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Business News/ Market / Mark-to-market/  As monsoon sets in, agriculture inputs stocks get a reality check
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As monsoon sets in, agriculture inputs stocks get a reality check

Except Coromandel International, shares of companies making agriculture inputs were subdued in the last two trading days

According to Emkay Global Financial Services Ltd, the slow progress in monsoon rains delayed sowing. This can impact sales of agrochemical companies in the June quarter. Photo: Mint Premium
According to Emkay Global Financial Services Ltd, the slow progress in monsoon rains delayed sowing. This can impact sales of agrochemical companies in the June quarter. Photo: Mint

Investors in agriculture inputs stocks have given a muted response to the weather office update that monsoon rains will cover entire India this week. The reaction is surprising, since the monsoon rains are crucial for agriculture input providers. Demand for these products was hit in the last two years due to delayed and untimely rains.

Shares of most agricultural inputs makers were subdued in the last three trading days. It’s possible that good monsoons are already discounted—many of these stocks rallied in the last three months.

But as the monsoon progressed and initial reports emerged, there is a growing realization that earnings may not see a linear or straight line recovery. According to Emkay Global Financial Services Ltd, the slow progress in monsoon rains delayed sowing. This can impact sales of agrochemical companies in the June quarter.

Separately, a channel check by Edelweiss Securities Ltd found that both agrochemical companies and dealers were cautious last quarter. Companies refrained from aggressively placing products at dealers, the broking firm says. As a result, volume growth can be moderate in the June quarter.

In fertilisers, volumes (urea plus complex) are estimated to have fallen by 20% in the June quarter due to high inventories. This is expected to weigh on profitability as companies may have offered discounts to push sales. “Profitability will be hit led by lower margins (higher discount) and higher subsidy receivables," HDFC Securities Ltd said in a note.

But the situation is expected to improve. ICRA Ltd estimates the excess fertiliser inventories will get liquidated in the current (kharif) season. According to K. Ravichandran, senior vice-president and co-head of corporate ratings, ICRA, the fertiliser industry can see good growth in 2016-17 if low input costs are passed on to farmers and moisture in soil improves.

Except in generics, agrochemicals do not have an inventory problem. So if kharif sowing picks up, the demand can improve in the current quarter itself.

But the arguments are not watertight. In terms of earnings, regaining pricing power is as crucial as volume recovery for agrochemical firms. Also, recovery for fertiliser companies is dependent on the success of the current crop season and improvement in farmer sentiments.

The rise in valuations and a prolonged recovery means that future gains can be hard to come by. “While revival in monsoon could boost demand environment and drive up earnings growth, we await better entry point for companies under coverage," Emkay said in a note on agrochemicals stocks valuations.

The writer does not own shares in the above-mentioned companies.

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Published: 13 Jul 2016, 11:26 AM IST
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