Prabhudas Lilladher: Stable performance expected amid volatile environment for Indian agrochemical industry

Stable performance expected amid volatile environment

Prabhudas Lilladher expects agrochemical companies under its coverage to report revenue/EBITDA/PAT growth 18%/19%/16% YoY respectively primarily driven by healthy performance from export oriented players like UPL, Sharda Cropchem, PI Industries and Sumitomo Chemical. Better growth from exporters is driven by a) better weather conditions globally; b) robust agriinput demand scenario; c) remunerative crop prices globally and d) favorable currency impact. While on the domestic front, Prabhudas Lilladher expects companies to post subdued growth (mid to high single digit growth YoY) led by a) seasonally lean quarter for the domestic players; b) erratic weather conditions particularly in the Southern India; c) 3rd wave of COVID-19, limiting the movement of goods and people.

Prabhudas Lilladher’s interaction with agrochemical dealers and industry players indicate that the domestic industry is likely to witness 7-10% YoY growth during 4QFY22 primarily driven by higher prices than volumes. Despite price led growth during the quarter the pressure on the margins is likely to persist as the industry has not been able to fully pass on the inflated cost amid a rising cost scenario. Prabhudas Lilladher rates UPL, Sumitomo Chemical and Rallis India as its top pick.

Remunerative crop prices bode well for the upcoming kharif season

Geo-political tensions between Russia and Ukraine has in turn resulted into disruption in global commodities value chain leading to sharp run-up in soft commodities as well. Prabhudas Lilladher notes that, Ukraine is amongst the largest global exporters of wheat, Sunflower, barley, rapeseed and maize with a global exports market share of 10%/47%/17%/20%/14% respectively. While, Russia also has strong presence with global exports of 25%/18%/14% respectively in Sunflower, wheat and Barley. The domestic crop prices are witnessing catch-up rally with the global prices which in turn bode well for the overall farm economics ahead of the kharif season. While several weather forecasting agencies expects normal monsoon this year (96-104% of LPA) would boost rural sentiments.

Channel Checks takeaways

• Industry has taken price hike across products (effective from Nov’21 onwards to the tune of 5-7% hike across portfolio level) to mitigate inflated RM cost to farmers. Further hikes likely for the upcoming kharif season.

• Herbicide and fungicide category continues to do well (likely to benefit players like- PI Industries and UPL);

• Glyphosate prices continue with its northward trajectory (likely to benefit players like Bayer, Sumitomo Chemical).

• Prices of glyphosate technical are on higher side led by supply side constraints; while other players have stopped purchasing as it becomes unviable for them to pass on this cost quantum to farmers; hence sales are lost to that extent (major beneficiaries Bayer Crop science, Sumitomo chemicals);

• Working Capital likely to be stretched for the industry (March’22 v/s March’21) led by higher cost inventory (in form of RM inventory) and slower receivables as compared to last year.

Revenue expectation

Prabhudas Lilladher expects agrochemical companies under its coverage to post revenue growth of 18% YoY in 4QFY22. Better revenue growth is likely to be driven by healthy performance from export oriented players like UPL, Sharda Crop chem, PI Industries and Sumitomo Chemical. While, Prabhudas Lilladher expects the domestic industry to post mid-single digit growth during 4QFY22 led by abnormally higher base of last year. The export focused players like UPL and Sharda Cropchem are expected to post decent performance led by better cropping season in Europe, LATAM and NAFTA regions (aided by favorable currency impact).

EBITDA expectation

Prabhudas Lilladher expects EBITDA for its agrochemical universe to grow by 19% YoY with margins largely to remain flat (up 20bps YoY) primarily driven by price hikes in the recent past to mitigate the RM inflation. Going forward, the industry is likely to take further price hikes ahead of the kharif season as the RM prices continues to remain elevated.

Read more: https://www.dsij.in/productAttachment/premarketreports/Agro%20Chemicals%20-%20Prabhudas%20Lilladher.pdf