Fresh worries for agrochemical majors as govt considers banning 27 products

Net impact would depend on final list of chemicals to be banned and companies' move to diversify portfolio

Sentiment on the Street about agrochemical manufacturers was impacted from Tuesday’s news that the government is considering banning 27 agrochemicals. Stock prices of UPL, Coromandel International, Rallis India and Sumitomo Chemical, that fell between two and 9.6 per cent on Tuesday, with UPL witnessing the biggest fall. Although the stocks have seen some rebound on Wednesday, some overhang is likely to remain.

Analysts say the chemicals being considered for ban form a significant part of the export and domestic portfolio of many players. For instance, products such as 2, 4-Dinitrophenol, Chloropyrifos Mancozeb, Acephate, and Pendimethilin are strong portfolio contributors for UPL, Sumitomo, Coromandel, Atul Ltd and Rallis. Since the move can impact 60-70 per cent of their existing product offerings, Street concerns are bound to get aggravated. An analyst at a domestic brokerage says that as management replies and inputs are awaited, elementary assessment of the situation in his view is a negative for the entire agrochemicals pack. These insecticides have a material impact on the revenues of agrochemical companies such as Coromandel International, Dhanuka Agritech, PI Industries, Rallis and UPL, says Varshit Shah of Emkay Global.

 

Meanwhile, UPL stock has lost the most as the Street is worried that banning manufacturing can impact the company’s exports significantly.

Analysts, nevertheless feel that the government is still in process of deciding and will work on data provided by companies. Further, being a draft order it can be challenged by the industry body too. 

Experts point out that the government committee formed in 2013  to probe agro chemicals banned in other countries but being used in India has made these recommendations. At first point, the committee needs to be clear if they are looking at insecticides or herbicides. Phasing out of herbicides cannot be sudden and will take long to replace with cost effective solutions. Further, the list includes chemicals that are banned only in few countries like Mancozeb being banned only in the UAE. Besides, the move comes at a time when government is promoting 'Make in India' and thereby banning indigenously produced chemicals does not make sense. So, experts are of the view that the government committee may re-look at its stance.

Nav Bhardwaj at Anand Rathi Securities says that the steep correction in stocks was a knee-jerk reaction as the Street starts factoring in the worst-case scenario. Shah, too, feels that there is long road ahead before final ban.

 

Meanwhile, companies will also be reworking their portfolio, suggest analysts. Companies have in the past too successfully diversified their portfolios and Rallis India is one example, point out analysts. Thus, the actual impact may be lower, says Amit Khanna, Head of Research at Dolat Capital, who however believes that the overhang may remain on stock prices till clarity emerges.

This is in contrast to the firm Street sentiment seen towards agrochemical majors (till Tuesday's news came), due to expectations of good Kharif prospects and normal monsoon predictions.