Falling rupee comes to the aid of agrochemical exporters

The falling rupee is affecting urea producers, whose stocks are tracking the broader market’s losses. But shares of companies that derive substantial sales from exports or complex fertilizers are holding up rather well.

Barring Chambal Fertilisers and Chemicals Ltd and Gujarat State Fertilizers and Chemicals Ltd, stocks of companies that have a strong non-urea product portfolio—Coromandel International Ltd and Deepak Fertilisers and Petrochemicals Corp. Ltd—are showing some resilience.

Since the beginning of August, Coromandel International gained as much as 15%. Although the BSE 500 index in the same period lost 7%, Deepak Fertilisers, which derives more than one-third of its sales from complex fertilizers, lost only 1%.

The outperformance can be explained by the improving business outlook. Healthy rains have boosted crop sowing, resulting in greater consumption of fertilizers. Sales of domestically manufactured fertilizers grew by about 13% in July. Also aiding the complex fertilizer manufacturers are easing raw material prices in the international markets.

As pointed out earlier in this column, prices of key raw materials have fallen in the range of 13-40% last month. All companies depend on imported raw materials to manufacture complex fertilizers. With prices easing, many analysts expect volumes to pick up in coming months. Muriate of potash sales, for instance, rose by 20% in July.

That said, the falling rupee is playing spoilsport and the outperformance in stock prices may not last long. If the rupee’s volatility continues, companies may be forced to hike prices, which in turn could weigh on sales.

The depreciating rupee, however, is providing a helping hand to firms that derive substantial sales from overseas. United Phosphorus Ltd earns more than three-fifths of its revenues from exports. PI Industries Ltd derives close to half of its sales from abroad. Similarly, international business contributes more than 30% to Rallis India Ltd’s revenues.

The falling rupee improves realizations and that is helping the stocks outperform the broader markets. These companies, too, import raw materials, but their foreign exchange earnings are far higher than the amount they spend on imports. Last fiscal, United Phosphorus and PI Industries spent less than 60% of the foreign exchange they earned. While the depreciating rupee will give a fillip to rupee earnings, the steady growth in international agriculture input markets is allowing the managements of these companies remain sanguine about future prospects.

All three companies have strong institutional business since they supply agrochemicals to commercial and innovator companies. A substantial fall in the rupee makes their products more appealing. Buoyed by the strong demand for agrochemicals in the domestic and international markets, PI Industries has revised the revenue growth guidance upwards of 20% after the first quarter results.

While the United Phosphorus management maintains the annual growth forecast of 12-15%, execution of delayed orders and better summer crop sowing is expected to help Rallis India register better operational performance.

In short, the depreciating rupee is not having a uniform effect on farm input providers.