Fertilizers & Agricultural Chemicals: Weak monsoon, weaker offtake; soft earnings

MUMBAI, 7 OCTOBER: We expect Elara Fertilizers and Agricultural Chemicals coverage universe to report weak Q2FY27 with decline in topline, EBITDA and PAT by 7%, 13% and 31% respectively. An erratic monsoon left West and South India in a rain-deficit situation through most of August and September, hurting both fertilizer offtake and agrochemical consumption. Urea and phosphatic fertilizers declined 6% and 21% respectively. We expect aggregate topline, EBITDA and PAT to decline by 12%, 26% and 37% respectively for fertilizers coverage universe. Rising raw material price, limited increase in subsidy and negative operating leverage have created a dent in industry profitability. We expect Coromandel International and Paradeep Phosphates to see an earnings decline of more than 50% (without considering inventory gains on Rabi season subsidy).

While agrochemical consumption is weak due to lower pest and fungal infestation, the situation is not as dismal as in the case of fertilizers. This is due to: (a) limited placement in Q1, (b) rains in the last 10 days of Q2 aiding consumption and (c) lower base of last year. Agrochemical companies may report a flat quarter with decline in profits. We expect aggregate topline, EBITDA and PAT to drop 1%, 9% and 11% for the industry (ex UPL).

West and South India worst hit by erratic monsoon: Rainfall was deficient (down 20% – 59% from LPA) in 16 of 29 key subdivisions on an average in Q2. West and South India fared the worst, with all 15 subdivisions deficient for two straight weeks in early September. Marathwada and Madhya Maharashtra have been deficient every week since mid-August, and Punjab in 11 of 14 weeks this season. Prolonged dry spell during main cropping season impacted agrochemical consumption across major crops.

Fertilizer offtake weak, NPK the worst hit: NPK/Urea sales fell 35%/6% YoY to 3.1/10.9mn tonnes in Q2FY27. NPK sales declined in each of the three months. DAP sales grew 3.6% YoY, partly driven by the shift from NPK to DAP by farmers. MoP was down 15.2% and SSP by 10.6%. Country-level closing inventory rose between 20% and 100% for key nutrients.

Agri-input stocks have seen a steep correction in price as climatic and geopolitical factors have impacted financials of these companies. Fertilizer raw material prices are peaking out and we expect them to cool off gradually. On the demand side, recovery is expected CY27 onwards as El Nino ends in February. Agri-inputs stocks should bottom out between October and December and should rebound in H1CY27 followed by earnings recovery Q1FY28 onwards. Within fertilizers space, Paradeep Phosphates and Coromandel International are our top picks. We like Dhanuka Agritech and Bayer CropScience within agrochemicals.

Report by: PRASHANT BIYANI, ELARA CAPITAL

(Disclaimer: The information provided here is investment advice only. Investing in the markets is subject to risks and please consult your advisor before investing)

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