Agri input companies post single-digit growth in Q4 on weak Rabi season

Agri input companies posted single-digit growth in the March quarter due to erratic rainfall, low water availability, and high channel inventory in the 2018 rabi sowing season.

During last year’s monsoon season, though the long period average (LPA) rainfall for the entire country was reported to be normal at 94 per cent, yet, agrarian states of Maharashtra, Gujarat, and Telangana received below-normal rainfall. Being big markets, low rainfall in these states had impacted business of agri inputs like agro chemicals, pesticides, and seeds.

Consequently, sales and Ebitda (earnings before interest, tax, depreciation and amortisation) margins of agri input companies were affected badly during the kharif sowing season, followed by a similar rabi season with a deficient north-east monsoon rainfall. Agri input companies, however, reported a cumulative growth of mere 2.5 per cent in their Ebitda in the March 2019 quarter. 

With hardly any water left for crop irrigation and human consumption in Maharashtra and other agrarian states, farmers and agronomists pin hopes on the normal rainfall forecast by the Indian Meteorological Department (IMD) for the monsoon season 2019.

“Erratic rainfall, low water availability, and high channel inventory impacted growth in the last rabi season with a majority of domestic agri-input players posting low single digit growth. A weak market is casting clouds over growth prospects of fertiliser players with the risk of high-cost inventory in the near term. Favourable risk reward, however, makes domestic agrochemical players like Dhanuka Agritech and Rallis India a preferred investors’ choice,” said Rohan Gupta, an analyst with Edelweiss Securities. Aggregate domestic revenue of major companies in the agrochemical segment declined by 7 per cent YoY in Q4, the worst in the past seven quarters, with Bayer declining 57 per cent YoY and United Phosphorus (UPL, India region) clocking the highest growth (10 per cent YoY). 

Dhanuka Agritech and PI Industries reported 4 per cent growth. Rallis’ revenue fell 9 per cent YoY due to the presence of high channel inventory. On the global operations front, UPL benefited from a strong performance in Latin America. By contrast, however, PI’s custom synthesis manufacturing (CSM) segment continued to perform well with 39 per cent revenue growth. “Overall, margin pressure on the industry seems to be abating, but concerns remain with the situation in China again turning volatile,” Gupta added. “Our analysis of registration filings and approvals over the last three years shows a marked trend of approvals of favour of domestic manufacturers and significant import substitution,” said Lakshm­in­arayana Ganti, an analyst with SBICAP Securities. Meanwhile, fertiliser companies reported flat volume growth in March due to weak rabi season sales. 

While Coromandel International reported 11 per cent YoY growth, Deepak Fertiliser grew 15 per cent YoY (fertiliser segment). Soft raw material prices (phosphoric acid was at $728 per tonne, compared to $750 per tonne in Q4FY18, and ammonia at $291 per tonne, with $391 per tonne in Q4FY18) provides an opportunity to fertiliser players to expand margins in due course.

The government has already paid around Rs 17,000 crore (Rs 5,400 crore for complex and Rs 11,700 crore for urea) in April 2019 itself i.e. 22 per cent of total allocation. Thus, working capital pressure of fertiliser companies is expected to ease for the industry, as pending fertiliser subsidy backlog at the end of FY 2019 stood at around Rs 25,000 to 30,000 crore.

“The direct subsidies for chemicals and fertilisers are now being transferred to the farmers, which improve the purchasing power and also eliminate the leakage in the subsidy transfers,” said Punit Makharia, chairman and managing director of Shree Pushkar Chemicals & Fertilisers.

Experts, however, anticipate good times for agri input players owing to government support to farmers in the form of direct income transfers and fertiliser subsidies.

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