AGROCHEMICAL INDUSTRY: Firms with Overseas Exposure to Do Well as High Costs Hit Local Cos

The decline in food grain prices over the past three months has impacted agri input demand negatively and is likely to put pressure on the December 2011 quarter results of India’s agrochemical companies.
With the rupee weakening over 20% during the quarter, the cost pressure on India-focused firms is expected to be higher. Companies with an overseas exposure will, however, continue to do well.
Prices of a number of agrocommodities have fallen considerably in the past three months of 2011. Prices of vegetables, tomatoes, onions and potatoes fell between 23% and 63%, as reflected in their wholesale price index numbers.
This fall in prices comes at a time when the weather conditions have turned unfavourable and pest pressures are low. As a result, the profitability of farmers during the Rabi season was impacted, reducing demand for agri inputs.
In the past four years, the domestic agrochemicals industry has witnessed a healthy and steady growth, posting a compounded annual growth rate (CAGR) of 12.4% in topline and 19.1% in bottomline, driven by improved farmer profitability. This in turn has lead to strong agrochemicals demand.
For local agrochemical firms, the high cost of crude oil and the recent weakening of rupee have further added to cost pressures. In a low demand scenario, companies are reluctant to raise prices to pass on the burden. All these factors are set to dampen the performance of agrochemical companies in the quarter to December 2011.
The markets have taken a note of all this with most local agrochemical companies — Bayer CropScience, Dhanuka Agritech, Excel Crop Care, Meghmani Organics, Nagarjuna Agrichem, PI Industries and Rallis India — losing between 11% and 30% of their worth in the past three months, while the BSE Sensex lost 4.5% and BSE Mid Cap Index lost 11.7%. Insecticides India and United Phosphorous were the exceptions, gaining close to 2-3% each.
While domestic market conditions remain challenging, Indian agrochemical companies with an overseas exposure like United Phosphorus are expected to continue to do well. United Phosphorus draws more than half of its overall revenues from the overseas markets. For the past five years, the company traded at an average price-toearnings ratio of 17.3. However, it is now trading at 12.4.