Monsoon, higher prices expected to aid recovery in agrochemical stocks

The stocks of companies manufacturing agricultural chemicals have seen a rally over the last 10 days due to expectations that a favourable monsoon, higher crop prices, and government steps to boost rural economy will aid the sector. Higher demand and improved volumes are expected to help the companies liquidate excess inventory. Given the positive sentiment, the largest listed players in the sector have gained 10 per cent on aggregate since the start of the month compared to the flat performance of benchmark indices.

The prediction of a normal monsoon this year by the Indian Meteorological Department, according to Motilal Oswal Financial Services (MOFSL) and JM Financial Research, is positive for agriculture and crucial to driving rural demand. This will benefit sectors like agrochemicals, fertilisers, tractors, and fast-moving consumer goods, according to the brokerages.

While MOFSL recommends Coromandel International for the short term, expecting the operating performance of the crop protection business to improve from Q1FY25, JM Financial is positive on Chambal Fertilisers, which has a robust pipeline of 12 new products in crop protection chemicals for FY25. Additionally, strong growth is expected in the sunrise category of biologicals, focusing on soil health and sustainability, say Nirav Vora and Sushma Shetty of the brokerage.

In addition to the multiple tailwinds, including the monsoon, government measures to boost the rural economy could improve sentiment in the agriculture sector. Among the first steps taken by the new government in its third term was the release of the 17th tranche of the PM Kisan Nidhi. The government has released Rs 20,000 crore under the scheme, which offers Rs 6,000 to farmers annually and is expected to benefit 9.3 crore farmers.

Nuvama Research expects the domestic agri-input industry to gain from quicker channel inventory liquidation and increased demand aided by a potentially favourable monsoon. Rohan Gupta and Rohan Ohri of the brokerage, however, believe that fertiliser companies are likely to encounter uncertainty in the near term due to lower subsidies and high raw material prices.

What should support sentiment is the crop price trajectory, which has started showing improvement year-on-year (Y-o-Y). The brokerage expects domestic agrochemical majors to continue to turn in strong growth and has retained a buy rating on Dhanuka Agritech. While it has recently upgraded Sharda Cropchem to buy on the back of a revival in margin, it maintains a hold rating on Coromandel.

While there are encouraging signs, most brokerages believe that the recovery could be back-ended. Rohit Nagraj and Kunal Pai of Centrum Research expect companies in the agrochemicals space to witness challenging conditions in the first half of FY25 and expect a recovery thereafter. While capacity additions in China have led to pricing pressures, they expect generics prices to have bottomed out and are likely to remain stable for a couple of quarters, after which some uptick is expected.

Furthermore, even as lower exports demand and destocking continue in global markets, inventory will get liquidated over time at both the consumer and producer levels.