Correction turns spotlight on agricultural stocks

Investors can consider firms with strong growth drivers

Share prices of agriculture input companies have seen some correction due to a slowdown in the monsoon during August, as well as the goods and services tax (GST)-related impact on the June quarter performance. 

Since the markets were factoring in a strong monsoon, reports of below-normal rain in many parts and, consequently, crop area being affected during August hurt sentiment. But, the monsoon is again improving. 

A Monday’s note by Morgan Stanley says rainfall deficit remained at five per cent for the second week, but the India Meteorological Department (IMD) forecasts rainfall activity to improve in the next week. While the latest news is positive, experts recommend that investors be selective.

Although the long-term outlook for the agriculture sector looks good in light of the government’s initiatives on doubling farmer income, increasing irrigation penetration, crop insurance and diversity, etc, Sarabjit Kour Nangra at Angel Broking points out that entering at the right valuation is important as dividend payouts are typically small in case of this capital-intensive business. 

The recent correction, thus, opens up an opportunity for long-term investors. 

Himanshu Nayyar at Systematix Shares says valuations, which had become expensive, have started looking decent and will become attractive if some more correction takes place. His preferred picks include Rallis India and PI Industries. Analysts as Edelweiss prefer companies with manufacturing capabilities versus formulators. Their picks include UPL, PI Industries (post the 25 per cent fall from peak), Coromandel International and Jain Irrigation.

UPL’s attraction stems from its geographical diversification, line-up of product launches in India and Latin America, and its guidance of 12-15 per cent revenue growth and 50-75 basis point margin expansion for FY18. Moreover, it is also seeing debt reduction. The caveat is that of possible big-ticket acquisition, say analysts, which if it materialises could stretch its balance sheet again. 

Likewise, PI Industries, which had seen a sharp correction in its share price due to a key product becoming generic and impact of GST-led destocking, is also worth considering. An order book of $1 billion for its custom synthesis business provides growth visibility, say analysts. Besides, the GST impact is behind and with most negatives priced in the stock, the risk-reward equation is favourable. Analysts at HDFC Securities h ave a target price of Rs 950, while Emkay’s is at Rs 998 for a stock trading at Rs 719 levels.

Fertiliser companies, in contrast to agrochemical firms, had seen a strong June quarter. Improved acreage and higher sowing led to good volume growth, while lower input costs boosted profit margins. Industry-wide fertiliser inventories have declined by 30-40 per cent from March 2017 levels, which augurs well for volumes and margins, highlight analysts at Axis Capital. 

Coromandel International, also a preferred pick of analysts, had guided for operating profit margin of Rs 2,000-2,400 a tonne (Rs 2,000 earlier) on self-produced fertilisers, led by higher utilisation and expansion of PhosAcid capacity. It is due to these reasons the stock hasn’t fallen much.