Despite the uncertainty of Covid-19, the future looks bright for the Indian agrochemicals sector. Let's explore some investment opportunities.
An Agrichemical is a chemical product used in agriculture. In most cases, agrichemical refers to pesticides including insecticides, herbicides, fungicides and nematicides. (wiki)
At an estimated size of 2.8 Billion USD (2019), Indian agrochemicals is the second largest and a fast-growing segment in the Indian agri-input industry.
Agriculture and its allied sectors contributed nearly 17% to our GDP in 2019–20. It is a source of livelihood for more than 50% of the country’s population. So sector like agrochemicals, is on a far stronger wicket than many others in the economy, driven by major government actions and interventions.
The onset of agrochemicals era transformed Indian agriculture from food deficient to food surplus country. The Indian agrochemical market is worth ₹38,000 crore divided almost equally, between India’s domestic consumption at ₹20,000 crore and exports accounting for ₹18,000 crore.
Despite the challenges of this lockdown, the agrochemical industry will continue to expand in the coming year with an expected growth in agricultural output. India expects a record 298.3 million tonnes of foodgrain production in 2020, of which 149.92 million tonnes in the kharif (summer) season and 148.4 million tonnes during the rabi (winter) season, representing a 2% projected growth compared to the previous year.
Promise of a good ‘on-track’ monsoon should also ensure strong domestic demand, with limited Covid-19 impact. Driven by these factorsm, major agrochemical companies have shown about a 38% improvement (As on May 2020) in stock prices since the initial lockdown started on March 24, compared to about 23% by the Sensex, overall.
(Good) Listed companies in Agrochemical space in India:
Top Stock Picks:
As per the recent research done by Macquarie, they have selected 5 stocks:
My view: Almost all the stocks like PI Ind, UPL or Rallies have already ralled around 80-90%. But Sumitomo Chemicals India will be my preferred pick as it has not much participated in the rally and the stock is Fundamentally very strong:
Sumitomo Chemical India (Current Price: 275.60)
Sumitomo Chemical Co., Ltd. is a MNC company manufactures, imports and markets products for Crop Protection, Grain Fumigation, Rodent Control, Bio Pesticides, Environmental Health, Professional Pest control and Feed Additives for use in India.
Market Cap: 13,786 Cr. | ROCE: 29.27% | ROE: 22.41 % | Debt to equity: 0.03 | Interest Coverage: 43.06 | Pledged percentage: 0.00 % | Sales Growth (3Yrs): 44.78 % | Compounded Profit Growth of last 5 years: 46%
Demand for some specific agrochemical products have increased as buyers are trying to shift their sourcing away from China. Even orders are coming in from key international markets like Brazil, Japan, the U.S. etc., which have neither the expertise of producing such a wide array of agrochemicals nor the capital for capacity expansion of their own plants, given the inherent cost advantages of China and India.
Exports of agrochemicals in India have been growing at a CAGR of 12.8% during 2014-18. Furthermore, agrochemicals worth USD 4.1 Billion USD will be off patent by 2020, which will further boost Indian generic agrochemical production ability.
Industry must start thinking about how to leverage new opportunities that have appeared as an outcome of this crisis such as shifting manufacturing away from China. In wake of the government’s support of this shift, it could be a game-changer for the industry and first movers will benefit strongly.
Despite the optimism, Indian agrochem players, both large and small, need to do four things right: Manage liquidity tightly, Avoid or delay discretionary cost, Proactively manage supply side constraints, Engage deeply with customers. This will essentially boil down to getting the basics right—keeping people safe, operating the plant efficiently (which includes a detailed plan to ensure availability of raw and packaging materials), and managing multi-vendor logistics, in addition to a strong cash focus.
All these signs point to the resilience of India’s agricultural industry and its close association with agrochemicals. So, if you are thinking to add Agrochemicals stocks in your portfolio then this may the right time to do that.
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