Agrochemical players in a sweet spot

Coromandel International, UPL, Dhanuka and Monsanto offer reasonable upside

After a muted first half in FY18, on account of goods and services tax (GST)-related inventory adjustments and weak international demand, agrochemicals companies are back on the Street’s radar. It reflected in the recent rally in stocks such as Rallis and Coromondel International. Going ahead, brokerages expect improving volume and revenue growth on the back of successive good monsoons, higher minimum support prices, and policy support, which will boost farm incomes. 

From the various segments within this space, fertiliser players will be among the key beneficiaries, on the back of recent policy measures, which includes the payment of subsidy dues to fertiliser companies for FY17, to the tune of Rs 10,000 crore. Further with the government set to roll out direct benefit transfer (DBT) scheme for fertilisers (direct transfer of subsidy to accounts of farmers); the subsidy issues is being tackled swiftly. “As the fertiliser sector starts to get liberalised, and manufacturers start getting subsidy payments immediately, it would act as an incentive to improve supply,” say analysts at Credit Suisse. This comes at a time, when the Chinese are withdrawing from the export markets, creating an opportunity for Indian companies, they add. Given the structural changes, Credit Suisse finds value in Coromandel International and GSFC.

Coromandel International, besides fertilisers, will also continue to benefit from its growing agrochemical portfolio. Higher share of the non-fertiliser business will improve firm-wide margin and return ratios. Its fertiliser segment profitability (62 per cent of total operating profits) is expected to grow at 12 per cent annually till FY20, led by better capacity utilisations, according to analysts at Axis Capital.

In the agrochemical segment, given the bright outlook for rabi crops, sentiments remain upbeat. Elara Capital expects sector growth of 8-10 per cent in FY18. The brokerage believes UPL, with a target price of Rs 929, and Rallis India, which has a target price of Rs 260, will outperform peers, given their better product portfolio, across segments and geographies.

Among the top 10 agrochemical stocks by market capitalisation, the most favoured pick of brokerages is UPL given its strong prospects (both international and in India). 

The consensus target price of Rs 970 translates into a 33 per cent upside for the stock from the current levels. There were some disappointments on the export front, as growth during the first half was lower due to muted Latin America business and, more importantly, currency headwinds. Since international business is more than 60 per cent of UPL’s overall revenue, the unfavourable currency movement in the first half meant analysts had lowered their growth projections from 12-13 per cent to 8-10 per cent now. However, going ahead, analysts estimate significant upside in earnings in FY19. This is on the back of company’s strong portfolio of agrochemicals and seed (strengthened by acquisition of Advanta portfolio) and tie-up with Bayer in Brazil, which will improve its fungicide portfolio. In the domestic arena, rabi prospects have improved after late rains, especially in southern states.

 

Among other players, Monsanto India also remains a key pick of analysts, with about 12-15 per cent upside seen from the current levels for the multinational company. The growth is expected to be driven by its innovative product portfolio, new launches in the corn segment, and  herbicides, one of the fastest growing sub-segments within the agrochemical space.

Dhanuka Agritech, PI Industries and Rallis India are among other picks though the last two are trading at rich valuations. For Dhanuka, the five product launches in the first half of FY18 in the insecticides, fungicides and herbicides segments are likely to provide impetus to growth. Its herbicide Sempro could see high demand in the sugar cane season ahead. Consensus target price indicates a 20 per cent upside for the stock from the current levels.