Agrichemical exporters expected to clock better growth than domestic peers

Brokerages have a mixed outlook on margin trajectory for the sector

Near-term challenges for domestic agrochemical companies could see them underperforming compared to exporters. While higher demand and currency gains should aid export growth, inventory destocking could hit their domestic peers on margins.

Brokerage Prabhudas Lilladher Research believes that export-oriented players such as PI Industries, Sumitomo Chemicals and UPL are better placed than pure play domestic players like Dhanuka Agritech and Bayer CropScience in the near term.

“Near-term challenges pertaining to provisions for high cost inventory amid a falling raw material cost scenario coupled with higher sales return from kharif season and pricing pressure in the generic segment will likely weigh on margins for domestic players,” says Himanshu Binani of the brokerage.

The brokerage believes that channel inventory remains high for the insecticides category, caused by higher carryover of last year and lower product liquidation in kharif season due to uneven rainfall.

While there are challenges, Nirmal Bang Research expects the Indian crop protection chemical space to bounce back in the second half of FY23 on the back of robust growth in area under crops, the decline in chemical prices as well as container rates. Key freight indices are down 77-90 per cent as per the latest trends. This, according to Ramesh Sankaranarayanan of the brokerage, is likely to offset the headwinds posed by carryover of higher cost inventory and the muted pre-season booking of pesticides.

Growth triggers for the domestic space include a production-linked incentive scheme for agrichemicals and concessions related to tariff restructuring to support value added crop protection chemicals. The top picks for Nirmal Bang Research are PI Industries, Sumitomo and UPL. In addition, it is betting on Coromandel International as a value buy with potential upside from new launches and a Rs 100 crore multi-product plant.

The overall sector is expected growth of 15-17 per cent in FY23, and exporters within the space could grow 500 basis points higher. “Export revenue is seen rising 18-20 per cent this fiscal, with the US dollar appreciating about 9 per cent so far and volume growing as global players continue to de-risk their China dependency,” says Poonam Upadhyay, director of CRISIL Ratings.

CRISIL expects exports to grow 12-14 per cent next fiscal (FY24) as players keep up capital expenditure with an eye on molecules worth $4 billion going off-patent over the next two years. Exports are expected to remain the major contributor to the agrochemical sector, accounting for 53 per cent of the total revenue.

Prabhudas Lilladher Research, too, expects exporters to perform well due to robust global demand, remunerative crop prices and better realizations led by price hikes in the recent past.

While most analysts are positive on exports, Kotak Institutional Equities believes that the segment may have hit an air pocket due to customers amassing stock last year. The stocking happened amid supply chain uncertainties and lower-than-expected demand from Europe and the US. These, in turn, have reportedly led to high channel inventories in certain important regions, including Europe, North America and Latin America. Consequently, ordering from Indian suppliers appears to have slowed for a broad range of products, they add. Despite the near term turbulence, the brokerage expects the calendar year 2023 outlook to remain reasonably healthy, given remunerative crop prices.