Sales growth likely to sow seeds of distress for agrochem players

Exporters could do better as domestic firms are hit by monsoon delay

Agricultural input or agrochemical (agrochem) players might post a lower-than-expected April-June quarter (first quarter, or Q1) performance in 2022-23 (FY23) due to unfavourable weather conditions and higher inventory levels. Heatwaves earlier in the quarter and lower rainfall have led to a delay in planting.

Although there has been some recovery in rainfall, what could impact planting/acreage is labour shortage.

ICRA Research highlighted that with labour moving back to urban centres due to revival in service sector demand, the availability of manpower in rural areas to till the land may be limited in calendar year 2022. Also, the availability of fertilisers is a worry, posing a downside to acreage.

In a report last month, Prashant Biyani of Elara Capital, too, had pointed out that lower pre-monsoon showers have put the farming community on a wait-and-watch mode before it starts to plant in earnest. Usually, pre-monsoon showers provide the requisite soil moisture for planting, but a diminished rainfall this time around has led to delayed sowing in several regions across the country, adds Biyani.

Himanshu Binani of Prabhudas Lilladher Research expects subpar performance of the agrochem industry in Q1FY23, with growth ranging between mid-single digits and low double digits. The brokerage cites a delayed start to the southwest monsoon (sowing delay by 15-20 days) and higher placements by the industry during the fourth quarter of 2021-22 (FY22), coupled with slower on-ground activity, causing delayed liquidation in Q1FY23.

Elevated channel inventory in the insecticide category is another factor expected to peg back growth.   

While realisations on the back of price hikes have been impressive, volumes have been impacted by lower offtake. Within the sector, companies with a higher share of exports are expected to benefit from elevated crop prices in the international markets.

PI Industries and Sumitomo Chemical Co. are expected to post the highest year-on-year sales growth of 24-25 per cent.

Domestic-focused players like Dhanuka Agritech, Bayer CropScience, and Rallis India could trail the leaders, registering growth ranging between 8 per cent and 12 per cent.  

The muted performance by agrochem majors comes after they had posted a strong showing in the January-March quarter (fourth quarter, or Q4) of FY22. This was led by price hikes and higher volumes amid rising crop prices in India and the global markets.

For companies under its coverage, Sharekhan Research had reported an aggregate revenue growth of 27 per cent and margin improvement of 42 basis points in Q4FY22. The results in the previous quarter were better than estimates as some brokerages had expected a decline over the year-ago period and a slight cost pressure due to higher input and logistical costs.

Among the top five agrochem companies by market capitalisation, Sumitomo Chemical is the top pick of most brokerages. While the stock has gained about 14 per cent in the last 10 trading sessions, target prices in the Rs 507-540 range will translate into gains of 8-14 per cent from the current market price. Investors can consider it on dips.