Indian Agrochem firms on recovery path

Date:11-03-2016

Following a normal monsoon after two years of drought, big agro chemical companies that have declared quarterly results so far — PI Industries, Rallis and Bayer CropScience — have shown improvement in revenue and profit.

September is an important quarter for these companies, as demand is based on monsoon projections and progress. Will the growth continue?

Anuj Sethi, senior director, CRISIL Ratings, said: “Recovery in revenue growth will be gradual, with domestic demand outpacing exports. Further, softer input prices are expected to lead to steady operating profitability and better cash flows. In the absence of significant capital spending, credit metrics for agro chemical makers are expected to improve over the medium term, but working capital challenges would continue. Easier credit terms to support domestic offtake, and the inherent long credit cycles abroad, particularly Latin America, will counterpoise the benefits of inventory pruning.”

For Raliis, Bayer and P I, these results were the best since the earlier five, shows data compiled by BS Research. CRISIL has said: “High channel inventory and tepid global recovery will constrain a rapid rebound in near-term revenue growth, and high receivables would spawn working capital challenges.”

Rabi demand would be crucial for the domestic market. With kharif sowing improving and minimum support prices increasing, domestic demand growth for agro chemicals will swing back to double digits after two years. However, according to CRISIL’s analysis, “Overall revenue growth will be stuck in the five to seven per cent range this fiscal, only marginally higher than the past two years, with inventory pile-up in the domestic and global markets, muted global demand and soft realisations.”

Inventories had risen sharply in the past two years, a lot of it piped to distribution channels. As a result, the current financial year started with a glut, which dampened revenue growth prospects at a time when demand is set to strengthen. “Many distributors purchased agro chemicals but agricultural prospects were badly hit due to unseasonal rain and hailstorm last year, resulting in pipeline inventories,” said an industry executive. Demand growth is expected to remain low abroad, particularly in America and Europe. The Asia-Pacific and Latin America are recovering faster. Exports, 40-45 per cent of sales of major domestic agro chemical makers, face not only a demand challenge but currency volatility. Lower demand growth abroad is resulting in consolidation in major agro chemical and seed companies. In the past 12 months, four major merger deals were announced, all involving big names in the segment.

Consequently, “we see revenue growth reverting to the historic levels of 13-14 per cent only over the medium to long term, subject to a normal monsoon and steady demand recovery abroad”, said CRISIL. It believes India will continue to see more of licensing collaborations and distribution tie-ups, with an occasional inbound acquisition. Outbound transactions are likely to remain modest in size, mainly for registrations and market access.

CRISIL Ratings’ credit ratio (upgrades to downgrades) has increased above one, meaning upgrades outnumber downgrades for its portfolio of 33 agro chemical companies, in the first half of this financial year.

Manish Mahawa of Religare Institutional Research is not so bullish on investing in these companies. He said: “Our interactions with agro chemical dealers and players indicate rainfall was normal across India barring the southern region but agrochem demand has been below par”. The industry is likely to grow 12-15 per cent in the September quarter over a year before versus the 18-20 per cent earlier anticipated, he adds.

However, adequate reservoir and soil moisture content levels bode well for the coming rabi season. So, “we expect downgrades to FY17 earnings, even as rich valuations leave limited upside in agrochem stocks”.