India pesticide firms expect margins to go up as capex declines

Date:06-09-2017

India pesticide makers are likely to see better sales and profit margins on the back of falling capital expenditure and expected good monsoon rains.

The industry had invested heavily in augmenting capacity but demand undershot expectation because of untimely rains and back-to-back droughts, leaving at least 40 per cent of installed capacity unutilised. Analysts now project better capacity utilisation owing to anticipated attractive demand coming from good monsoon rains and muted capacity additions till FY19.

India is the fourth largest producer of pesticides after the US, Japan and China, with FY17 sales estimated at about Rs 31,360 crore.

According to rating agency Care Ratings, the industry added 60,000-70,000 tonnes in annual capacity with a cumulative investment of Rs 1,164 crore from FY09-FY13, considered the boom period. In the drought years FY14 to FY16, capacity addition declined to around 44,000 tonnes. Between FY17 and FY19, industry players are expected to add only 2,000-2,500 tonnes in capacity at an investment of just Rs 300-350 crore.

Pradip Dave, president of Pesticides Manufacturers and Formulators Association of India, said, “We are having over 40 per cent of unutilised capacities as the demand didn’t grow as expected, coupled with bad monsoon and droughts.”

Several leading pesticide makers including Insecticides India and Dhanuka Agritech said they don’t plan to add capacity in the current situation.

However, analysts expect these companies to see an improvement in their financials with a gradual improvement in demand.

“The earnings before interest, taxation, depreciation and amortisation (EBITDA) is likely to hit 20 per cent level in the next three years, which was last seen during the boom period from FY09-FY13,” said Vidhyasagar L, associate director, Care Ratings.

According to the analyst, the sector saw EBITDA drop to 10 per cent in the following years due to capacity addition and slowdown in demand because of erratic weather. The current EBITDA margins of the sector are hovering between 15 per cent and 17 per cent. “Also, the topline is likely to improve to 10 per cent over the next three fiscals, as against 5 per cent seen during FY09-FY13 when capacities were being added,” said Vidhyasagar L.

Experts say the expected improvement in topline could also help increase the return on investment by 200-300 basis points. Further, they predict rationalisation of capacities and demand by FY19, after which the sector could see an uptick in capacity additions.

“While domestic demand was subdued during the past couple of years, exports have been increasing, which helped utilise the existing capacity. We expect this muted capacity addition to continue till FY19, as by that time the industry might see rationalisation of demand in tune with the capacities,” said Vidhyasagar L.

Rajesh Aggarwal, managing director of Insecticides India, said good monsoons and the government’s effort to boost domestic manufacturing could see capacity addition picking up after FY19.