Agriculture firms' stocks steady as farmers protest against contested laws

Stocks of agro-chemicals, fertilisers, and edible oils companies are slowing down as farmers continue their weeks-long protests in Delhi

Even as farmers camp on Delhi’s borders to protest against three laws that open up India’s tightly regulated agricultural markets, one may have presumed that their hunkering down would reflect negatively on shares of agri-input and fertiliser companies.

Though a few have seen a marginal decline since November 27, 2020 (when the protests started), many agri-linked stocks continue to outpace indices such as the Sensex and Nifty (see table).

Stock prices of 21 such companies had risen in high double- and triple-digits in the 11 months prior to the end of November. Since November, while some agro-chemicals stocks like P I Industries and Rallis have lagged behind benchmark indices, Bayer Crop Science and UPL have gained between 13 per cent and 16 per cent. Likewise, fertiliser companies Chambal Fertilis­ers, GSFC, and Fertilisers & Chemicals gained between 18 and 24 per cent since November, while Coromandel Intern­ational and GNFC lagged behind the 9 per cent gains of the Sensex and Nifty.

Gaurang Shah, head investment strategist at Geojit Financial Services, says stocks are consolidating after a sharp rally. “The agri-input sector has been outperforming the benchmark indices on the back of the government’s various initiatives under the Aatmanirbhar Bharat programme. Besides, a lower Covid-19 impact on rural India, and bumper kharif harvest aided rural income ... All these factors together contributed towards the outperformance,” he said.

Others experts concur and don’t expect protests to have a significant impact on agri stocks.

G Chokkalingam, founder and chief investment officer at Equinomics Research, says: “The on-going protests will not have much impact on the stock prices because sowing (of rabi crops) is largely over and harvest is pending. Farmers wouldn’t allow their produce to be destroyed in their farms; therefore, these protests shouldn’t worry investors.” Stocks from this theme have taken a breather as they have already played out successfully in a big way, he adds.

Taking stock

Stocks of 13 agro-chemical firms have moved between minus 20 per cent and 120 per cent on a year-to-date basis. Of this, only two have delivered negative returns, with their average return working out to 57 per cent. Likewise, returns of eight fertiliser stocks range between 3 per cent and 53 per cent; the average is 37 per cent. In comparison, the one-year gains of the Sensex and Nifty were 16 per cent and 15 per cent, respectively.

A normal monsoon helped the rabi season to start on time. Till December 4, wheat sowing was up around 1 per cent year-on-year (YoY), pulses sowing was up 3 per cent, and the sowing of gram was up 14 per cent YoY, said a CRISIL report. The sowing of the rabi crops is expected to be 2 per cent higher than in 2019 while foodgrain production is likely to be up 3 per cent YoY.

“Government support, decent profitability in the last two crop cycles for farmers, and a higher reservoir level provide the comfort that growth may be seen in the upcoming rabi acreage. Else, acreage may at least be at the same level as last year. This bodes well for fertiliser and agrochemical consumption in H2FY21,” said analysts at Motilal Oswal Financial Services in a report.

A report by Edelweiss Securities said the Bills passed to deregulate agricultural markets were “a move in the right direction” and they would help farmers in the end.

Crop prices have remained soft (excluding those of arhar and soybean) in comparison to the minimum support price (MSP) the government pays farmers. Prices of crops (bajra, maize, ragi, and jowar) across open markets/mandis have remained nearly 20 per cent below MSP, said the brokerage. The laws are likely to help farmers sell in any part of the country and reduce their dependence on mandis.

“We expect farmers to gain from improved kharif yields. Also, better MSP and higher procurement by the government are likely to enhance the liquidity position of farmers,” it said.

Earnings momentum to accelerate

Earnings momentum is likely to accelerate in the December quarter of FY21 (Q3 FY21), estimate analysts at Edelweiss Securities, who expect firms under their coverage to report 15 per cent YoY growth, driven by a good start to rabi along with a healthy cash flow position of farmers.

They expect UPL’s domestic business and PI Industries (domestic business) to log 40 per cent and 37 per cent YoY profit growth, respectively, driven by a conducive environment.

Besides, Dhanuka Agritech is likely to yield 18 per cent YoY net profit growth, while Coromandel International’s profit is estimated to grow 23 per cent. Rallis is among the few exceptions, expected to post an 8.5 per cent decline in net profit for the December quarter.