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Why agrochemicals companies are set for tough times ahead

Companies,

Due to the market’s inventory buildup and high costs of raw materials, the Indian agrochemicals industry has had a challenging FY23 thus far. Revenue growth and margins were impacted, particularly in the December quarter (Q3FY23). For most organizations, income development was essentially cost driven, while volume development stayed quieted.

In light of this, shares of domestic agrochemical companies have fallen 10% to 15% over the past year.

However, the decrease in the cost of raw materials over the past few months has provided relief to businesses in this industry. According to Prathamesh Sawant, Research Analyst at Axis Securities, “Q4FY23 is expected to be good as inventory levels have started moderating based on our checks.” Companies such as UPL Ltd., Rallis India Ltd., Dhanuka Agritech Ltd., Bayer CropScience Ltd., and Sumitomo Chemical India Ltd. are anticipated to benefit in the fourth quarter of FY23. The sale is based on sowing earlier in the season. He stated, however, that the outlook for FY24 is unclear.

The domestic agrochemicals industry will be primarily affected by monsoon rains and kharif crop prices in FY24. Moderating inventory will contribute to future volume growth, but this should be closely monitored. This is on the grounds that any defer in planting could prompt stock development once more.

On the positive side, unrefined substance costs are supposed to stay low as the Chinese market returns after the lockdown.

Additionally, exports may be appealing in the upcoming quarters. The global market’s demand is still strong; Himanshu Binani, an analyst at Prabhudas Lilladher, stated that, despite the accumulation of some inventory, the situation is currently not alarming, based on comments from global businesses.

According to reports, the crop’s export market prices have been falling in recent months. According to a report published on March 23 by Kotak Institutional Equities, “the banking crisis currently unfolding in the US and Europe could further add to the pressure on final demand.”

Keep in mind that the dynamics of demand and supply as well as the operations of businesses vary from company to company. However, investor sentiment will be heavily influenced by the aforementioned factors when shares of agrochemical companies are rerated. “The macro conditions over the next few quarters and the commentary in the fourth quarter will both have an impact on the re-rating of the shares,” Sawant stated.

Agrochemical companies stand to benefit from price-driven growth, but analysts anticipate that it will moderate in FY24. “FY24 growth is expected to be driven by volumes,” says Prashant Biyani, Vice President, Institutional Equity, Elara Capital. “FY23 industry growth was driven by increase in prices.” Due to a decrease in the cost of raw materials, it is anticipated that prices will drop. He went on.

In the meantime, the government’s efforts to reduce subsidies will likely cause a slowdown in the fertilizer sector in the upcoming quarters. “With the government including a scheme (in seven districts) to promote nano-fertilizers and limit the sale of subsidized fertilizers,” the Kotak report stated, “The Indian fertilizer industry faces a challenging outlook.” trying a variety of strategies to cut down on usage, such as

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