PL Sector Report: Agro Chemicals - Ground Alert – All eyes on the rain God..!!

Agro Chemicals - Himanshu Binani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Ground Alert – All eyes on the rain God..!!

We hosted Dr. D S Pai, (Scientist and Head climate services division) of IMD (India Meteorological Department) to take an update on current monsoon trend and impact of El-Nino in the upcoming season. Key takeaways are: 1) probability of El-Nino occurrence remains high with chances of getting preponed to former dates than earlier expectations in 2nd half of the monsoon season (i.e from Mid- august to September); 2) Northwest and some parts of central India likely to receive deficit rainfall, while Southern peninsula and North-east India at better off position; 3) arrival of monsoon delayed due to Cyclone Biporjoy, resulting in deficient rainfall (down 92% of LPA) in June month and 4) IMD remains hopeful of revival in rainfall from 3rd week of June’23 till mid-July, which would aid in narrowing down of deficient rainfall.

Accordingly, for our agrochemical coverage universe we have factored in revenue growth of 9.7% YoY in FY24E vs 8.7% CAGR clocked over FY14-16 (FY15/FY16 witnessed deficit rainfall). We continue to maintain our cautious stance on the sector and prefer PI Industries and Sumitomo Chemicals in the agrochemicals space. Coromandel International remains our preferred pick in fertilizer space.

Other Key Takeaways:

§ El-Nino to impact South east Asian counties as well like parts of Bangladesh, Pakistan, Sri-Lanka, Mayan mar to receive below normal rainfall.

§ Maintains initial forecast of monsoons at 96% of LPA (+--4%); with chances of attaining lower end of the forecast.

§ Impact of El-Nino likely to be witnessed in Winter rains (Rabi season) as well; while El-Nino impact is expected to subside by May’24.

§ Early indications of one of the hottest summer season next year.

Historical data suggest El-Nino’s direct relation with food grain production: In last 38 years there have been 12 years of EL-Nino (3- strong years; 5- moderate years; and 4- weak years) (Refer Exhibit: 6). It is observed that there has been no impact of food grain production in case of weak EL-Nino (4 times in 38 years), whereas strong and moderate EL-Nino has resulted in 7% and 10% decline in kharif food grain production. For current year, IMD expects monsoons to be normal at 96% of LPA; however, they have indicated that El-nino patterns could be developed during mid-monsoon season (August- September) which in-turn will have an impact on food grain production in upcoming kharif season.

Maintain cautious stance on domestic agrochemicals: Domestic agrochemical industry (our coverage universe) clocked revenue CAGR of 8.7% during FY14-16 as two consecutive years of below normal monsoons (FY15 and FY16) coupled with higher channel inventory and pressure on farm incomes impacted sales in that period. Cash-flows were strained and below-normal monsoons led to muted volumes and price cuts across the industry. However, we believe that the pressure this time would not be as severe as FY15/16 given a) channel inventory is higher particularly for insecticides grades only, overall inventory remains at comfortable levels b) Domestic crop prices continues to be remunerative c) Govt.’s thrust on improving farm income; d) expectations of special aid from Govt. to farming community in case of crop damage or losses (due to adverse weather conditions etc.) given Lok Sabha elections next year.

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