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Steady performance in store

We expect the agrochemical companies in our coverage universe (Dhanuka Agritech (DAGRI), PI Industries (PII) and UPL) to report a steady ~6% YoY growth in revenue but a more robust 12% YoY growth in net earnings owing to stronger margins in Q2 helped by traditional seasonal strength in this quarter. An erratic monsoon and disruptions in spatial distribution are likely to drive a lower than expected growth in DAGRI, while a rebound in pricing and seasonal factors should drive a strong Q2 for UPL. We expect PI to have another consistent quarter with a healthy order book and steady performance of its domestic business.

Dhanuka Agritech – H1 trending lower than previous two years For Q2FY22E, we expect DAGRI’s revenue/EBITDA/PAT to grow 4/4/2% YoY owing to the very strong base of Q2FY21 (revenue/EBITDA/PAT had grown 10/21/17% YoY in Q2FY21) and delays in rainfall in key northern and western states by 10-12 days, which impacted sowing, and therefore, offtake.

Additionally, raw material costs are expected to rise 300bp vs Q2FY21 to 65% of revenue in Q2 (-130bp QoQ) owing to freight and transport issues from China, which would keep EBITDA margin flat YoY at 20% despite lower opex in the quarter. The management has already turned cautious on prospects from the beginning of the year, lowering its revenue/EBITDA margin guidance for FY22, and a weaker Q2 can further reinforce this weakness.

UPL – Latin America, India both to see stronger growth We expect a strong Q2 for UPL, with a recovery in the Latin American market coupled with steady performance from the Indian market delivering a revenue/EBITDA/PAT of Rs93.5/20.7/8.15bn (+4.6/24.4/+15.6% YoY), despite a lower revenue trajectory from US/Europe and muted monsoon-led strength from the Indian market.

The expected performance of the India and LatAm geographies in a challenging quarter is creditable and the management has maintained its guidance of ~10% revenue growth and ~15% EBITDA growth for FY22. Synergies from the Arysta acquisition continue to drive growth. Focus on differentiated product solutions and a more comprehensive offering to farmers from seed to post-harvest care has helped improve pricing power.

PI Industries – relatively unscathed PI Industries (PII) started FY22 on a steady note, with a 13/9/29% YoY growth in revenue/EBITDA/PAT to Rs11.9/2.5/1.87bn. We expect the momentum to sustain in Q2FY22, with an estimated 15% YoY revenue growth even though EBITDA/PAT growth of 12/5% is moderated by lower margins vs Q2FY21. The acquisition of IndSwift Labs’ (ISFL) pharma API and intermediate assets for Rs15.3bn (~8.5x FY21 EV/EBITDA) sets the stage for a material diversification.

PII’s ability to reduce NWC days, create operational synergies, and raise return ratios by leveraging its own R&D and experience to create a viable CRAMS portfolio through ISFL would be a key monitorable, going forward. The Q2 estimates for the agrochemical companies reflect a slightly more challenging FY22E than the much more favorable environment seen over FY20 and FY21, which had benefited earnings materially for the domestic business of all three companies.

PII and UPL have also seen their international portfoliosflourish, but execution of the IndSwift Labs purchase synergies for PII and DAGRI’s ability to successfully execute its Rs3bn backward integration/diversification project will be key monitorables going forward; for UPL, continued efforts to create a more comprehensive agri solutions portfolio incorporating both traditional crop solutions and a biosimilar portfolio will be the key to sustained earrings growth and margin expansion.

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