Why agrochemicals companies are set for tough times ahead

fertilizer company

Due to rising raw material costs and a market inventory build-up, the Indian agrochemicals sector has had a challenging FY23 thus far. These variables had a negative impact on margins and sales growth, especially in the December quarter (Q3FY23). For the majority of businesses, volume growth remained subdued while revenue growth was mostly driven by prices.

In light of this, domestic agrochemicals companies’ stock prices have dropped 10% to 15% over the past year.

But during the past six months, raw material prices have been declining, giving businesses in this industry some relief. Experts predict that businesses like UPL Ltd, Rallis India Ltd, Dhanuka Agritech Ltd, Bayer Cropscience Ltd, and Sumitomo Chemical India Ltd would have successful fourth fiscal quarters.

According to our inspections, inventory levels have started to moderate, therefore Q4FY23 is anticipated to be strong, according to Prathamesh Sawant, research analyst at Axis Securities. Sales are made in advance based on the previous season’s sowing. Yet, he continued, the forecast for FY24 remains uncertain.

Monsoon rainfall and the pricing of kharif crops will be important variables for the domestic agrochemical business in FY24. Keeping inventory under control will aid volume growth moving forward, but it must be carefully controlled. This is due to the possibility that any planting delays may generate an increase in inventory.

Positively, raw material prices are anticipated to stay low once the Chinese market reopens following the closure.

Moreover, exports may be profitable in the upcoming quarters. According to comments from international corporations, the demand in the worldwide market is still strong. While some inventories are building up, the situation isn’t worrying (at least not yet), according to Prabhudas Lilladher analyst Himanshu Binani.

Yet, for the past six months, crop prices on the export market have been declining. According to a research from Kotak Institutional Equities dated March 23, “the banking crisis currently playing out in the US and Europe could further increase pressure on end-demand.”

Keep in mind that business practises and demand and supply dynamics differ from company to firm. The aforementioned elements would be crucial in defining investor mood but for a re-rating in the shares of agrochemical businesses. According to Sawant, “Re-rating of stocks hinges on the comments on Q4 and macro-conditions in the next quarters.

Although price-led growth seems to have been successful for agrochemical firms, analysts anticipate this to slow in FY24. Price increases drove industry growth in FY23, while Prashant Biyani, vice president of institutional equity at Elara Capital, asserts that “growth in FY24 is projected to be driven by volumes.” A decrease in the cost of raw materials is anticipated to result in lower costs, he noted.

The government’s initiatives to reduce subsidies will also have an impact on the fertiliser business in the upcoming quarters. According to the Kotak research, “the Indian fertiliser business faces a hard future, with the government considering different ways to cut usage, including pushing nano-fertilizers and piloting a scheme (in seven districts) to cap sales of subsidised fertilisers.”