Highlights:
-Mixed performance in the agri space
-Weak North-East monsoon impacts volumes for companies
-Raw material cost and inventory pile-up eat into profits of Rallis-Easing of key raw material prices helps improve margins for Coromandel
For the latest quarter gone by, Rallis India and Coromandel international are the two agrochemical companies to get off the block on the earnings front.
Performance in the agri space has remained mixed till now. While Rallis India continued with a disappointing show, Coromandel International reported encouraging numbers with signs of improvement, post dismal quarters.
While there are long-term triggers for improvement for both, we believe that the pressure on performance will continue in the short term because of expectations of a weak monsoon and high input costs. We advise investors to remain on the sidelines until operational performance improves.
Rallis India
- Inventory pile-up coupled with low pest infestation ate away profitability of the domestic business.
- Raw material cost continued to rise, which led to a substantial erosion in margins and profits. Rallis imports close to 45 percent of its raw materials from China.
- With high channel inventory, price hikes were limited.
- The weak North-East monsoon impacted the Rabi season. Low crop acreages and reservoir levels affected performance in Karnataka, Telangana and Andhra Pradesh.
- International business continued to gain traction, driven by surge in demand for some products.
- The company is planning Rs 800 crore investment in the next 5-6 years for building a facility in Dahej for manufacturing formulation, technical and associated intermediary products for domestic and international markets.
- For FY20, the company has a pipeline of five products. The management believes that launching more speciality products with higher margins should help improve margins in future.
Coromandel International
- Although volume growth remained muted amid a deficit North-East monsoon, price uptick in the nutrient business helped improve margins.
- Lower exports impacted the top line in the crop protection business. However, the margins saw improvement.
- Softness in prices of important raw materials like phosphoric acid and ammonia led to margin improvement.
- Higher inventory and delay in subsidy payments stretched working capital position.
- The company is banking on the backward integration project in nutrients and new launches in crop protection chemicals across technical grades as well as formulations to support its future growth.
Outlook
Rallis’ renewed strategy and announcement of capex -- which was missing for the past 3-4 years -- might result in a turnaround in the long term. However, the company is impacted by external operating environment, and we believe that the overhang would continue in the near term.
With an improving product mix and cooling off of prices of some key raw materials, we expect improvement in Coromandel’s margins in upcoming quarters. We expect improved growth in the longer window on a growing share of the non-subsidy business, greater operating leverage and visibility of growth in crop protection business.
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(Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here)
