Outlook for India-focused agri input firms worsens post monsoon forecast

After a weak rabi season and high inventories impacting March quarter, below normal monsoon means the June quarter too will be weak

The outlook for India-focused agri-input companies has worsened after the monsoon predictions earlier this week. 
 

Skymet Weather Services on Wednesday predicted this year’s monsoon at 93 per cent of the long period average (LPA), impacted by a devolving El Nino. Rainfall is expected to be deficient in June and July, which means the June quarter is likely to be weak for agri-input firms. 

However, a grey area is how the monsoon behaves thereafter. Analysts say that rainfall is expected to pick up during August and September, and may compensate for the deficient rain in June and July. Therefore, they say, the overall demand for agriculture production and agrochemicals may not get materially impacted.

Nevertheless, they will be watching the progress of the monsoon. In this backdrop, and looking at strong international prospects, the advice for investors is to stick with companies with sizeable exports or global exposure.

Analysts at Prabhudas Lilladher say: “We continue to remain positive on companies with sizeable exports/international business such as PI Industries and UPL, given their high revenue growth visibility as well as consistency in performance.” 
 

Though Dhanuka Agritech and Insecticides India also figure among their picks, the fortunes of these two companies completely on how the monsoon pans out in India.

The sentiment around domestic-focused agriculture  companies is also likely to be impacted by the expected weak performance in the March quarter. 

The weak rabi season and high inventory at channel partners is likely to weigh on their performance. Analysts at Edelweiss say the near-term outlook for agri-input companies remains muted on account of a weak rabi season and crop prices. Further, with the presence of higher-channel inventory in the system, they expect marginal growth of 4 per cent year-on-year (YoY) in domestic agrochemical revenues. 

The overall growth of agrochemical companies is expected to be driven primarily by PI Industries. The analysts expect a 14 per cent YoY increase in revenues for the firm, driven by a 20 per cent YoY rise in the custom synthesis and manufacturing solutions segment, which is seeing a strong order book and growth momentum. 

UPL, too, is expected to see 12 per cent YoY growth, driven by performance in Latin America despite the weak domestic performance. However, looking at government initiatives such as the Direct Income Transfer and farm loan waivers to support farmers’ income, Coromandel International remains among the top picks of analysts.