PL Sector Report: Agro Chemicals - Jul-Sep’23 Earnings Preview – Subdued Quarter; Outlook remains bleak!!

Agro Chemicals - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd

Jul-Sep’23 Earnings Preview – Subdued Quarter; Outlook remains bleak!!

Our discussions with industry experts and channel partners suggests that, the domestic industry will likely exhibit a subdued performance in 2QFY24, with growth expected to be in the mid-single to low double digits YoY. This subdued outlook is primarily attributed to the delayed onset of monsoons, leading to a postponement in crop acreages and subsequently resulting in lower volume off tick. We expect a modest 5% YoY revenue growth for this period for our coverage universe. While we anticipate a 4% YoY increase in absolute EBITDA for our coverage universe, it is crucial to note that EBITDA margins are likely to face pressure, declining by 20 basis points YoY. This margin strain is a consequence of the price cuts to the tune of 8-10% (particularly for the generics) implemented during the quarter.

That said, we continue to maintain our cautious stance on the sector largely led by a) looming fears of El-Nino for the upcoming Rabi season (2H contributing around 40% of the total revenues); b) pressure on prices realizations amid a falling RM cost scenario (particularly generic molecules) and c) lower water reservoir levels pose a significant concern for the upcoming Rabi season, as it is primarily dependent on adequate water supply. While, on the exports side lower demand in key geographies coupled with higher inventory pile-up is likely to keep the performance under check in near term for exporters. We continue to like PI Industries in the agrochemical space.

Uneven distribution of rainfall… Cumulative rainfall till 27th Sep-2023 was down 6% LPA largely led by deficient rainfall recorded in North East & Southern peninsula down 18%/9% of LPA was partially offset by better rains in North-west and Central India up 1%/0% of LPA.

…impacting crop acreages till date: Crop acreages as on 29th Sep’23 were flat YoY (+0.2% YoY). Acreages for major crops like rice, pulses, coarse cereals and oil seeds and sugarcane were up +2%/-4%/+2/-2%+8% YoY respectively. With decent pick up in rainfall during second fortnight of June’23 resulted in gradual improvement in sowing activities.

…impacting water reservoir levels: As on 29th Sep’23, water storage levels in India's 150 reservoirs stood at 73% of the total capacity. Water storage level was down 18% YoY and lower by 8% as compared to average of last 10 years. North, East, West, Central and South have storage capacity of 85%/ 73%/ 87%/ 84% and 48% respectively. Further, 86 out of the 150 reservoirs in India (60% of total) have water levels higher than 70% of total storage capacity.

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