued product off-takes in the April-June period, are preparing to report another quarter of weak performance.

Low rainfall and drought-like conditions in the key markets of Andhra Pradesh, Telangana, Karnataka and Maharashtra have hit agrochemical usage. Farmers either delayed or postponed pest control measures, said Kapil Mehan, managing director of Zuari Agro Chemicals Ltd.

Poor sentiments and pressure on farm incomes are not helping either. Farmers are choosing low-cost options, and commentary from companies confirm down-trading. These factors are expected to weigh on agrochemical firms’ revenues in the September quarter.

“Our interaction with most of the retailers suggests that growth for agrochemicals is likely to be in single digits, maybe around 5-7%. Low crop prices, a deficient monsoon and pressure on farmers’ profitability have played spoilsport in 2Q again,” B&K Securities India Pvt. Ltd said in a note.

Even the companies that focus on licensed, branded or premium products are facing the heat.

In recent annual general meetings, P I Industries Ltd and Bayer CropScience Ltd were cautious about their domestic agrochemical business and gave the impression that growth in the current fiscal year can be slower than last year, analysts say.

“The company cited that it will be difficult to achieve (previous fiscal’s) 20% growth in FY16 in the segment (domestic agri-inputs),” Dolat Capital Market Pvt. Ltd said in a note.

The commentary and the channel checks can lead to another round of earnings cuts. After the June quarter results, some analysts have pared their estimates. But many refrained from broad-based cuts, hoping for clarity in the crucial September quarter. June-September is seasonally a strong period for agrochemical firms and the summer crop season proved to be a dampener.

Also, with the industry already facing two troubled crop seasons in the previous fiscal year, analysts fear that the companies will face delays in collections, which will stretch their working capital cycles and weigh on earnings.

“On the back of three weak consecutive seasons, we expect working capital cycle is likely to deteriorate going forward. Generally, retailers sell agrochemicals on credit to dealers, which is to be repaid at the end of the harvesting season. From companies’ side, firms give credit of around three months to dealers. We expect debtors’ days to stretch further,” B & K Securities added.