Agrochemical companies are expected to report a 6-10 percent sales growth for the quarter ending March 2018 but high raw material prices may put pressure on margins, research firms suggest.
Overall, the performance of such companies is expected to be good even though it is a seasonally a weak quarter. "Aggregate revenue of domestic companies is likely to increase by 10 percent YoY. Overall revenue growth (including exports) is estimated at 25 percent YoY, driven by a 16 percent YoY growth each in Bayer CropSciences (due to a lower base) and PI Industries (due to ramp-up in execution of its CRAMS business)," Emkay Research said.
According to Edelweiss, the domestic agrochemical industry may post moderate 6-8 percent sales growth whereas agrochemical universe (ex-UPL and Bayer Cropscience) may post 17 percent YoY growth led by PI Industries (post recovery in CSM) and Sharda Cropchem, while Rallis would gain from low base.
Emkay said interaction with managements suggest that the prices of key raw materials continue to remain higher, which would adversely impact EBITDA margins in Q4FY18. However, integrated players will witness improvement in margins.
The agency expects aggregate EBITDA (earnings before interest, tax, depreciation and amortisation) to grow by 9 percent YoY while EBITDA margin is likely to contract by modest 40bps due to improvement in margins for integrated player Insecticides India and steady margins for UPL.
Elara Capital also feels the EBITDA across agrochemicals universe is expected to grow nearly 9 percent YoY in Q4FY18 on the back of margin erosion.
"While Dhanuka Agritech is expected to report an EBITDA of Rs 26.7 crore with margin of 16 percent, UPL is likely to post EBITDA of Rs 1,126.5 crore with margin of 19 percent. PI Industries and Rallis are likely to report an EBITDA growth of 9.3 percent YoY and 6.1 percent YoY, respectively," it said.
Edelweiss expect Rallis to extend its growth trend of Q3FY18 as it expects the sales push to continue, along with a lower base, and hence factor in 16 percent YoY growth. "Dhanuka Agritech is expected to report a stable quarter. For Bayer, we estimate revenue to normalise (up 80 percent YoY) on an exceptionally bad Q4FY17. We estimate UPL to post strong growth in North America (11 percent YoY growth in revenues) in-line with the company’s guidance."
Despite moderate growth in Q4, all brokerage houses are positive on agrochemical sector on hopes of strong performance in FY19 due to government's intent to double farm incomes and expected normal monsoon.
According to weather forecaster Skymet, monsoon is likely to remain normal at 100 percent (with an error margin of +/-5%) of the long period average (LPA) of 887mm from June to September.
Elara Capital expects ramp-up in Kharif sowing for FY19, following good monsoon. Also, expected hikes in MSP rates are likely to bring in improved expectations for farm income. Higher acreage and yield on the back of improved farmers’ sentiments coupled with recovery in farm income are likely to bolster growth in the agrochemicals business for FY19, it said.
Edelweiss also expects agri input players to report strong growth in FY19, especially after this year’s Kharif season hit by GST. In irrigation, higher funds allocation by government will support growth. Falling subsidy and DBT implementation brighten prospects of fertiliser companies, it said.
Insecticides India and UPL remain top picks of Emkay Research due to their better product mix and healthy product placements, high degree of backward integration and resilient business models. Also, the recent correction in their stock prices offers good entry point. The research house also likes Dhanuka Agritech due to compelling valuation.
Edelweiss also likes Dhanuka Agritech while Elara Capital said UPL and Rallis are its top picks.
Here are Emkay's top five agrochemical stocks that can give up to 53 percent return:
Dhanuka Agritech | Rating - Buy | Target - Rs 847 | Return - 44%
We estimate 4 percent YoY revenue growth, as we anticipate moderate sales across segments. Sales of Cover, Sempra and Sakura are likely to remain steady. EBITDA margin could decline by 260bps to 19.0 percent due to higher raw material (RM) prices. We estimate PAT to drop by 13 percent YoY.
Insecticides India | Rating - Buy | Target - Rs 1,150 | Return - 53%
Revenue growth of 7.3 percent YoY will be primarily driven by strong performance in the Technical segment, as we anticipate higher production of Byspyribac Sodium (Green Lebel). We expect margin improvement of 232bps YoY to 9.9 percent, resulting in 40.1 percent YoY growth in EBITDA. PAT growth is estimated at 16.2 percent YoY.
PI Industries | Rating - Buy | Target - Rs 1,028 | Return - 15%
We estimate 16 percent YoY increase in revenue, mainly driven by CSM business (to register 20 percent YoY growth). Margin is likely to decrease by 250bps to 22.8 percent, primarily due to elevated RM prices. Adjusted profit after tax (adjusted for forex impact) is estimated to be at Rs 110 crore, down 11.8 percent YoY. At USD 1 billion, order book position is likely to remain at the similar level as Q3FY18.
Sharda Cropchem | Rating - Accumulate | Target - Rs 494 | Return - 22%
We estimate revenue growth of 15 percent YoY. Margin is likely to remain under pressure at 24 percent, as prices of chemicals have increased in China post shutdown of many facilities. We
estimate PAT growth of 4.1 percent YoY. New registrations will be key driver of revenue growth. Demand environment in Europe & Latin America will be the key to watch out for.
UPL | Rating - Buy | Target - Rs 997 | Return - 32%
Domestic segment is likely to post 5 percent YoY revenue growth while we estimate Latin America to grow by 8 percent YoY, primarily due to healthy Soybean sowing. Europe is expected to register revenue growth of 9 percent YoY due to bumper Sugar Beet crop.
We estimate an overall revenue growth of 8.7 percent YoY, primarily driven by increased volume in the key regions of North America, Latin America and Europe. We estimate 6 percent YoY EBITDA growth with 58bps contraction in margins to 20.5 percent.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.