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Indian agrochem companies’ sales couldn’t match favourable monsoon
Oct. 11, 2016
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Dhanuka Agritech Ltd.
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IndiaIndia received good rainfall after two successive years of drought, but that hasn’t translated into a bumper September quarter for agrochemical companies.
While the season was favourable for farmers and sowing activity increased, the domestic market-focused agrochemical companies saw some slowdown due to lack of pest attacks, Sandeep Aggarwal, the chief financial officer of crop solutions major Insecticides India, told BloombergQuint in a telephonic interview. The sentiment was echoed by MK Dhanuka, the managing director of rival Dhanuka Agritech.
Agrochemicals broadly include herbicides, insecticides and fungicides. While fertilisers are used by farmers for crop nutrition and better yield, agrochemicals are used to protect crops from various pests.
Guidance Cut
Insecticides India cut its sales growth guidance to 12-15 percent for financial year 2016-17 compared to its earlier target of 18-20 percent. The lower-than-expected sales were not on account of an inventory glut, according to Aggarwal, who said existing stocks from the previous year had been exhausted by dealers in the April to June period.
Insecticides India expects volume growth of about 15 percent in the quarter ended September and the company has not taken any price hikes.
Capacity utilisation had gone up to 70 percent in the first six months of this fiscal year but is expected to remain low in the third quarter due to the planned shutdown of plants in Dahej (Gujarat) and Chopanki (Rajasthan) for maintenance.
Dhanuka Agritech witnessed a pickup in sales till August. But since then, fewer pest attacks in North India, sub-par rains in Gujarat, and floods in Bihar, UP and Madhya Pradesh, have dented sales, Dhanuka Agritech Managing Director MK Dhanuka told BloombergQuint in a telephonic interview.
Subsequently, the company lowered its sales growth guidance for the financial year to 15 percent from 20 percent earlier. The earlier target was based on the Indian Meteorological Department’s forecast that this year’s monsoons will be 106 percent of long-period average. The cumulative rainfall this monsoon season was 3 percent lower than the 50-year average, the department said in its revised estimate in late September.
The impact of lower cotton sowing this monsoon will be offset by higher acreage in pulses, Dhanuka added.
Despite the downward revision, Dhanuka Agritech and Insecticides India are expected to outperform the agrochemical industry, which is expected to grow 12 percent this year.
Margin Optimism
Insecticides India is confident of meeting its operating margin guidance of 10.5 percent. Dhanuka said it is on track to achieve its 17 percent margin guidance, but said its working capital requirement will rise by up to 10 percent due to the weaker-than-expected sales.
The contribution from Dhanuka’s Udhampur facility is expected to go up from the current 25 percent to about 33 percent over the next two years, once the expanded capacities come on-stream.
Stock Performance
Shares of agrochemical companies have outperformed the Nifty in the first six months of this fiscal year.
With a bumper September quarter looking unlikely, the outlook for the agrochemical stocks will depend on how the rabi season or the winter crop pans out.
Source: Bloomberg
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