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Divergence at play

Agrochemicals: channel inventory position is key

The earnings trajectory of agrochemicals companies under our coverage in Q3 is expected to be divergent. Companies that are light on channel inventory and have liquidated high-cost inventory are likely to be on a strong footing while earnings for the rest of the universe are likely to be under pressure.

Domestically, Q3 has been positive. Demand has been healthy in North, Central India and Southeast India. Demand is soft in West and Southwest India, especially in the pockets of Maharashtra and Karnataka, due to lingering effects of a deficit Monsoon. Fungicide liquidation also has been slow in Maharashtra due to clear climate as well as decline in sowing of onion crop. Internationally, demand continues to be weak, especially in North America, which has a huge pile of herbicides inventory. Demand is slightly better in Brazil.

Lower subsidy for fertilizers to weigh on profitability

The government has lowered complex fertilizer subsidy rates for H2 by more than 40%, which would lead to pressure on EBITDA per tonne. Companies have taken price hikes and lower discounts to dealers. Since  subsidy reduction on phosphate heavy fertilizers is high, companies have not been pushing for volume aggressively. Fertilizer with lower phosphate content is being pushed. We expect a significant decline in EBITDA per tonne for complex fertilizer companies. Coromandel International is our top pick in the sector.

Disrupted shipping lines could be a silver lining

The geopolitical tensions around Red Sea and the Suez Canal have led to upwardly spiraling shipping rates. The alternative shipping route i.e., the Panama Canal region, is experiencing drought and the Canal Authority has capped the number of vessels that can cross the channel. These limits imposed late last year are the strictest since 1989. The current daily capacity is 24 ships vs pre-drought’s ~38. The disrupted shipping lines may lead to increase in agrochemicals prices based on concerns related to potential delay in supplies.

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