Weak sentiments hit agro input companies

Stocks have corrected on poor monsoon, lower expectations from the rabi season

Key stocks in the agricultural input space have hit their 52-week lows due to weak monsoon, falling commodity prices and concerns on the upcoming Rabi season. Drought conditions in Brazil and weak intermediate chemical prices, too, contributed to softer demand and realisations. Thus, it’s not surprising that Rallis, Bayer CropScience, Kaveri Seeds, and P I Industries have been trading weak in the past few days. While the players have lost 30-60 per cent of their market cap this financial year, one can expect some recovery from here on.

Analysts at Ambit say the preference for agricultural chemicals stocks over seeds continues to play out. According to them, PI Industries is the best pick in the agri-space; Dhanuka Agritech is another. The company maintained its working capital in the first half, a key improvement.

While PI Industries saw flat growth in its custom synthesis portfolio, the September 2015 quarter performance was driven by 10 per cent growth in agri-input division led by higher volumes. The company has been generating positive cash flows and has maintained the growth momentum in recent quarters. Better growth in agri-inputs than competition, product launches and the pipeline of high margin in-licensed products lead analysts at Anand Rathi to peg a 22 per cent annual earnings growth over the FY15-18 period. HSBC, too, maintains a ‘buy’ rating on the company’s strong long-term growth story.

The shift to cheaper seeds has resulted in organised seed market declining, impacting most players. Analysts at HSBC believe the sector volumes have bottomed out in FY16. They add the Kaveri Seeds scrip has dropped 60 per cent since June 2015. Most of the earnings damage is now in the stock price and despite a cut in target price from Rs 850 to Rs 775, the stock can see an 80 per cent upside from its current levels of Rs 418.

Rallis, too, has been hit by the business environment, though the company’s management remains committed to better growth than peers. Its seeds subsidiary Metahelix has seen an impressive 41 per cent annual growth over FY11-15. This could sustain, believe analysts at Ambit. They add it will remain margin-dilutive for the consolidated business. The firm is also working on a tight working capital cycle, which remains a concern. Sharda Cropchem, Insecticides India and PI have seen an increase in working capital cycle, though the PI management expect the working capital to normalise by the year end.