Export deferrals accentuate revenue drop at Indian agrochemical firms

Contract manufacturing for innovators is seen as a good hedge against the seasonality of the domestic crop season for agrochemical firms. Companies get steady business and are insulated from market vagaries. But the current slowdown in global agriculture market is putting that assumption to the test.

For example, the PI Industries Ltd stock lost 12% of its value after the company reported a sharp slowdown in revenue growth, which fell from 39% a year ago to 1% last quarter. The deceleration is led by the core custom synthesis exports where revenue growth decelerated from 44% to 9%. Custom synthesis and contract manufacturing generate roughly three-fifths of PI Industries’ revenue.

The slowdown is not just confined to PI Industries. Rallis India Ltd’s revenue fell one-fifth last quarter as export orders did not materialize. Even multinational firm Bayer CropScience Ltd’s export revenue halved last quarter, points out Edelweiss Securities Ltd.

Bayer had the disadvantage of a strong base. But there is no denying that the global market for agricultural inputs is under pressure, visible in the muted performances of companies that depend on overseas markets for most of their revenues.

UPL Ltd’s revenue grew just 2% last quarter. Sharda Cropchem Ltd reported a 2.7% fall in revenue on low volumes. In the first nine months of the current fiscal year, Sharda Cropchem’s revenue dropped 3.6% while UPL’s grew 6%. During the same period last fiscal year, revenues of these companies had gone up 13% and 44%, respectively.

The story is similar at PI Industries, Rallis and Bayer. Revenue growth in the first nine months of the current fiscal year is lower than in the year-ago period. Apart from a weak domestic market, the companies are suffering from a dearth of export orders.

PI Industries, whose custom synthesis order book has increased, saw its customers defer procurements on tight market conditions and high channel inventory.
Overseas customers of Rallis also deferred purchases due to high inventories and low crop prices.

According to the agrochemical firms, the inventory overhang is easing. Also, as new plants come on stream and new products get commercialized, the companies expect the export revenues to rebound. But not everybody is optimistic. Some analysts doubt if the recovery can happen this quick, especially considering the commodities-led pricing pressure the market is seeing right now.

“The soft agrochemical industry environment globally is unlikely to improve soon,” IIFL Institutional Equities said in a note.