India: weak monsoon raises the risk of earnings estimates cuts for agrochemical firms

Date:09-29-2017

As the summer crop (kharif) season draws to a close, more proof is emerging that the season has been anything but strong.

Antique Stock Broking Ltd’s interactions with agrochemical dealers indicate that uneven rains have impacted the use of agrochemicals. “Demand has been below par. The industry is likely to grow at mid-single digit in H1FY18,” the brokerage firm said in a note, warning that consensus earnings estimates of domestic agrochemical companies are likely to see downward revisions.

As pointed out earlier, the season had started on a positive note. But the implementation of the goods and services tax (GST) and weather-related disruptions hit product offtake. For example, Dhanuka Agritech Ltd expects the domestic industry to grow in single digits during the first half of the current fiscal year, Antique Stock Broking said in another note.

Another company, Insecticides (India) Ltd, said earlier this month that the current season is not as strong as expected.

If indeed the industry growth is in single digits in the first half of the current fiscal year, then we can see moderation of earnings estimates.

To be sure, as Ritesh Gupta, research analyst and vice- president (institutional equities) at Ambit Capital Pvt. Ltd said that the current quarter (July-September or Q2) will be better than the June quarter (Q1). Product offtake in April-June this year was impacted by inventory liquidation ahead of the implementation of GST. So, the second quarter can certainly be better. But the question is whether it will make up for the sluggishness in the June quarter. “Q2 will be better than Q1 but nowhere close to normal,” added Gupta.

It remains to be seen if the Street will be happy with single-digit growth rates. Fiscal year Q2 is generally a strong quarter for agricultural inputs providers. If the industry lags in this quarter, then it can have a bearing on the full-year growth rates as the forthcoming winter crops season (rabi) , which is mostly river-fed, is not as big as the summer crop season.

“To give perspective, historically the industry has grown at 12-13% CAGR (compound annual growth rate). Compared to that, a 6-7% growth is not really good especially considering that the agrochemical industry has been more or less flat over the last three years. We expect full year growth to be ~8-9% for the industry,” added Gupta.

According to Antique Stock Broking, Dhanuka Agritech would revisit its current fiscal year revenue growth guidance (earlier +15%) after monitoring the progress of rainfall in September and reservoir levels.

Note that the shares of leading agrochemical companies—Rallis India Ltd, Bayer CropScience Ltd and Dhanuka Agritech—have already seen a substantial correction over the last three months. The current quarter’s results and management commentary will validate the accuracy of the Street’s reading of the situation.