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Analysts see agrochemicals in 2009 qrcode

Jan. 7, 2009

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Jan. 7, 2009
Martin Taylor, chairman of Syngenta AG had said, “These rising commodity prices are a greater incentive for farmers around the globe to protect their crops as effectively as possible against diseases and pests and to optimise their crop yields through the use of modern technologies, crop protection products and seeds,” while he was addressing a meeting in Basel.

Almost a year later, echoes of this sentiment can be found closer home, with equity analysts predicting a bright outlook for the agro-chem industry in 2009. At a time when the rest of India Inc would be wrestling with earnings pressure, growth prospects for this sector are looking up. India is now recognised as an important source for supply of generic products and a net exporter of agrochemicals.

“The outlook for producers is much better, particularly given the increase in consumption of agrochemical products. Input costs are also down on account of crude prices coming off sharply. Given better realisation for their crops, producers are also well-positioned to pass on higher prices to farmers. With crude prices coming off, effective subsidy in urea and other fertilizers will come down substantially, thereby reducing government’s subsidy burden,” said the head of a domestic brokerage.

An assured offtake of farm produce has led to another positive development in the industry that farmers have started investing in high-tech and quality seeds and agrochemicals. This was unlike earlier occasions when use of spurious products would mar production. “Food scarcity is a big issue today. If you look at the Indian market, minimum prices of all food articles have been increased by almost 30% this year by the government.?This has resulted in more disposable income with farmers, which, in turn, has seen a corresponding increase in productivity. It is a definite positive,” says Ajay Parmar, head-research and institutional sales at Emkay Share and Stock Brokers.

Low prices of farm produce in the past resulted in static output in agrochemical industry. However, in 2007, a 10% increase in volume globally changed the supply glut to shortage of agrochemicals and consequent increase in their prices.

Analysts tracking this sector believe prosperity and resultant increase in purchasing power of people in China and India led to a substantial increase in consumption of food products, both in quantity and quality. This is one of the factors responsible for food shortage globally. Hence, prices for agricultural commodities are expected to remain high in light of continuing strong demand for food, energy and feed plants and low inventories worldwide, resulting in more intensive crop production and expanded acreages.

“Despite slowdown, growth in the agriculture sector is expected to be better than last year. We are looking at a 4% growth for this year, which is quite healthy. Going forward, the number will only go up,” said the head-research of a leading domestic brokerage. Analysts maintain that companies like Bayer Crop Science, Monsanto, Rallis India, United Phosphorous, etc. are poised to tap into the upcurve in this industry.

On Monday, the stock price of Bayer CropScience was up by almost 12% at Rs 249.10 on the BSE, while Rallis India ended 4% higher at Rs 355.50 and United Phosphorous at Rs 118.50, up 2.46% on the BSE.

“The rural story is something we are bullish on. We believe companies with a rural exposure will prove to be far more resilient to overall downfall in the market,” says Amar Ambani, VP-research, India Infoline.

Analysts recommend buying into the stock of Rallis India with a long term view. Batlivala & Karani in its October 2008 result update had revised its earnings estimate for the company upwards by 27% for FY09 E(estimated) and 28% for FY10E to factor in higher than expected margin expansion.

Backgroud:
Martin Taylor, chairman, Syngenta AG, had in April 2008 credited his company’s outstanding performance to the worldwide rise in demand for agricultural products, which found reflection in unusually high price increases.

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