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Subdued Q4; La Nina to lift prospects

Channel inventory remains key overhang

High channel inventory in the domestic market, water deficiency in South India, adverse nutrient-based subsidy (NBS) and continued inventory destocking globally have led to a subdued Q4 for agrochemicals and fertilizer companies. Rabi sowing as on 2 February was flat YoY at 71mn hectares, but agrochemicals and fertilizer placements have been weak, given existing high channel inventory.

Low consumption, high inventory plague agrochemicals space

Water deficiency in Karnataka has led to less sowing in catchment areas of Krishna and Tungabhadra rivers. In Telangana, chili crop damage due to a cyclone in December has slowed crop spraying, which resulted in lower fungicide demand in Q4. Pan-India wheat sowing was up 1%, but less yellow rust infestation led to a decline in demand for fungicide. The cumin crop business saw good growth in Rajasthan while potato crop protection business was average. Therefore, high channel inventory persists for most companies as we enter into the next Kharif season. Among our coverage universe, aggregate top line, EBITDA and PAT are likely to decline by 23%, 47% and 83%, respectively. Ex-UPL, we expect aggregate top line to rise by 6%, EBITDA by 30% and PAT by 33%, driven by PI Industries and Bayer CropScience.

Fertilizers: high channel inventory leads to deferral of purchases

The adverse NBS subsidy and subdued demand prevail in Q4, and the indicative channel inventory at end-February was ~6.9mn tonne for urea and 5.2mn tonne for complex fertilizer. The current channel inventory was up 76% and 117% for urea and complex fertilizer, respectively, from the levels in February 2022 when the Russia-Ukraine War started. The comfortable channel inventory situation has led to more just-in-time purchases of fertilizers by the trade channel and farmers. We expect top line to decline by 24% for three companies under our coverage, with EBITDA growth of 20% & PAT growth of 7%.

El Nino weakens; La Nina to set in

El Nino is nearing its end and La Nina is likely to set in this Monsoon, according to the Bureau of Meteorology, Australia. We believe La Nina will be positive for domestic agrochemicals as well as fertilizer companies as better Monsoon will lead to higher volume growth.

Outlook: growth trajectory to set from Q1FY25

While Q4 is likely to remain soft, we are positive about the prospects of domestic agri-input companies from FY25, due to expectations of a better Monsoon and higher declared NBS subsidy in H1FY25. However, we remain cautious about companies with higher exports as demand is still fragile in the international markets. We are negative on Coromandel International and Paradeep Phosphates in the short term, due to expectations of a weak Q4 results. BYRCS, PI, CRIN and SUMICHEM are our preferred picks from a long-term perspective.

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