Analysts say, chemicals being considered for ban form significant part of the portfolio, both exports and domestic sales, of many players. For instance, agrochemicals
such as 2, 4-Dinitrophenol, Chloropyrifos Mancozeb, Acephate, and Pendimethilin are strong portfolio contributors for UPL, Sumitomo, Coromandel, Atul Ltd and Rallis. Since the move can impact a large part of their product offerings, the Street concerns are bound to get aggravated.
"This has come as a negative surprise for the industry which is already battling Covid-19-related disruption. The decision is likely to affect 25-30 per cent of the domestic agrochemicals
market (Rs 18,000 crore) as products worth Rs 4,000 crore will be replaced by high-cost molecules. The manufacturing ban will also affect exports of Rs 4,000-5,000 crore from India," said
Edelweiss Securities' analysts led by Rohan Gupta, in a note on Friday. These insecticides have a material impact on the revenues of agrochemical companies
such as Coromandel International, Dhanuka Agritech, PI Industries, Rallis and UPL, says Varshit Shah of Emkay Global.
While Edelweiss does not see any significant near-term impact, Gupta said, in the long term multinational players with access to new-age products (Bayer, Sumitomo) and domestic companies with strong connect with global innovators to launch new products like PI Industries (Hold) and Dhanuka (Buy) will benefit. This is considering the government’s target of replacing old molecules with new-age products.
Meanwhile, the UPL stock continues to lag as the Street is worried that banning manufacturing can impact the company’s exports significantly.
The industry, though sees a ray of hope as it believes the government is still in process of deciding and will work on data provided by companies. Further, being a draft order it can be challenged by the industry body too.
"With the government offering a 45-day window for discussion and comments on the order for the industry from the date of publishing of the order in the Gazette, it remains to be seen which pesticides are banned in the final order, post which the extent of impact will be more certain on the agrochemical industry," said K Ravichandran, Group Head & Senior Vice President, ICRA, in a recent note.
Other experts point out that the government committee formed in 2013 to probe agro chemicals banned in other countries but being used in India has made these recommendations. At first point, the committee needs to be clear if they are looking at insecticides or herbicides. Phasing out of herbicides cannot be sudden and will take long to replace with cost effective solutions. Further, the list includes chemicals that are banned only in few countries like Mancozeb being banned only in the UAE. Besides, the move comes at a time when government is promoting 'Make in India' and thereby banning indigenously produced chemicals does not make sense. So, experts are of the view that the government committee may re-look at its stance.
Nav Bhardwaj at Anand Rathi Securities says that the steep correction in stocks was a knee-jerk reaction as the Street starts factoring in the worst-case scenario. Shah, too, feels that there is long road ahead before final ban.
Meanwhile, companies can also rework to diversity their portfolio. An example here is that of Rallis India, point out analysts.
Thus, the actual impact may be lower, says Amit Khanna, Head of Research at Dolat Capital.
For now, expectations of good Kharif prospects and normal monsoon predictions are some positive news
for the sector.