Pricing worries weigh on agri-input stocks

Higher MSPs, good rain positives; costlier raw material to hurt margins

At a time when the country is witnessing its third consecutive year of good/normal monsoon, few would expect agri-input stocks to fall. Over the past six months, many have corrected significantly with Rallis India, PI Industries, UPL and Coromandel International, among others, down 23-33 per cent from their January highs.

Even positive news such as the forecast and expectations of a normal monsoon, and government announcing a hike in minimum support prices (MSP), among others, have not been able to lift investor sentiment.

While analysts believe that much of the bad news is now priced in, they are awaiting June quarter numbers and management commentary, for further cues.

Rising prices of imported chemicals on the back of China’s crackdown on industries to curb pollution, elevated crude oil prices, and higher input prices— are all expected to weigh on margins of agri-input companies, and have been key factors behind the weak sentiment.

For exporters, concerns on global tariff wars impacting sales and unfavourable emerging markets’ currency movement hurting margins, are other reasons keeping investors nervous.

Prices for potash Murate, DAP and phosphoric acid, for instance, have risen up to 20 per cent in the June quarter and could impact profitability of fertilisers and nutrient players. Analysts at Edelweiss say that despite the price hike, higher raw material costs would hurt margins for fertiliser companies, which remains a key monitorable.

Similarly, the increase in chemical prices, which had impacted profitability of agro-chemicals or crop protection players during the March quarter, can prove to be spoilsport in June quarter too.

For example, Rallis’ operating profits fell by about 19 per cent during the March quarter on the back of rising input costs from China, and a higher share of generic sales, which tend to earn lower margins. Thus, analysts are awaiting June quarter numbers for further indication.

Comparatively, seeds producers appear better placed. Rohit Nagraj at Sunidhi Securities says the opportunity for incumbents is strong, as multinational companies are leaving seeds business in India, while rising MSPs and increasing farm credit will aid growth for players.

Though Kaveri Seeds is a preferred pick, Rallis, too, has a strong seed portfolio that can aid the company’s performance. Amongst others, analysts maintain positive outlook for UPL, PI Industries, Dhanuka Agritech and Jain Irrigation as they feel the correction is now factoring in most concerns and post results many of these could rebound.