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Green shoots

Domestic space to drive recovery

The agri-input industry (agrochemicals and fertilizers) has been in the doldrums for the past 12 months, driven by global destocking of agrochemicals, adverse Monsoon in India and non-remunerative subsidy regime for the domestic fertilizer industry. While global demand for agrochemicals continues to be weak, we expect green shoots to emerge for domestic agrochemicals and fertilizer companies. Hence, we expect a recovery in the agri input space, primarily driven by the domestic sector. Green shoots would emerge, given 1) a steadily weakening the El Nino phenomenon, and 2) better nutrient-based subsidy (NBS) for the domestic fertilizer industry. Hence, we prefer Indiafocused companies, such as Dhanuka Agritech (DAGRI IN), Bayer CropScience (BYRCS IN), Sumitomo Chemicals (SUMICHEM IN) and Coromandel International (CRIN IN).

El Nino effects to subside by April

According to the global weather forecasting agencies, such as the Australia-based Bureau of Meteorology and USA-based National Weather Service, El Nino is weakening and sea surface temperatures are expected to be in the El Nino-Southern Oscillation (ENSO) neutral state during April-June 2024. There is a 55% probability of La Nina developing during June-August, which coincides with the onset of Monsoon in India. Formation of La Nina would lead to better timing and spatial distribution of Monsoon in India, which is expected to drive volume-led growth for domestic agri input companies, such as DAGRI, BYRCS, SUMICHEM and CRIN.

Increased NBS to improve profitability

The Department of Fertiliser has increased NBS subsidy for phosphate by 38% to INR 28.7 per kg for H1FY25. We expect this move to improve profitability of complex fertilizer firms as rising international prices of raw materials were making it unviable to manufacture important grades, such as DAP, 16-20-0-13 and 20-20-0-13. DAP makers continue to be under pressure due to withdrawal of additional incentive of INR 4,500 per tonne. A 30% QoQ decline in price of ammonia is likely to improve Nitrogen’s profitability. We had already factored in the remunerative subsidy regime for fertilizer companies from FY25; hence, we are not changing our estimates currently. We prefer CRIN in the fertilizer space

Valuation: recommend Buy on DAGRI and INST; Reduce on UPL

We expect domestic agri input companies to recover earlier than their global peers, driven by India-specific macroeconomic factors, such as improved weather conditions and favorable fertilizer subsidy. We raise our DAGRI EBITDA and PAT by 3% each for FY25E and by 15% and 16% for FY26E, respectively. We upgrade DAGRI to Buy from Reduce with a higher TP of INR 1,287 from INR 1,115 based on 15x (unchanged) FY26E P/E. We revise our rating on INST to Buy (from Accumulate) with an unchanged TP of INR 629 based on 10.0x FY26E P/E. We revise our rating on UPLL to Reduce from Sell with an unchanged TP of INR 491 based on 6.0x FY26E EV/EBITDA.

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