"It would be prudent for investors to avoid this sector as of now and wait for onset of monsoons and Q1FY19 result. Just playing on the predictions of monsoons would be a risky option for traders," says Akash Jain, Vice-president, Equity Research at Ajcon Global Services.
Indian agriculture sector is heavily dependent on monsoon rains. Hence predictions abolut monsoons from IMD and Skymet and outcome of monsoons bring a lot of unpredictability to the sector. Every year, as farmers pin their hopes on meteorological predictions, so does the agrochemical industry. Normal monsoons imply a healthy season and a healthy demand.
A significant part of agrochemical use takes place in the first half of the monsoon season, or June and July. Timely onset of rains will ensure sowing has happened in the first place and then the application of agrochemicals will take place. Even if the rains abate in the second half, or fall into the deficit zone, it will impact the yield of crops at the most, provided there are no damages.
Demand for agricultural inputs is also influenced by prices of farm produce, rural incomes and overall sentiment, the outlook for which is not encouraging right now owing to the distress in rural India. Perhaps that is the reason why the trends are mixed.
The major players in agrochemicals segment are Dhanuka Agritech, Excel Crop Care, Insecticides(India) Ltd. and Rallis India. According to industry sources, during years of normal monsoon, the industry grows at a compounded annual growth rate of 20 percent. There was some action last week but we believe it is just a temporary which generally happens every year before onset of actual monsoons in June.
Shares of agriculture-related stocks were in focus on Friday last week with Chambal Fertilisers & Chemicals, Escorts and Shakti Pumps (India) hitting their respective 52-week highs on expectations of a government thrust to drive sector. Madras Fertilizers, Fertilizers & Chemicals Travancore, Rashtriya Chemicals & Fertilisers, Chambal Fertilisers & Chemicals and Deepak Fertilisers & Petrochemicals from fertilizers, Shakti Pumps (India) and Roto Pumps from pumps manufacturer and Escorts from the tractors were up in the range of 3 percent to 8 percent on the BSE.
Meanwhile, early predictions by various weather forecasting agencies indicate normal Southwest monsoon this year. Skymet expects monsoon this year to be 100 percent of the long period average (LPA) with a model error of +/- 5 percent. The agency also expects that there is no possibility of a nationwide drought or deficient rainfall.
Q4FY18 is generally a seasonally weak quarter for the domestic agrochemicals players. The inventories are on the lower side, as the companies stayed away from channel filling in March 2018. This is expected to result in better volume growth in FY19 due to lower channel inventories and prediction of normal monsoon this year.
We believe the players in agrochemicals valuations have peaked out. The margin of safety in leading stocks in this space is not available.
It would be prudent for investors to avoid this sector as of now and wait for onset of monsoons and Q1FY19 result. Just playing on the predictions of monsoons would be a risky option for traders.Disclaimer: The author is Vice-president, Equity Research at Ajcon Global Services. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.