Monsoon: Export-centric agrochem firms to gain more than home-focused ones

With normal rain this monsoon season, agrochemical companies are looking at better profitability in the coming quarters, following bumper sale of seed and pesticide.

An HDFC Securities’ report of last week said companies with a focus on export, such as UPL, would see 10-13 per cent growth in their net profit. And those with a domestic-centric business like PI Industries or Dhanuka Agritech would report a five to 8 per cent growth in profitability during the quarter ended June.

Agrochem companies faced several headwinds before implementation of the goods and services tax (GST), with lower inventory build-up by dealers and retailers. However, the forecast for a normal, for a consecutive year, has raised hope for an upsurge in demand for seed and pesticide, for kharif sowing.

“Consecutive normal rainfall in 2017 is a positive for these companies, as only around 45 per cent of arable land has irrigation. In the long term, better farm income, improved irrigation facilities, new product launches, lower penetration and greater outsourcing will drive growth. Export/CSMs (crop stress management) are also likely to pick up, with an improvement in global agri commodity prices. Thus, companies with an export focus would perform better than domestic counterparts,” said Deepak Kolhe, an analyst with HDFC Securities.

Tata Group company Rallis India, a leading entity in the crop protection industry, has reported consolidated revenue for 2016-17 at Rs 463 crore and profit before exceptional items and tax at Rs 61 crore, both around the same level as a year before.

“In the crop protection segment, we have witnessed de-stocking by dealers ahead of GST implementation and down-trading by farmers. Consequently, placement was muted during the April-June quarter compared to the regular scale, which has since picked up in July,” said V Shankar, managing director (MD).

India Meteorological Department has reported 2.6 per cent of surplus cumulative rain so far this season (as of Wednesday), resulting in 7.9 per cent of more kharif sowing, compared to the same period last year. All kharif crops — rice, pulses coarse cereals, sugarcane, cotton — reported an increase. “We were among the very first few movers which turned our stocks into excisable invoices and, hence, the confusion which erupted during the pre-GST era did not impact us much. So, we will be able to maintain our top line growth in mid-single digit and the bottom line much higher for the April-June quarter. In July, however, demand for seed and pesticide picked up, which is good for companies like us,” said Rajesh Aggarwal, MD at Insecticides India. Stockists have returned their inventory of agri inputs to their respective manufacturers, amid fear of GST levy on unsold stocks after July 1, the implementation date.

Meanwhile, export-centric companies are enjoying 10-15 per cent better realisation from sales abroad than counterparts with domestic focus, said Kolhe.

Looking ahead

  •  Companies with a focus on export would see 10-13% growth in their net profit
  •  And those with a domestic-centric business would report a 5%-8% growth in profitability during the quarter ended June 
  •  Agrochem firms faced several headwinds before implementation of the GST, with lower inventory build-up by dealers and retailers

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel