India:Acceleration in sales growth expected for Agro Chemicals

Agrochemical Industry is showing initial signs of recovery post severe pressures witnessed in the past 3 years mainly due to adverse timing & spatial distribution of rainfall, lower than expected pest incidence and short supply & increase in price of raw materials.

We expect better days ahead with acceleration in sales growth and profits led by
1) expected increase in global agro chemical industry post consolidation of past 3 years
2) rising exports (14.4% growth in volume @ 2.5 lakh MT and 28.1% growth in value @ US$ 1.7 billion YTDFY19) enabled by INR depreciation and cost competitiveness of domestic industry
3) Industry showing pricing power by passing on input cost increase and
4) Structural rise pest infestation due to global warming (Number of weeds up 86% between 2010-2016).

Although we don’t rule out growth pangs for another 3-6 months, worst seems to be over for the agrochemical industry. We initiate coverage on the agrochemical sector. Insecticides India (INST) is our top pick with 57% upside; UPLL (Buy) and PI (Accumulate) are structural plays. Sharda Cropchem (SHCR) and Dhanuka Agritech (DAGRI) offers decent upside, but SHCR is sensitive to the raw material supply situation in China and DAGRI’s fortunes are dependent fully on the domestic market. BYRCS remains a structural pick, although returns might be back ended.

The structural growth story of the Indian agrochemicals industry is intact and is driven by both domestic and export business growth. Rise in labour cost (7.2% CAGR between FY14-17), scope for increasing yields (potential to increase framers profit by 12-27%), competitive manufacturing cost and US$ 3 bn worth of agrochemicals going off-patent globally (26 molecules going off-patent between 2017-2020) are the key growth drivers for the industry.