Delayed monsoon rainfall to adversely impact agri input companies

Fertilizers, seeds and agrochemicals and other segments to cumulatively yield single-digit growth

A nearly three-week-long delay in the onset of monsoon this year is likely to hit the margins of agriculture input companies. Their growth could be limited to high single digits, said analysts and experts. The drought in western and southern states has forced farmers and agriculture businesses to alter their strategy. Farmers are testing out seeds, fertilisers and other chemicals over small areas before trying out large farms. Agri input companies are trying to attract them with extended credit and buyback.

“The weak monsoon has deferred crop sowing, and this might arrest growth of the domestic agrochemical segment to a single digit,” said Rohan Gupta, analyst with Edelweiss Securities.

He added a delay in sowing is likely to result in contraction for the fertiliser segment. “Margins of agrochemical and fertiliser companies are expected to be stable thanks to normalisation of raw material prices,” Gupta added.

Companies with export business, however, are expecting to compensate the decline in sales in one geography with an upsurge elsewhere. UPL, Sharda Cropchem and Rallis India expect their topline growth to be 8-10 per cent, thanks to favourable conditions in Europe and Latin America. Firms are also banking on other factors to boost margins.

Farmer incomes are likely to rise thanks to recent hikes in minimum support prices and the government’s push to double farm incomes. Central and state government schemes, particularly direct income support, could drive up consumption of agri inputs. A pickup in the global agrochemical cycle and strong order books bode well for contract, research and manufacturing services (CRAMS) players such as PI Industries and SRF.

“Valuation of CRAMS players having run-up, domestic formulation companies such as Dhanuka Agritech offer a favourable risk-reward,” said Gupta.

A change in the weather could also be helpful. “Good rainfall in July till date is expected to reduce shortfall and stimulate demand for agrochemicals products,” said Pankaj Kumar, an analyst with Kotak Securities.

A large quantity of kharif and rabi crops was reported to have been damaged in Maharashtra, Andhra Pradesh and Telangana because of drought last year. 

Some major agricultural zones in Gujarat and Tamil Nadu were also affected because of the uneven distribution of rain.

To eradicate risk, therefore, farmers have started adopting modern techniques with quick shift in crop sowing which suits the climatic condition for better prosperity. 

With the sale of cotton seeds almost complete, the delayed rainfall poses threat of thrips and whitefly outbreaks.