Given the slowdown in manufacturing and services segments, the agriculture sector is set to support India’s economic growth. But will this benefit cos which provide vital inputs to the agri sector?
COMPANIES PROVIDING inputs to agriculture and related activities are back in vogue, given the deceleration in manufacturing and services sectors. The major companies operating in this space have performed well on the bourses in FY09 so far, outperforming the BSE Sensex. ETIG brings you a first cut on this sector and various players therein.
Following the global economic crisis, a slowdown is visible in manufacturing as well as services sectors in India. Be it in textiles, steel, construction, automobiles, gems & jewellery or IT & IT-enabled services, finance, hospitality, travel & tourism — the news about lay-offs and slowdown are doing the rounds everywhere. Also, after growing steadily till September ’08, India’s merchandise exports dipped by a whopping 12% in October ’08. Against this backdrop, economists are looking at the agriculture sector to spring a surprise and support India’s economic growth in the second half of FY09. This is expected to benefit the companies which provide vital inputs to the agriculture sector. The agro sector needs a number of vital inputs for its survival and growth, which include fertilisers, micronutrients, pesticides and seeds. Though fertilisers play an important role in agriculture, the sector is highly regulated in India and thus, has limited ability to benefit from any growth in the agro sector. Hence, we are not considering this sector here.
GROWTH DRIVERS FOR AGRICULTURE:
The purchasing power in rural India is likely to remain healthy, despite the global economic turmoil. The sector is now attracting direct and indirect investments from the private sector. The minimum support price for the kharif season has also been attractive. At the same time, the government’s loan waiver scheme earlier this year and its continuing expenditure on developing the rural economy will also provide a positive impetus to the domestic agriculture sector.
AGROCHEMICALS:
Agrochemicals have become an integral part of the development process of agriculture and their use is expected to increase manifold in India. There are two growth drivers in this business. The first one is increase in labour cost of farm labour and continuous decrease in the availability of farm labour. The second is increasing awareness among Indian farmers regarding usage of new products.
Due to availability of cheap technical manpower and lower cost of production, India has become a manufacturing hub of agrochemicals exporting to western countries. Nearly half of the pesticides manufactured in India are exported to various countries. United Phosphorus is India’s largest agrochemicals company, which has expanded into various countries through acquisitions in the past few years. Bayer CropScience is the market leader in the domestic pesticides market with well-established products. The company more than tripled its profits in the first half of FY09. Rallis has also performed well over the past four years after its turnaround and posted a higher operating profit in H1 FY09 than during entire FY08. It is one of the very few companies whose valuation in terms of P/E multiple has not suffered due to the current market turmoil.
SEEDS:
Many countries, including India, give greater priority to high agricultural productivity. This is possible only by increasing the genetic potential of seeds on a continuous basis to increase yields. As a result, expansion of the seeds industry has taken place along with growth in agricultural productivity.
Hybrid and genetically modified seeds are increasingly being used in India to improve agricultural yield. Advanta and Monsanto are the leading players in this business, although numerous other players also operate in this space. Monsanto has divested its sunflower seeds business and part of its herbicides business to focus only on hybrid corn seeds and glyphosate herbicide. On the other hand, Advanta is trying to emerge as a global player in the seeds business, following in the footsteps of its parent company, United Phosphorus.
GOOD H1 FY09:
The agro inputs industry had an exceptionally good first half as the demand for agrochemicals continued to rise even as prices continued to move up. Due to the sudden spurt in demand, there was a shortage of pesticides in several parts of the country. As a result, the industry enjoyed higher sales and margins.
ALL’S NOT WELL:
However, this industry has its own set of woes. When prices were increasing, the industry players built up raw material inventories — at times paying upfront for future deliveries. Now, with prices crashing steeply, these companies will take a hit on their margins. The 15% demand growth witnessed so far this year in domestic agrochemicals may not continue in future.
Even on the exports front, things may not work out well for the industry, despite a weak rupee. Due to the ongoing credit crisis, a number of overseas importers are unable to secure letters of credit required for importing materials, thereby resulting in a fall in demand for domestic manufacturers. As a result, companies may achieve their sales target in the second half based on healthy domestic demand, but their profit targets will take a hit.
COMPANIES PROVIDING inputs to agriculture and related activities are back in vogue, given the deceleration in manufacturing and services sectors. The major companies operating in this space have performed well on the bourses in FY09 so far, outperforming the BSE Sensex. ETIG brings you a first cut on this sector and various players therein.
Following the global economic crisis, a slowdown is visible in manufacturing as well as services sectors in India. Be it in textiles, steel, construction, automobiles, gems & jewellery or IT & IT-enabled services, finance, hospitality, travel & tourism — the news about lay-offs and slowdown are doing the rounds everywhere. Also, after growing steadily till September ’08, India’s merchandise exports dipped by a whopping 12% in October ’08. Against this backdrop, economists are looking at the agriculture sector to spring a surprise and support India’s economic growth in the second half of FY09. This is expected to benefit the companies which provide vital inputs to the agriculture sector. The agro sector needs a number of vital inputs for its survival and growth, which include fertilisers, micronutrients, pesticides and seeds. Though fertilisers play an important role in agriculture, the sector is highly regulated in India and thus, has limited ability to benefit from any growth in the agro sector. Hence, we are not considering this sector here.
GROWTH DRIVERS FOR AGRICULTURE:
The purchasing power in rural India is likely to remain healthy, despite the global economic turmoil. The sector is now attracting direct and indirect investments from the private sector. The minimum support price for the kharif season has also been attractive. At the same time, the government’s loan waiver scheme earlier this year and its continuing expenditure on developing the rural economy will also provide a positive impetus to the domestic agriculture sector.
AGROCHEMICALS:
Agrochemicals have become an integral part of the development process of agriculture and their use is expected to increase manifold in India. There are two growth drivers in this business. The first one is increase in labour cost of farm labour and continuous decrease in the availability of farm labour. The second is increasing awareness among Indian farmers regarding usage of new products.
Due to availability of cheap technical manpower and lower cost of production, India has become a manufacturing hub of agrochemicals exporting to western countries. Nearly half of the pesticides manufactured in India are exported to various countries. United Phosphorus is India’s largest agrochemicals company, which has expanded into various countries through acquisitions in the past few years. Bayer CropScience is the market leader in the domestic pesticides market with well-established products. The company more than tripled its profits in the first half of FY09. Rallis has also performed well over the past four years after its turnaround and posted a higher operating profit in H1 FY09 than during entire FY08. It is one of the very few companies whose valuation in terms of P/E multiple has not suffered due to the current market turmoil.
SEEDS:
Many countries, including India, give greater priority to high agricultural productivity. This is possible only by increasing the genetic potential of seeds on a continuous basis to increase yields. As a result, expansion of the seeds industry has taken place along with growth in agricultural productivity.
Hybrid and genetically modified seeds are increasingly being used in India to improve agricultural yield. Advanta and Monsanto are the leading players in this business, although numerous other players also operate in this space. Monsanto has divested its sunflower seeds business and part of its herbicides business to focus only on hybrid corn seeds and glyphosate herbicide. On the other hand, Advanta is trying to emerge as a global player in the seeds business, following in the footsteps of its parent company, United Phosphorus.
GOOD H1 FY09:
The agro inputs industry had an exceptionally good first half as the demand for agrochemicals continued to rise even as prices continued to move up. Due to the sudden spurt in demand, there was a shortage of pesticides in several parts of the country. As a result, the industry enjoyed higher sales and margins.
ALL’S NOT WELL:
However, this industry has its own set of woes. When prices were increasing, the industry players built up raw material inventories — at times paying upfront for future deliveries. Now, with prices crashing steeply, these companies will take a hit on their margins. The 15% demand growth witnessed so far this year in domestic agrochemicals may not continue in future.
Even on the exports front, things may not work out well for the industry, despite a weak rupee. Due to the ongoing credit crisis, a number of overseas importers are unable to secure letters of credit required for importing materials, thereby resulting in a fall in demand for domestic manufacturers. As a result, companies may achieve their sales target in the second half based on healthy domestic demand, but their profit targets will take a hit.
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