Performance of most agrochemical firms, including Rallis India, Dhanuka Agritech, Bayer CropScience and PI Industries, was hit in the June quarter due to inventory liquidation. Graphic: Mint
For all the talk of timely onset of the monsoon and the forecast of normal rains, the current season is proving to be a dampener for investors in agrochemical companies. Shares of Rallis India Ltd, Dhanuka Agritech Ltd and Bayer CropScience Ltd have lost in the range of 8-24% over the last three months compared to around a 4% gain in the BSE 500 index.
Of course, these shares had seen smart up-moves ahead of the current crop season on business recovery expectations, especially post the demonetization hit in 2016. But the message implicit in the selling is this: the current season is proving to be anything but robust.
First, the June quarter performance was impacted by inventory liquidation ahead of the goods and services tax implementation. Dealers’ reluctance to stock up goods ahead of the new tax law impacted sales. Rajesh Aggarwal, managing director at Insecticides (India) Ltd, says 10-15 days of the initial part of the season, which is usually used for product placements, was lost as many took time to set up the systems.
Supply-chain channel checks by Investec Capital Services (India) Pvt. Ltd in August showed strong volume offtake from mid-July, which should aid agrochemical sales in the current quarter.
However, as August progressed, the uneven spread of the monsoon became more apparent, with the south and central parts of the country seeing significant deficit in rainfall. This weighed on sowing of crops like paddy, a heavy user of agrochemicals. According to Aggarwal, slow accumulation of water in crucial reservoir levels weighed on paddy sowing.
Nevertheless, as water became available, paddy sowing took place in the latter part of the season in southern India, which can extend the sales season to September and October. Even then, it has to be seen how big a lift this can give to agrochemical sales. According to Aggarwal, many firms are lagging behind their sales targets. “It looked to be a good year. But it is only a medium season, not as strong as initially expected,” he added.
Adding to the uncertainty is sub-par water levels at major reservoirs, which is crucial for the forthcoming (winter) crop season. As of last month, water levels in major reservoirs tracked by the Central Water Commission are 16% less than the year-ago levels and 55% of their storage capacity.
The situation is more acute in the south where water levels are only 36% of the total live storage capacity of the reservoirs. An analyst with a domestic broking firm says he is more worried about the winter crop season. The southern region is a large market for agricultural inputs and low groundwater levels and water availability may weigh on demand in the coming season, he warned.
While the monsoon is yet to withdraw completely, a clear picture on the quantum of business recovery will be known only when the companies declare their current quarterly results. For now, anecdotal evidence does not paint a robust earnings recovery for the sector.