Both fertilizer and agrochemical companies are highly dependent on imports for raw materials. With rupee depreciation exacerbating the rise in prices of raw materials, the profitability of the companies is expected to take a hit this year
The forecast of a record foodgrain production in the ongoing kharif season has brought no cheer to agricultural inputs stocks. Shares of Rallis India Ltd lost 3% last week. Dhanuka Agritech Ltd slumped 12%. Coromandel International Ltd lost 0.7%. The reaction reflects the challenges the industry is facing. Despite the timely onset of monsoon rains facilitating good product placements, sales did not take off in a big way, says Aditya Jhawar, an analyst at Investec Capital Services (India) Pvt. Ltd. “It is turning to be an OK or subdued season as below-par rains in several parts of high agriculture inputs consuming states Telangana, Andhra Pradesh and Karnataka impacted sales,” he adds.
Channel checks by analysts at Antique Stock Broking Ltd reveal that the domestic agrochemicals industry is likely to grow 10-12% in the ongoing kharif season, a sub-par rate compared to expectations. “During the ongoing kharif season, agrochemical demand has been at sub-par, aided by better paddy acreage, partially impacted by erratic rain fall, low agro-commodity prices and reduced cotton sowing,” analysts at Antique said in a note released in the second week of September.
In contrast, the fertilizer industry clocked decent sales, in spite of the disruption the sector saw due to implementation of the direct benefit transfer. Urea sales are up 7% in April-August, shows data compiled by Emkay Global Financial Services Ltd.
Encouragingly, sales of partially deregulated and relatively expensive complex fertilizers increased by a third. This indicates focused investments in crop nutrients by farmers, a good sign.
Investec Capital’s Jhawar says the depreciation in the rupee has made trading (importing and selling in the domestic market) difficult. This should aid domestic producers such as Coromandel International.
Even so, expectations are low. The Coromandel International stock is down 6% from a year ago. Rallis India and Dhanuka Agritech have lost much more ground, severely underperforming the BSE 500 index.
The underperformance reflects investor concerns about profitability. Both fertilizer and agrochemical companies are highly dependent on imports for raw materials. With rupee depreciation exacerbating the rise in prices of raw materials, the profitability of the companies is expected to take a hit this year. “The company (Coromandel), however, still faces gross margin pressure due to the run up in raw material prices (phosphoric acid and ammonia). We expect margins to contract by 130bps to 9.9% in FY19,” said Motilal Oswal Financial Services Ltd. A hundred basis points equals one percentage point.
Agrochemical companies not only have to contend with subdued sales but also stretched working capital pressures. Closure of facilities in China (due to pollution norms) means the companies are forced to stock up raw materials in a rising cost environment. While translation into price hikes has been rather gradual till the end of the first quarter of the current fiscal year, the challenges are making investors wary.
Source:https://www.livemint.com/Money/8MxkXXPfvLPzolH4MiidCN/Why-record-foodgrain-production-failed-to-cheer-farm-input-p.html
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