Prabhudas Lilladher’s interaction with industry experts and channel partners indicate that domestic industry will likely post subdued performance in 1QFY23 (likely to grow at mid-single to low double digit YoY) (PLe 14% YoY growth) primarily led by late onset of monsoons resulting in slower placements.

Growth will be largely driven by superior realization as industry has taken price hikes to the tune of 4-5% during 1QFY23 to partially offset higher RM cost and rupee depreciation. Lower than expected rainfall during June'22 is likely to have spillover of sales from 1Q to 2Q. We believe 25-30% of total kharif sowing is done in June, hence with expectations of better rainfall in July, sowing activities will eventually pick up.

We expect EBITDA for our coverage universe to increase by 15% YoY with margin likely to be flat YoY (up 20bps YoY), led by price hikes taken in the recent past.

Citing above reasons, we remain cautiously optimistic on the sector and watchful on how rainfall pans out over the next few weeks as July month is very crucial from liquidation point of view. Further, export driven players are in a better-off position than domestic focused players. We continue to like Sumitomo Chemicals, PI Industries and UPL in the agrochemicals space.

Late onset of monsoons in India… Cumulative rainfall till 1st July'22 was down by 6% with Northwest India/Central India/Southern peninsula at 4%/28%/11% deficient during the week ending 1st July'22. However, East and North east region received 21% surplus rainfall resulting in an overall narrowing down of rainfall deficit on Pan India basis. As of now, several weather forecasting agencies are expecting good rainfall for the remaining period.

...impacting acreages across states: As on 1st July'22 acreages were down 5% YoY and remained flat or down on YoY basis for major crops. However, sowing activities considerably increased during last one week led by better rainfall which in turn resulted in narrowing down of acreage deficit on weekly basis. Acreages for major crops like paddy, pulses, coarse cereals, oilseeds and cotton stood at -27%, +7%, +2%, -8% and +4% YoY, respectively till date.

...impacting water levels at reservoirs too: As on 30thJune'22, water storage in India's 143 reservoirs was at 28% of the total capacity. Storage level was down 14% as compared to water levels in the same period last year. While, it was up 18% as compared to average of past ten years. North, east, west, central and south have storage capacity of 23%, 17%, 24%, 28% and 35% respectively. Currently, water storage level is down for all the regions as compared to same period last year. Further, most reservoirs storage remained low below 40% of total storage capacity.

Exporters to outpace pure play domestic players in the near term: We expect subpar performance of agrochemicals industry in 1QFY23 (mid-single digit to low double digit growth) (PLe 14% YoY revenue growth) given (a) delayed start of south west monsoons, thereby delaying sowing by 15-20 days; (b) higher placements by industry during 4QFY22 coupled with slower on-ground activities, causing delayed liquidation in 1QFY23 and (c) elevated channel inventory particularly in insecticides category. We expect agrochemical sector revenue growth of 14% YoY in 1QFY23 primarily driven by superior performance from export oriented players.

Hence, we believe that export focused players like PI Industries, Sumitomo Chemical and UPL will likely report better growth as compared to pure domestic focused players like Dhanuka Agritech, Bayer Cropscience and Rallis India. We expect EBITDA to grow 15% YoY with margins improvement of 20bps YoY primarily led by superior margin improvement from Bayer Crop (up 60bps YoY) and Sumitomo chemicals (up 190bps YoY) led by better realizations in glyphosate. While, we also expect margin improvement in PI Industries (lower base of last year; up 110bps YoY) and UPL (better product and price hikes; up 30bps YoY).