Positive monsoon outlook boosts Indian agrochemical stocks; analysts bullish on sector’s growth

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Shares of agrochemical companies, including Coromandel International, Deepak Fertilizers, Rashtriya Chemicals & Fertilizers Ltd, UPL, Dhanuka Agritech and Bayer CropScience have surged between 4 and 32 per cent in the past month, with some hitting their respective 52-week highs.

Analysts expect better urea volume growth in FY25 due to the onset of the La Nina phenomenon and  normal monsoon predictions by IMD and Skymet . The monsoon plays a crucial role in Indian agriculture as two-thirds of farmland across the country lacks irrigation facilities and is dependent on the monsoon rainfall. A good monsoon results in better sentiments among the farming community and lifts the demand for farm inputs such as seeds, agrochemicals, and farm machinery, among others, across the country.

Vinod TP, Research Analyst at Geojit Financial Services, feels that the revenue of fertilizer companies is expected to rise with higher volumes and falling raw material prices despite lower subsidies. This should boost EBITDA for both fertilizers and agrochemicals companies. “Inventory de-stocking issues should improve with the good monsoon,” he added.

Brokerages believe domestic companies will outperform exports in the March quarter (Q4 FY24) and FY25. Demand for agricultural inputs was weak in the December quarter due to elevated channel inventory, higher imports from China and pressure on realisations, which weighed on margins. Sentiment in the rabi season was impacted by below-normal rainfall and lower reservoir levels. There could be some improvement in the September quarter. According to Mordor Intelligence, the domestic agrochemicals market size is estimated at $8.22 billion in 2024, and is expected to reach $13.08 billion by 2029, growing at a CAGR of 4 per cent during 2024-29.

Deepak Fertilizers is up 1.17 per cent at ₹780 on the BSE. Considering that a normal monsoon will help drive rural demand and benefit sectors such as agrochemicals, fertilizers, tractors and FMCG, brokerage Motilal Oswal Financial Services (MOFSL) recommends Buy with a target price of ₹810 and a stop-loss at ₹690. Shares of the company are inching closer to the 52-week high of ₹779.85. 

Dhanuka Agritech is now trading at ₹1,744.20 (down 1.8 per cent) though the stock delivered a robust 18% returns in one month. Brokerage firm Anand Rathi believes the execution and ramp-up of the Dahej project will set the company on the next leg of growth. The brokerage has initiated coverage on Dhanuka Agritech with a Buy at a TP of ₹1,200.

Shares of UPL edged up to ₹567.60 (up 0.02 per cent) on the BSE though it delivered a 4 per cent returns over a month. Analysts recommend longs in the range of ₹520-530 with a target price of ₹580 placing the stop-loss at ₹498.

Growth areas 

The increasing use of herbicides is significantly driving market growth. Major investments are being made to develop new, more effective, and eco-friendly herbicide varieties. Most modern herbicides are designed to decompose shortly after application, and they are used across a wide range of crops, including cereals, grains, fruits, vegetables, oilseeds, and pulses. The growing consumer preference for fruits and green vegetables, post-Covid, further fuels herbicide use in agriculture.

Despite ongoing protests advocating for the ban of harmful herbicides, their presence in the Indian agrochemical market persists due to their lower costs compared to alternatives. Industry players are increasingly developing bio-based herbicides, which, while eco-friendly, are more expensive and targeted at controlling weeds resistant to chemical herbicides. These factors are expected to drive market growth during the forecast period.

The implementation of Integrated Pest Management (IPM) is an emerging trend shaping market growth. According to a technavio.com report on India’s Agrochemicals Market, pest control accounts for about 35 per cent of a farmer’s crop production cost, with pests causing losses of 11-32 per cent. While pesticides are crucial for controlling pests, rising pest resistance and environmental and health concerns have led to reduced use of chemical pesticides. IPM is a strategy involving specific procedures for pest prevention in agriculture. These innovations are expected to positively influence market growth. 

According to the Federation of Indian Chambers of Commerce and Industry, the Indian government recognises the agrochemical industry as one of its top 12 industries to achieve global leadership, growing at 8-10% through 2025.

Sunil Damania, Chief Investment Officer, MojoPMS, told businessline: “Following the General Election, the government has placed a significant emphasis on agriculture. We’ve observed an increase in the minimum support price (MSP) for kharif crops, and additional measures may be introduced in the upcoming Budget. Despite a 7 per cent monsoon deficit by the end of June, rainfall has improved, and as of July, we are 1 per cent above the Long Period Average (LPA). Favourable monsoon outlook, coupled with government support, enhances the business prospects for agricultural input companies. We remain optimistic about these companies and believe they are well-positioned for strong performance. Additionally, some agri-input companies are exploring export markets, which could further boost their revenues.” Higher demand and improved volumes are expected to help the companies liquidate excess inventory.

Vinod of Geojit, too, concurs pointing out positive progress in sowing, particularly, for pulses, oilseeds and cotton, although rice planting has been down a tad. However, even the distribution of rainfall remains crucial to sustain this positive trend.

Key challenges 

The road ahead for the sector has its fair share of challenges. Organic farming poses a significant challenge to market growth as a viable alternative. This method involves cultivating crops and livestock without pesticides, fertilizers, antibiotics, or genetically modified organisms, aiming for a sustainable and environmentally friendly approach. Key practices include crop rotation, cover crops, and balanced host-predator relationships. The Permitted Substances List allows certain substances to be used as pesticides in organic farming.

Organic crops and crop-based foods contain 19%-68% higher levels of antioxidants, such as polyphenolics, compared to conventionally grown crops, and have four times less pesticide residue. This reduction in agrochemical use appeals to health-conscious consumers and influences their purchasing decisions. As awareness increases, it is expected to impact the agrochemicals market in India, potentially limiting its growth during the forecast period.

According to a report by Rubix Data Sciences, a risk management and monitoring company, the top five countries (Brazil, the US, Vietnam, China, and Japan) now account for nearly 65 per cent of India’s agrochemical exports, up from 48 per cent in FY19. 

Low utilisation, climate change, unpredictable monsoons, and global economic uncertainties pose a risk, as do intense competition from established players like China. India’s domestic agrochemicals usage currently totals a mere 0.6 kg per hectare, which is a fraction compared to the Asian average (3.6 kg/ha) and a mere quarter of the global average (2.4 kg/ha), the report said. “This low utilisation signifies immense potential for market expansion in the coming years, presenting a fertile ground for industry growth,” the report said.