Indian agri tailwinds aid input firms but the valuations look  pricey

-  Demand for phosphatic and nutrient-based fertilizers meant healthier financials of fertilizer firms

-  Increases in soy and corn acreage kept Latin American demand firm, and would continue driving more purchases of agrochemicals

It seems like 2021 may be a blessed year for agri-input firms. But several stocks have already clocked good gains in 2020, and the high base this year could weigh on growth rates.

Some of the factors that have aided the sector’s performance could continue. Crop seasons have been good. Rising farmer incomes, too, ensured greater demand for seeds, crop protection chemicals and fertilizers. That helped increase agrochemical production 11.4% in H1FY21. Good rains drove key domestic agrochemicals companies’ revenue growth to 16% on average.

“The outlook for the ongoing rabi season is encouraging, and fertilizer and agrochemicals manufacturers would report healthy performances in H2 FY21," said Motilal Oswal Financial Services Ltd’s analysts in a client note.

Demand for phosphatic and nutrient-based fertilizers meant healthier financials of fertilizer firms. Favourable conditions may keep domestic demand for agrochemicals and fertilizers high, say experts. Good soil moisture and adequate water levels in reservoirs boosted prospects of winter crops. Acreage is also set to improve. Besides, bright prospects of key agrochemicals exporters such as PI Industries Ltd also helped. After logistical hiccups initially in FY21, exports have been good. Exports, primarily directed towards Brazil, the US, Vietnam, Bangladesh, Australia, Costa Rica, France and Indonesia, grew 13.4% H1, suggests Care Ratings data.

Increases in soy and corn acreage kept Latin American demand firm, and would continue driving more purchases of agrochemicals. Favourable weather patterns ensure strong US demand, too. Besides, easing trade tensions with China reduced concerns and better prices of grain in the US is likely to remain favourable for agri-input firms. Demand from Europe has been largely unaffected even after the second covid-19 wave, though one needs to watch the situation.

Even so, agri-input stocks’ valuations reflect much of the better market conditions. Stocks such as PI Industries, Rallis India Ltd and Dhanuka Agritech Ltd have gained 56-86% in the past year.

Note even with the promising outlook overall, agri prospects hinge on continuing favourable climatic conditions such as good monsoons. Further, the high base of last year may also weigh on the upside.