Channel checks: South spoils the party in Q4
Our interactions with agrochemical dealers and players indicate that (a) a below-normal northeast monsoon has severely affected the southern region, (b) pan-India rabi acreage is up 6% YoY but the states of Tamil Nadu and Karnataka have posted declines, (c) southern reservoirs are at very low storage levels, and (d) below-par agrochem demand is expected to keep industry growth in the lower single digits in Q4FY17. We like RALI and DAGRI in the space.
* Tamil Nadu and Karnataka worst hit by errant northeast monsoon:
After two consecutive drought years, rainfall across India was normal during the kharif crop season. However, the poor northeast monsoon (Oct-Dec’16) has hit the states of Tamil Nadu and Karnataka hard. The southern peninsula witnessed a 60% departure from the long period average (LPA) rainfall during the northeast monsoon.
* Rabi acreage up 6% YoY, wheat and pulses gained:
Overall crop acreage was up 6% YoY during the rabi season, primarily led by wheat (+7% YoY) and pulses (+11% YoY) and driven by the northern states. Our channel checks suggest that the wheat crop in Madhya Pradesh and Uttar Pradesh performed extremely well in terms of acreage as well as prices. However, rice and coarse cereals witnessed a drop in acreage by 12% YoY and 6% YoY respectively due to poor rainfall in the south.
* Reservoir level up 32% YoY, south significantly below long-term average:
As on date, India’s reservoir level is at 31% of the overall live storage capacity vs. 23% last year – this is 2% higher than the average of the past 10 years. Region-wise reservoir levels stand as follows: north – 23% vs. 23% last year, east – 49% vs. 34%, west – 39% vs. 20%, central – 43% vs. 31% and south – 12% vs. 15%. Reservoir storage in the south is significantly lower than the last 10-year average of 23%.
* Agrochemicals – subdued Q4 expected:
Our channel checks suggest that the agrochem industry is likely to grow in lower single digits YoY in Q4FY17, backed by higher pricing to manage rising input costs, even as industry volumes have declined. Imported raw material cost from China has inched up significantly since December led by lot of plant shutdowns on account of environment norms. Our checks indicate that prices of glyphosate, imidacloprid and paraquat have risen by 15-100% since December. On the whole, we expect revenues for our coverage universe to grow at 10% YoY in Q4 (ex-UPLL where the merger with Advanta has been underway since Q1FY17).
* FY18 could be a challenging year for PI:
PI’s largest selling product Nomineegold (bispyribac sodium) is likely to see tough competition in FY18 as Insecticide India (Green Label brand), Gharda Chemicals (Takila), Godrej Agrovat and Adama (Narkis) are all launching rival products, many of which are at prices 5-7% lower than Nomineegold. We believe that Adama can offer tough competition to PI.
* Good monsoon key near-term trigger; we remain long-term positive:
The monsoon will be a key factor to watch in the near term. We are structurally positive on the agrochemical space over the long term and like RALI and DAGRI.
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