Weak demand, inventory to weigh on agrochemical companies' stocks

Street remains cautious about the sector due to lower price realisations and fears about El Nino's impact on the monsoon

Headwinds, which hit the prospects of agrochemical companies in the second half of FY23, are likely to continue in the June quarter (Q1FY24). After a 4 per cent revenue growth year-on-year (y-o-y) in the March quarter which missed estimates, aggregate sales growth for the companies in the June quarter is expected to fall by 1 per cent as compared to the year-ago quarter.

Himanshu Binani, an analyst with Prabhudas Lilladher Research, expects the performance of agrochemical companies to be muted primarily due to sluggish demand in both domestic and global markets, higher carry-over inventory from last year (FY23) leaving limited room for further inventory push and provisions of high cost inventory amid falling raw material cost scenario.

The impact on the operating and net profit for the sector was sharp in the March quarter. Operating profit fell by 16 per cent y-o-y as compared to the mid-single digit estimates by analysts.

The profit print in the June quarter too could reflect the muted top line performance. Agricultural input majors are expected to report a 10 per cent decline in operating profit. Barring PI Industries, which is expected to post a 21 per cent growth in operating profit and an 80 basis points expansion in margins, the dip in margin performance for the rest of the sector varies between 60 and 300 basis points. While sales volumes are expected to be in mid-single digits, profitability has been impacted by inferior product mix and provisioning due to high cost inventory. These pressures may impact the performance for the rest of the year as well.

“In the near term there are few headwinds in the form of high channel inventory, declining input prices, higher supplies from China and uncertain weather conditions due to El Nino which are likely to result in lower sales growth with pressure on operating profitability margins in FY24,” says Hardik Shah, director at CareEdge Ratings.

While the operating profitability margin for agrochemical companies remained healthy at 14 per cent to 15 per cent in FY21 and FY22, it moderated to 13 per cent in FY23 due to the impact of the decline in input prices leading to inventory losses, especially in H2 FY23. Going ahead, in line with the likely moderation in sales growth in FY24, operating profitability is also expected to remain under pressure in the near term, says CareEdge Ratings.

Brokerages such as Prabhudas Lilladher remain cautious on the sector given delayed monsoons with looming fears of El Nino in second half of the monsoon season (mid-August to September), pressure on price realisations amid falling raw materials cost scenario (generics) and higher base of last year.

Investors thus should await volume and margin trends of the June quarter before considering stocks in the sector.