Agrichem exporters may harvest gains better than India-focused players

Higher demand and rising prices likely to help firms like UPL and PI offset input cost pressure

Listed crop protection or agrochemical majors are expected to be the big beneficiaries of the rise in agriculture commodity prices. Their gains are backed by favourable conditions in both Indian and global markets. While revenue growth is expected to be strong, margins can remain stable as companies pass on the higher input costs to customers.

In the domestic market, prospects are driven by a healthy rabi season and expectations of a normal monsoon. Rohan Gupta and Bharat Gupta of Edelweiss Research say: “Despite erratic and non-uniform rains, the monsoon has remained normal for the third consecutive year. We believe that rabi prospects remain bright. Better crop prices, given higher procurement targets, and good reservoir levels have been the key driving factors in the ongoing rabi season.” Weather forecaster Skymet expects a normal monsoon this year with rains expected to be 96-104 per cent of the long-term average. Water reservoir levels, too, are higher than last year and the decadal average.

The surge in crop prices in both domestic and international markets shall remain a trigger. While maize, soybean, and cotton are costlier by 39-65 per cent, wheat prices have gained 14 per cent over the past year. In international markets, wheat prices have risen to a 14-year-high of more than $400 a tonne as shipments from Russia and Ukraine remain disrupted, following the ongoing crisis. Higher prices in major crops are expected to improve farm incomes and cash flows of farmers.

This is positive for agrochemical companies and can help them pass on the input cost pressure and maintain their margins.

While higher prices are positive for all companies, analysts believe that agrochemical exporters will benefit more. Ritesh Gupta and Prasenjit Bhuiya of Kotak Institutional Equities say: “The current positive global agri-cycle is likely to benefit exporters and contract manufacturers. In contrast, domestic agrichem players may see margin pressure due to increase in raw material costs and pressure on farmer profitability.”

The brokerage has increased the operating profit estimates of UPL and PI Industries (PI) for FY23-24 by 2 per cent each. While UPL is expected to benefit from the current situation and gain market share, PI’s profit revision is due to the positive commentary from its global customers. The key trigger for UPL is gross debt reduction, with the brokerage expecting the company to report a $400-million decline in it in FY22. While the brokerage has increased the target prices for both to reflect the revision in estimates, it has a “sell” rating on the two stocks as they are already factoring in the positive.

In the near term, the focus of the Street will be on the March quarter results. Commenting on the performance of the agriculture input makers, Deepak Chitroda and Surya Patra of PhillipCapital (India) say that sales shall grow by 23 per cent YoY, supported by export demand and higher realisation. Exporters should see a bigger increase in prices compared to volumes and this could enable them to pass on the higher costs, they add.

Most brokerages expect India-focused companies to post subdued Q4 growth. The reasons, according to Himanshu Binani of Prabhudas Lilladher Research, are a seasonally lean quarter for the domestic players, erratic weather conditions, particularly in south India, and the third wave of Covid-19 limiting the movement of goods and people. He expects export-oriented companies, such as UPL, Sharda Cropchem, PI Industries and Sumitomo Chemical, to lead the sectoral revenue/profit growth charts in the quarter. 

While operating profit is expected to see an uptick in the range of 9-19 per cent YoY, the margin for the sector can be flat or slightly negative due to higher raw material costs.

The favourable trend for exporters is also reflected in the listed stocks. The stock of pure-play agrochemical exports company Sharda Cropchem is up 29 per cent over the past month (it has more than doubled over the last three months), while Dhanuka Agritech is up 5 per cent over the past month and flattish over the three-month period.

Given that most crop protection majors are expected to see earnings growth upwards of 20 per cent over the FY22-24 period on the back of multiple tailwinds, investors could consider them on dips.