PI Industries top pick as headwinds persist for agrochemical sector

Not surprisingly the share prices of most agrochemical manufacturers have seen muted performance. While UPL Ltd is down more than 14% in last months, Rallis India Ltd that had shown some spark rebounding in September however is down more than 7% from September highs. Only PI Industries that has higher portion of patented molecules in its portfolio and strong order book for its custom synthesis segment or contract manufacturing, has seen share price rise more than 15% in last months

Analysts such as Swarnendu Bhushan at Prabhudas Lilladher said that we continue to maintain our cautious stance on the sector largely led by looming fears of El-Nino for the upcoming Rabi season. Second half contributes around 40% to total revenues. Also, pressure on prices and in turn realizations amid a falling raw material cost scenario (particularly generic molecules) is another concern. The lower water reservoir levels pose a significant concern for the upcoming Rabi season, as per Bhushan as it is primarily dependent on adequate water supply.

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The supplies of molecules from China had continued to rise post Covid related curbs were reduced. The demand within China did not see a pickup as per expectations while rising production meant more exports for generic molecules from China, leading to regular fall in prices. The falling prices led to inventory destocking since many manufacturers carried high-cost inventory and even many had to provision for the higher cost inventory impacting their net profits. The declining realizations and regular fall in prices have been a concern for manufacturers in the global as well as domestic arena.

“While on the exports side lower demand in key geographies coupled with a higher inventory pile-up is likely to keep the performance under check in the near term for exporters, we continue to like PI Industries in the agrochemical space,” said Bhushan.

The weak outlook is reflected in the expectations of the rating agency CRISIL.

Following a supply deluge from China; two, muted demand for exports (53% of revenues) owing to destocking by global manufacturers; and three, the impact of lower reservoir levels on rabi sowing, CRISIL, Research has said that “For the first time in a decade, Indian agrochemicals makers will see a drop in revenue — by up to 3% on-year in fiscal 2024″

Poonam Upadhyay, Director, CRISIL Ratings said that , “Increased supplies of low-priced products from China prodded global agrochemicals companies to increase inventory by 45 days between January and June 2023 . The subsequent destocking amid a slowing global economy led to slump in exports from India in the first half of this fiscal”

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There are some expectations that with global manufacturers restocking before the onset of the cropping season in Latin America and the US — which accounts for ~55% of India’s exports — a recovery in overseas demand could begin from November 2023.

Rohit Nagraj At Centrum Broking said that the “Near term triggers for the chemicals and agrochemicals sector are lacking and recovery in exports remains the key trigger for the sector in near to medium term”.

PI Industries, Coromandel International remain top picks of Sharekhan in space.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 16 Oct 2023, 04:35 PM IST