High base notwithstanding, Indian agrochemical companies' growth prospects remain firm

Expectations of a bountiful rabi harvest following a decent monsoon season are likely to help agrochemical manufacturers sustain growth momentum. Monsoon rains had been above normal in most pockets, beating expectations for the second consecutive year. With water reservoir levels higher across most of the country, sowing of rabi crops---planted in winter--has been progressing well. Wheat, barley, rapeseed, peas, gram, mustard are among the key rabi crops.

Kharif harvest had also been good. According to first advance estimates of crop production released by the agriculture ministry, kharif food grain output touched a record 144.5 million tonne this year, up from 143.4 million tonne in the previous year. This will likely boost incomes of farmers, which in turn will help them invest in seeds, fertilisers, and crop protection solutions for the next sowing season.

The strong growth trajectory seen by agrochemical firms during the first half of the fiscal, therefore, is likely to continue. However, weather vagaries such as unseasonal rains need to be watched out for.

The agrochemical industry has had a fairly good run so far led by normal monsoons and remunerative prices, all of which have resulted in acceleration of agricultural activities, say analysts. Better crop prices given higher procurement target along with good reservoir levels will likely see a robust rabi harvest despite the high base of Q3FY20 say, analysts.

Growth prospects of agrochemical players are not only being helped by increased usage of traditional products but increasing acceptance of new products. Insecticides dominate the Indian crop protection market however herbicides are emerging as the fastest-growing segment, says CARE Ratings.

Meanwhile, exports have also contributed to the growth of agrochemical players. Experts feel overseas sales of agrochemicals will be steady during the second half of the fiscal, adding to prospects of exporters.

Also, agronomic conditions in most markets across the world have improved own year, said Care Ratings, and will drive growth for agrochemical companies.

Domestic performance of most companies had remained strong during Q2, however, pandemic-led supply disruptions had hit exports of some. Companies like Rallis India Ltd had seen strong growth during Q2 but exports were muted. Improved prospects on exports mean the company can see much improved consolidated performance.

For, export-focussed PI Industries and UPL will see better days ahead. Export growth remains crucial for PI Industries to continue enjoying premium valuations the stock commands. UPL is a much larger player growth momentum leading to better cash flows may help the company reduce leverage on its balance sheet.

However, investors need to monitor supply disruptions that may result from fresh lockdowns being in many countries to fight the pandemic.