Q1FY13 review: Emkay's take on agri input & chemicals

Emkay Global Financial Services has come out with its report on agri input & chemicals sector. The research firm is cautious on the sector. Deepak Fertiliser & Tata Chemicals are the top picks in the agri space due to attractive valuations.

• As expected that contracting farm income will have adverse impact on the companies’ profitability, Q1FY13 results demonstrate similar patterns. It has resulted into 4% drop in aggregate PAT in Q1FY13 n Despite 13% increase in aggregate revenues, 240bps drop in EBITDA margins to 14.9% impacted bottomline. Fertilisers, agrochemicals witnessed drop in volumes.
• Fertiliser revenues for our universe declined by 3% yoy while EBIT margins shrunk 260bps yoy/40bps qoq due to rupee depreciation & higher raw material prices n Chemicals revenues for our universe increased 24% yoy (Emkay chemical index up by 7%) while EBIT margins shrunk 520bps yoy to 18.4% (mainly due to GSFC)
• Complex fertilizer volumes declined by 14%yoy in Q1FY13 mainly on account of sharp increase in complex fertilizer prices & delayed monsoon.
• Agrochemicals companies also witnessed pressure since despite 16% increase in revenues, PAT increased by mere 5%. Industry expects volume growth in Q1FY13 was muted.
• Poor monsoon has adversely affected the industry and we expect near term environment to remain challenging. Key inputs like fertiliser and agrochemicals continue to witness demand pressure.
• Post the results, we maintain our cautious outlook on the sector. Deepak Fertiliser & Tata Chemicals remain our top picks in the agri space due to attractive valuations

Near-term outlook on agri-inputs remains cautious: We maintain our cautious outlook on agri input companies as subdued farm economics is likely to restrict consumption of agri-inputs in near future. With monsoons being deficient by 17% so far, it is likely to further put pressure on agri-inputs consumption. Complex fertiliser consumption is likely to remain weak as the full impact of increased prices unfolds starting Q2FY13.Though MSPs have been increased to provide relief to the farmers however we believe the broader issue surrounding the foodgrains sector is huge supply in system.

Prefer Deepak Fertiliser & Tata Chem on valuation parameters: Deepak Fertiliser & Tata Chemicals remain our top picks in the sector based on attractive valuations. Though Ammonium Nitrate demand is witnessing sluggish growth due to lull in mining activities, however Deepak Fert is gaining market share gradually by replacing imports. Deepak is currently trading at 4.3x 1 yr fwd earnings against its average of 7-8x 1 yr fwd earnings. Tata Chemicals Q1FY13 operations were affected by multiple factors however business has normalized from current quarter and would help company to report strong results in subsequent quarters. At CMP of Rs 308, Tata Chemicals is currently trading at 8.1x 1 yr fwd earnings against its historical average of 10-11x 1 yr fwd earnings.

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