Agrochem cos worry over rain, dam levels

NEW DELHI : After a weak Q1 performance, agrochemical manufacturers are staring at challenges in Q2 as well owing to a slowdown and uneven distribution of monsoon, deficient reservoir levels and flat crop acreage.

The monsoon season had started on a promising note and increased activity in July raised hopes of sowing and good acreage that could have led to a higher usage of agrochemicals. However, a weakened monsoon in August is adding to the challenges of farmers as well as agrochemical manufacturers.

Himashu Binani, senior analyst at Prabhudas Lilladher said that the monsoon pattern in the last 15 days has impacted liquidation of inventory. The crop acreage has largely been flat and the impact of El Nino effect on the rainfall activity during September will be crucial for the sector.

The July-September quarter remains important for the liquidation of inventory at the retail level in the domestic arena for agrochemical manufacturers following inventory placements beginning in the June quarter. These companies have been struggling in the past few quarters. Global demand has been impacted due to higher channel inventory, unfavourable weather, declining crop prices and recessionary environment.

The opening up of China led to increased supplies of agrochemical intermediates, which, in turn, had meant regular and steep decline in raw material prices. Companies carrying higher cost raw material inventory saw pressure on margins. This impacted the financial performance of producers in the past few quarters.

Analysts said Q1 remained a challenging quarter for the agrochemicals sector, with year-on-year (y-o-y) performance being severely impacted. Although it was expected that raw material decline had stabilised, the decline continued during Q1 as dumping by China exacerbated the situation, said Rohit Nagraj, research analyst at Centrum Institution Research.

Analysts at Kotak institutional Equities said most agrochemical companies—in India and overseas—reported weak results for the recently-concluded June quarter amid pressure from channel destocking and generics oversupply. The oversupply situation is likely to continue longer in the global arena, said analysts. It is seen lasting through calendar year 2023 and, in some cases, first half calendar year 2024, said analysts at Kotak Institutional Equities.

Exporters, especially in the generic space, are likely to see headwinds continue on their earnings growth. Comparatively, the Indian agrochemical market may fare better than overseas markets in Q2 FY24, though a break in monsoon rainfall in August-September remains a key risk, said analysts.

On a sequential basis, Q2 may see better domestic volumes compared to Q1 as at least July saw some uptick in demand. This may also lead to some improvement in operational performance. However, the inching up of crude prices remains a fresh concern, said analysts. Since Q1 and Q2 are placement quarters, the actual picture shall emerge after returns start coming in and how balance sheets look post the first half of FY24 results, said Nagraj.