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3QFY24 is likely to have been another painful quarter for both chemical intermediate makers and crop-protection chemical companies. We see high risk of earnings downgrades for several companies including NFIL, RALI, SRF and UPLL (versus KIE estimates) and ATLP, DN and TTCH (versus consensus). Given rich valuations and recent strength in stock prices, we remain cautious on the sector and see risks of disappointing returns from most leading stocks.

Customer destocking, unfavorable Rabi season to hurt crop chemicals sector

3QFY24 was likely a difficult quarter for the crop-protection chemicals industry, with exports likely hurt more than domestic sales amid continued destocking by customers. That said, even the domestic Rabi season was challenging amid low water levels, elevated channel inventories and intense competition. Some companies again cut prices during the quarter; margins likely remained under pressure. UPLL may be the worst-hit amid customer destocking and pricing pressures. RALI is also likely to report sharply lower earnings owing to a collapse in export revenues. GOAGRO will likely report a subdued quarter, with strength in its domestic crop protection business offset by continued agony at Astec. BYRCS’ earnings growth may once again be supported by lower employee costs, although revenue growth may be lackluster.

No signs of recovery yet for chemical intermediate makers

We expect another weak quarter for most chemical companies due to continued destocking, demand weakness across certain important end-use industries, and price erosion amid intense competition from China. In most cases, both revenues and margins are likely to remain under pressure. The best results may again come from PI, which continued to benefit from robust demand for its biggest product, pyroxasulfone. Other companies under our coverage are all likely to post yoy declines in earnings. We think TTCH, SRF, NFIL and ATLP are likely to register the largest declines on a yoy basis, and all of them may also report qoq declines. Given that stock prices of most chemical companies have run up into the results, we think negative surprises on the earnings front could potentially spark corrections.

Most companies remain at risk of earnings downgrades

Companies for which the highest risk of downgrades to our FY2024E EPS are NFIL, RALI, SRF and UPLL. As Exhibit 2 shows, in all of these cases, the asking rate for earnings in 4QFY24 is likely to be almost impossibly high. Besides, our FY2024E and FY2025E estimates are already significantly below consensus in the cases of NFIL and UPLL, and so downgrade risk versus our estimates implies even greater downgrade risk versus consensus. Separately, other companies for which our FY2025E estimates are significantly below consensus are ATLP, DN and TTCH; we continue to see risks to consensus here. The only company for which our FY2024E EPS seem conservative and likely to be upgraded is CLEAN; however, here our FY2025E EPS is in line with consensus and implies sharp yoy growth, and hence seems unlikely to move up materially.

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