In FY24, monsoon rainfall, and Kharif crop prices will be significant variables for domestic agrochemical firms.
Although lowering inventories will support volume growth moving ahead, it must be properly controlled. This is because any delay in sowing might again lead to an inventory build-up.
The Indian agrochemical firms have had a hard FY23 so far owing to high raw material prices and inventory build-up in the market. These issues took a toll on sales growth and profitability, notably in the December quarter (Q3FY23) (Q3FY23). For most organizations, revenue growth was largely price-driven, while volume growth remained sluggish.
Against this environment, shares of domestic agrochemical businesses have lost 10%-15% this past year.
Raw material costs, however, have been reducing over the previous several months, bringing reprieve to enterprises working in this field. Experts predict Q4FY23 to be positive for firms such as UPL Ltd, Rallis India Ltd, Dhanuka Agritech Ltd, Bayer CropScience Ltd, and Sumitomo Chemical India Ltd.
Prathamesh Sawant, research analyst, at Axis Securities, said, “Q4FY23 is projected to be excellent as the inventory levels have begun to decline based on our assessments. Sales occur in advance depending on sowing in the preceding season.” But the FY24 prognosis is unknown, he noted.
In FY24, monsoon rainfall, and Kharif crop prices will be significant variables for the domestic agrochemical business. Although lowering inventories will support volume growth moving ahead, it must be properly controlled. This is because any delay in sowing might again lead to an inventory build-up.
On the good side, raw material prices are projected to stay low, with the Chinese market re-opening post-lockdown.
Additionally, exports may be beneficial in future quarters. “Demand in the worldwide market continues to be robust as of now; although there is some inventory build-up, the situation isn’t worrying (for now) as per the commentary received from global corporations,” said Himanshu Binani, an analyst at Prabhudas Lilladher.
Having said that, crop prices in the export market have been drifting downward over the previous several months. “The financial crisis presently emerging in the US and Europe might further increase pressure on end-demand,” warned a Kotak Institutional Equities study dated 23 March.
Remember that demand and supply dynamics and business operations differ from firm to company. Yet for a re-rating in the shares of agrochemical businesses, the above-mentioned elements would play a crucial part in deciding investor mood. “Re-rating of equities hinges on the comments on Q4 and macro-conditions in the coming several quarters,” said Sawant.
Although price-led growth seems to have worked well for agrochemical businesses, experts anticipate this to decline in FY24. According to Prashant Biyani, vice president, of institutional equity, at Elara Capital, “FY23 industry growth was driven by price rises, while FY24 growth is projected to be driven by volumes.” Prices are projected to fall owing to a reduction in raw material costs, he noted.
Furthermore, the fertilizer and agricultural business, too, will experience an overhang in the coming quarters, especially because the government attempts to restrict subsidies. “The Indian fertilizer business confronts a tough future, with the government adopting different ways to cut consumption, including promoting nano-fertilizers and launching a program (in seven districts) to curb sales of subsidized fertilizers,” stated the Kotak research.
