Prabhudas Lilladher has come out with its report on agri products & chemicals sector. The research firm remains cautiously optimistic on complex fertiliser companies as inventory overhang remains our biggest concern.
While the agri-inputs industry witnessed robust growth from FY06-11, the last two years have seen growth plumetting due to multiple issues ranging from pressure on farmers. cash flows to deficient monsoons. However, we expect growth to revive in FY14E supported by improvement in farmers. cash flow positions, expectation of normal monsoons, improved farmer sentiments and pick-up in demand. On the agrochemicals side, we expect pick-up in pesticide consumption, new products launches and low penetration of agrochemicals in India to drive growth over the medium-term. In the fertiliser space, we prefer urea over complex fertiliser in the near-term. Urea demand remains steady and we expect urea to continue to benefit from the wide differential in prices. We remain cautiously optimistic on complex fertiliser companies as inventory overhang remains our biggest concern. Our channel checks suggest that the system is holding on to 6m mt of complex fertiliser inventory which is double the normal levels. Hence, even if complex fertiliser consumption improves, it is likely to limit company level volume growth in FY14E. Chambal Fertiliser, Dhanuka Agritech & United Phosphorus are our top picks.
- Expect agri-inputs consumption to pick-up in FY14E supported by improvement in industry environment: We expect agri-inputs consumption to pick up in FY14E, supported by improvement in crop prices, stabilizing costs, expectation of normal monsoons and improved farmer sentiments. Crop prices have recovered by 25-30 percent from their lows over the last few months and PL Crop Index is currently trading at an all-time high. On the other hand, agri-inputs costs have stabilized leading to improvement in farmers’ cash flow position.
- Chambal Fertiliser, Dhanuka Agritech, United Phosphorus- our top picks: We are wary of the near-term headwinds considering how the agri-inputs sector is shaping up and issues surrounding complex fertiliser consumption. We prefer Chambal Fertiliser (core urea business remains steady, attractive valuation upside), Dhanuka Agritech (asset-light model, higher profitability & return ratios, strong revenue visibility, valuation discount to domestic peers) and United Phosphorus (earnings growth combined with improvement in return ratios, no further deterioration in working capital, attractive valuation upside) and position them as our top picks.
- Urea demand expected to remain steady; Recommend .BUY. on Chambal: Urea demand has grown at a CAGR of 3 percent over FY02-11 and we expect demand to remain steady, given the wider acceptance and huge differential between urea and complex fertiliser prices. We recommend ‘BUY’ on Chambal (target Rs70), primarily due to its steady profile of earnings and attractive valuation upside.
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