Union Budget 2018 proposals to drive prospects of agri-input companies

The use of procurement as an instrument to enforce MSP is usually costly and costlier for crops where a ready avenue for disposal does not exist
With the emphasis on boosting farmers’ income and rural economy, the Finance minister Arun Jaitley emphasised on several measures during the Union budget 2018-19. Arun Jaitley, in his Budget speech, proposed to increase the MSP (minimum Support price) for Kharif crop to 1.5 times producer’s costs and various other measures are likely to propel prospects of Agri-input companies (seeds, Fertilisers, agrochemicals players) as other proposed measure too will drive benefits.

Rating agency Icra says that the Union Budget 2018-19 lays huge emphasis on reviving the rural economy by increasing the income level of the farmers and reducing their costs and proposed measures as increase in MSP for Kharif crop. The rating agency added that the investment of Rs 20 billion on agri-market infrastructure fund, Rs 5 billion for operations green, focus on micro irrigation, cluster approach to develop agriculture markets and increased allocation for agricultural credit at Rs 11 trillion, will help revive the rural economy which has seen a sharp slowdown in the current fiscal and help rural focused companies as Agri Inputs (Seeds, Fertilisers and Agrochemicals).

The enthusiasm of industry is visible as RG Agarwal (Chairman, Dhanuka Agritech Ltd.) says that by increasing the agriculture credit to Rs 11 trillion will help both the agriculture and allied industry and setting up a corpus to Agri Market development fund is a big step in developing agriculture markets.

Thus most of the companies in the space as UPL, Rallis India, Dhanuka, PI industries Coromandel and others are well placed to derive benefits.

UPL already had reported good India growth for the quarter ending December. Analysts at Morgan Stanley post results had said that India and Latam are key growth engines for UPL over the medium term and they believe UPL's strong distribution base, established product portfolio, and new launches should drive outsized growth.

Rallis India posts recent corrections on the bourses in the back of margin miss during December quarter is trading at attractive valuations. The analysts already see strong growth ahead for the company as analysts at Kotak Institutional equities expect the company to deliver strong 22 per cent CAGR in Earnings over FY2017-20 driven by robust growth in the domestic and international formulation businesses and expected improvement in performance of Metahelix.

As all measures bode well, there is a slight disappointment on allocations for fertiliser subsidy. K Ravichandran Sr. VP, Group Head Corporate Ratings, Icra feels that there could be a shortfall of around Rs 350 billion, which is largely the carried forward amount from 2017-18, and subsidy provided for the fertiliser sector for 2018-19 at Rs 700.80 billion for 2018-19  is only  marginally higher than the level of Rs 649.74 billion in 2017-18. The industry players have repeatedly been complaining about the under the provision of subsidy and significant delays in the payment of subsidy especially in the second half of fiscal years. The issue assumes more importance for 2018-19 as the government is preparing to roll out DBT (Direct Benefit Transfer) scheme for the sector on a pan India basis, where without adequate budgetary provision, working capital cycle for the industry could elongate points out Ravichandran.

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