Is the agrochemical industry on the cusp of a turnaround?

Prashant Biyani, Vice President of Institutional Equity Research at Elara Capital, notes that the global inventory destocking phase is largely over. But while domestic-facing companies are in the clear, exporters face a different challenge: despite the volume recovery, prices are not increasing due to steady supplies from China, he said.

An ICICI Securities report dated 19 June said, “Early signs of a turnaround in agrochemicals, particularly supplies for innovators, are visible now." The report noted that agrochemical inventory levels have dropped below normal, providing some comfort, while underlying demand remains stable. US agrochemical companies are ramping up outsourcing and embracing an asset-light model, opening the door for Indian specialty chemical firms to tap a bigger addressable market, the report added.

Also read: Heavy showers could rain on agrochemical firms' parade in Q2

The chemicals and agrochemicals sector struggled in FY24 owing to shrinking export demand, China's aggressive dumping, and persistent pricing pressures. The disruption in global logistics after the Red Sea incident in December 2023 further raised costs, compounding the sector's woes. Despite reporting volume growth in the June quarter due to lower global inventories, concerns persisted as China's agrochemical production surged nearly 50% year-on-year in January-July 2024, raising fears of a new inventory overhang.

Time for a rebound?

Biyani said, “Domestic consumption is already bouncing back, with an export revival also on the horizon." Gaurang Shah, senior vice president at Geojit Financial Services, also sees strong long-term prospects for domestic agrochemical companies, with exports set to benefit as well from the China-plus-one strategy.

“Green shoots in the agrochemicals business are already visible. We’re observing an increase in inquiries," said Gopal Agrawal, chief executive officer of Anupam Rasayan India Ltd. He said the agrochemical business, which accounted for 65% of the company’s consolidated revenue in FY24, is expected to recover by the end of FY25 and grow thereafter.

Also read: Expiry of patent for key product weighs on PI Industries

Sales of agrochemical companies in FY24 were affected by destocking and increased competition from Chinese firms, leading to sharp cuts in consensus earnings per share over the past year, analysts said.

Gyanendra Shukla, MD & CEO of Rallis India, noted that the industry is grappling with a price meltdown because of demand-supply mismatches, largely driven by excess capacity from China. Indian companies, including some pharmaceutical firms, have expanded their capacities to capitalise on the China-plus-one trend. Additionally, uneven monsoon rains, particularly droughts in the northeastern and southern regions, have dampened consumption and led to excess inventory. However, he remains confident of the long-term growth prospects of the industry.

“As per our internal estimates, the Indian agrochemicals market is worth about ₹40,000 crore and growing in high single digits. Despite having much arable land, our agrochemicals consumption stands at 0.4 kg/hectare versus global usage of 2.6 kg/hectare, indicating significant headroom for growth," Shukla said. Agrochemicals remains the predominant business for Rallis India, generating more than 75% annual revenue.

Simon Wiebusch, president of Bayer South Asia, remains cautiously optimistic about the outlook for the agrochemicals business. “The increasingly erratic monsoon patterns have disrupted agricultural activities, delaying timely sprays, which may impact the recovery timeline," he said, adding, “A clearer assessment of the ongoing Kharif season is expected in the coming weeks."

Global demand tempers expectations

While the macro environment has started to brighten in 2024, global demand remains moderate and is poised for a gradual recovery. Biyani notes that while heavy rainfall has slightly tempered growth expectations, high single-digit volume growth year-on-year is still achievable for the September quarter, versus healthy double-digit year-on-year growth in the June quarter. Nevertheless, he's optimistic that the second half of FY25 will be significantly stronger.

Also read: Raising farmer income is a key priority for India

A Centrum report dated 5 September said, “Amid these challenges, companies did not curtail capex during FY24 and have largely continued with the announced capex for FY25E. However, the focus has now shifted to increasing capacity utilisation and driving/ramping up revenues from newly commissioned capex."

Shah favours Aarti Industries, Pidilite Industries, PI Industries, Vinati Organics, and UPL in the specialty and agrochemical sectors. He also believes India's agrochemical demand has a strong long-term outlook, backed by sustained government support, increased mechanisation, and advanced field technologies.