Weak pricing offsets strong volume show of Indian agrochemical majors

By Ram Prasad Sahu

Despite volume growth in the export segment and strong demand in the domestic market, a pricing uptick is eluding Indian agrochemical companies. Most agrochemical companies missed street estimates due to multiple headwinds. Brokerages have downgraded earnings estimates for a few and expect only a gradual recovery over the next couple of quarters.

Companies with a significant share of exports were impacted more than domestic companies. Despite healthy volume growth, pricing pressure and excessive dumping from China dented profitability, says IIFL Research, with export-oriented agrochemical companies like UPL, Anupam Rasayan, and Rallis continuing to witness a challenging quarter.

Ranjit Cirumalla and Viral M Shah of the brokerage have downgraded Kaveri Seeds and Bayer CropScience on account of a subdued performance and a not-so-encouraging outlook, coupled with the steep run-up in stock prices.

The situation, according to Kotak Institutional Equities, is unlikely to improve in the near term. Abhijit Akella and Sumit Kumar of the brokerage point out that falling global farm incomes on the back of significant declines in prices of key field crops seem likely to weigh on demand for agricultural inputs in the months to come.

Prices of corn, soybeans, and wheat are now at their lowest since Covid and are down 20-30 per cent Y-o-Y. The USDA projects that US net farm income will be down 25.5 per cent Y-o-Y in 2024 to $116 billion, down sharply from $185 billion in 2022. This will likely weigh on demand for farm inputs.

The situation was markedly better in India, which has enabled domestic agrochemical companies to report strong results in Q1. The sales growth was aided by robust volumes amid increased demand. Rohan Gupta and Rohan Ohri of Nuvama Research believe that the growth has been supported by above-average rainfall across the country, which has accelerated inventory liquidation and subsequently prompted restocking. They expect this growth momentum to sustain, led by better rainfall as well as sowing activities across the country, benefiting domestic agrochemical companies. Fertiliser companies, however, have been a drag on the overall performance of domestic companies due to lower realisation and higher input prices. The brokerage is optimistic about domestic companies, and its top pick is Dhanuka Agritech.

Sharekhan Research is also positive about the domestic outlook and points out that the performance of agri-input companies rose on a sequential basis. Demand for crop protection chemicals during the Kharif season was strong, with better sowing averages due to improved monsoon conditions. However, they expect the recovery process to be slow. While domestic market sentiment is positive due to favourable rainfall forecasts, normalisation of inventory and a full recovery in demand is expected to take several more quarters. Though there are short-term hiccups, Sharekhan Research is positive on the long-term structural drivers like the China Plus One strategy and import substitution, which remain intact and would drive the expansion of India’s global market share to 7-8 per cent in the next few years from 4 per cent currently. PI Industries, Insecticides (India), and Sumitomo Chemical are its top picks.