Margin to remain under pressure

Domestic-focused companies to post subdued results

We expect our domestic-focused agrochemicals universe’s sales of 8- 10% YoY on modest sowing data. While sales of Dhanuka Agritech is expected to grow by 7% YoY, Insecticides India is likely to post 8% YoY on the back of sales of its recently launched products. However, we expect ramp-up in Kharif sowing for FY19, following good Monsoon, and, in turn, would aid in trend reversal for domestic companies backed by MSP hikes. We expect UPL and PI Industries to post revenue growth of 11% YoY and 18% YoY in Q4FY18E, respectively, owing to geographic diversification. Both companies are expected to post numbers ahead of its peers. Overall sales growth of our companies under our coverage universe is expected to be 11.6% YoY in Q4FY18E.

Margin likely to erode in Q4FY18

EBITDA across our agrochemicals universe is expected to grow 8.8% YoY in Q4FY18E on the back of margin erosion. We expect slight deterioration in margin, due to rising raw material prices. While Dhanuka Agritech is expected to report an EBITDA of INR 267mn with margin of 16%, UPL is likely to post EBITDA of INR 11,265mn with margin of 19%. PI Industries and Rallis are likely to report an EBITDA growth of 9.3% YoY and 6.1% YoY, respectively.

Timely Monsoon to aid in sales for FY19

According to Skymet Weather, 2018 Monsoon is likely to remain normal at 100% (with an error margin of +/-5%) of the long period average (LPA) of 887mm from June to September. Also, expected hikes in MSP rates are likely to bring in improved expectations for farm income. Higher acreage and yield on the back of improved farmers’ sentiments coupled with recovery in farm income are likely to bolster growth in the agrochemicals business for FY19.

Valuation: Our top picks, in order of preference, are UPL and Rallis.

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