6 Stocks From The Agrochemicals Space, Where Prabhudas Lilladher Has A Buy Call

Brokerage firm Prabhudas Lilladher has recently come-up with its report on the agrochemicals space. The brokerage has a buy call on the stocks of Dhanuka, PI Industries, Rallis India, Sharda Cropchem, Sumitomo Chemicals and UPL. However, the preferred stock pick from the space is PI Industries, according to the Prabhudas Lilladher report.

Subdued performance likely

According to the brokerage, the interaction with industry experts and channel partners indicate that domestic industry will likely post subdued performance in 2QFY23 (expected to grow at mid-single to low double digit YoY) (PLe 14% YoY revenue growth) primarily led by 1) uneven distribution of monsoons causing miss in spraying activities, thereby resulting in lower volume growth and 2) higher carry-over inventory during the quarter.

"Despite industry taking price hikes to the tune of 4-5% (at portfolio level during 1QFY23) for partially offsetting higher raw materials cost and rupee depreciation, we believe falling raw material prices from July'22 (on MoM basis) amid a high cost carry-over inventory may likely impact gross margins. We expect absolute EBITDA for our coverage universe to be up 5%
YoY backed by higher revenue growth (led by price hikes), however EBITDA margins will likely be under pressure (PLe down 130 bps YoY) due to lower gross margins and higher other expenses (advertisement and promotional expenses- 1st normal year of operations post COVID-19 restrictions)," the brokerage has said.

Herbicides and fungicides likely to outperform with higher share of branded sales

According to Brokerage firm, its interaction with channel partners suggests that herbicide and fungicide category will continue to do well in the on-going kharif season (likely to benefit players like- PI Industries and UPL).

"While better sales of branded generics will continue just like last year, companies more active on the ground-level will reap maximum benefits (players likely to benefit- Dhanuka Agritech, Adama, Syngenta and Bayer Crop)," the brokerage has said.

Raw material situation in a better-off position

According to Prabhudas Lilladher, though raw material prices have been on declining trend since last few months, the trend continues to prevail, largely led by a) adverse weather conditions in certain key geographies like US, Europe and India - resulting in lower demand and b) better availability of RM with China opening up post COVID-19 related lockdowns.

Demand & Outlook

Domestic industry will likely post subpar performance in 2QFY23 (mid-single digit to low double digit YoY growth) primarily led by (a) uneven distribution of monsoons resulting in lower pest infestations and miss in spraying activates; (b) higher placements during 4QFY22 and 1QFY23 coupled with slower on-ground activities led by uneven rainfall, resulting in lower liquidation of inventories; (c) elevated channel inventory particularly in insecticides category and d) agrochemical companies with higher exposure to herbicides to likely post 12-15% growth in 2QFY23.