Govt policies, affordability, global warming to spur growth of agri inputs

Farm inputs such as fertilisers and pesticides are essential to the agriculture ecosystem and farmers' income, which govt wants to double by 2022

The agri input sector is likely to see significant growth, with fertilisers, pesticides and other products in this domain becoming more affordable and with government policies turning favourable. Global warming is also being seen as growth driver, as it increases the need for farm nutrients. 

The global fertiliser and pesticide market was estimated at $215 billion in 2016-17 with India’s share at about 12 per cent.

A PhillipCapital India Research report on agriculture inputs, prepared by Deepak Hasmukh Chitroda and Surya Patra, is bullish on the sector. The authors state in the report, “With visible structural growth, led by China’s environment protection clampdown and global climate change, Indian agrochemicals have great upside potential. With policy reforms very likely, Indian fertilisers companies are set for a re‐rating and are likely to surpass historical performance.” 

The Indian agri‐inputs sector has outperformed both global and Indian benchmarks over the past decade, despite headwinds such as its seasonal nature, competition from China, and government control. Specifically, agro-chemicals delivered 7x return versus BSE Mid Cap at 2.3x and global agro index at 1.5x.

Leaders in this domain, such as PI Industries and UPL, delivered 157x/6x. Indian fertilisers, under pressure due to government control and large import dependency, delivered similar returns (1.9x) as the BSE Mid Cap Index (2.3x) but outdid the global sectoral index (1x) over the last decade. Fertiliser leaders Coromandel (4.6x) and Chambal Fertiliser (2.9x) outperformed.

India is one of the largest consumers of fertilisers at 56 million tonnes a year, with government-controlled fertilisers (urea) taking up a large share of the consumption. Concerns about subsidy receivables have always put pressure on companies’ working capital. However, the government is now implementing direct benefit transfer (DBT) of subsidies, by crediting the amount in farmers accounts. With strong focus on balanced nutrient usage and efforts to increase the income of farmers, PhillipCapital sees the sector being re-rated soon.

Sameer Goel, MD & Executive Director, Coromandel International said during the last analyst call that with the positive monsoon forecast in the Southern Peninsula region in the coming months, the crop sowing and agricultural consumptions are likely to improve. Further reforms like DBT-2 focusing on soil health and balanced nutritional income support schemes, improved crop prices, irrigation projects in Coromandel's key markets will help the agriculture prospects. 

He added, “Under DBT-2, the government aims to utilise the data for real-time for balanced nutrition application. Basically, 5.4 crores soil health cards have been loaded by the government, and there's a recommendation now on the type of balanced nutrition which the farmer can get when he visits a retail outlet. And for that government has linked the farmers' soil health cards with the farmers' bazaar to provide customized nutrient application recommended for the growers. This will augur well for the company which is basically into NPK fertilizer. There's also a chance that the government will explore the feasibility of direct cash transfers to the farmers' account.” 

Farmers’ distress problem is due to high production and limited procurement. This will resolve once government schemes are fully implemented, especially DBT and irrigation, says the report. All government schemes are aimed at minimising business risks including monsoon, storage, financing, power shortage, crop damage, deteriorating soil quality, and below‐par market value, added the report. 

The fertiliser sector will be in a better place considering prospects of DBT and the aim of the government is to free companies from the working‐capital cycle over the long term. Besides, farmer spending is higher on fertilisers with its well organised and defined products, compared to pesticides, where export‐market advantages are higher, says Philips Capital. 

Pesticides provide protection from insects, weeds and other parasites, and play an important role in improving crop yields. About 30 per cent of the pesticides industry is controlled by the unorganised sector and there are many manufacturers. 

Monsoon plays an important role for consumption of pesticides and distribution of rainfall across states. Demand is largely function of pest incidence for specific crops (largely paddy and cotton). 50% of India’s total agrochemicals revenues are from exports. Therefore, the demand and supply situation in the export market plays an important role for growth.