Poor monsoon impairs Agri-input’s outlook ::Espirito Santo

Poor monsoon impairs Agri-input’s outlook
The progress of the monsoon has been pretty weak to date, with
overall rainfall deficient to the tune of 22%, triggering us to do a sense
check on agri-input demand. Our channel checks suggest that demand
has indeed been seriously impacted by a weak monsoon, late sowing,
changing crop patterns, on top of the 25-30% hike in complex fertilizer
prices and 8-10% hike in Agrochem prices. We maintain our cautious
near-term stance on the sector and expect volume growth to be
sluggish if the monsoon continues to be deficient. Agri-inputs is a
structural growth theme, and we’re likely to see good entry points
coming up in the face of short-term demand weakness.

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Deficient rains hit sowing
Overall rainfall has been deficient to the tune of 22%, and also very erratic daily
rainfall, with most weeks seeing extreme shortfall of rains and other weeks
torrents. Given that over 50% of farms are still rain fed, dwindling rainfall has
materially impacted sowing, which is down 20% lower versus the same period
last year, furthermore sowing of key agri-input consuming food grains have seen
a 31% decline to this point.
Monsoon bad in key states
Apart from AP, most of the agriculture-dominated states are facing acute
shortage of rainfalls, increasing risk to the already deteriorating demand of
fertilizers and pesticides. Considering the vast disparity in the occurrence of
rainfall across the country it is important to see the regional exposure of agriinput
companies to assess the impact on each company. Taking cues from the
distribution of fertilizer volumes for FY12 we can make a fair judgment with
regard to their regional exposures. Coromandel is relatively better off as
compared to other fertilizer companies as 52% of fertilizer volumes for the
company come from the states of Andhra Pradesh and Tamil Nadu, which has
experienced normal monsoon till now. Chambal, Deepak & GSFC generate most
of the revenues from states that are currently experiencing deficient to scant
rainfalls.
Damage already visible
The impact of a poor monsoon, coupled with increased prices of fertilizers and
already high inventory with dealers can be clearly seen on Q1FY13 volumes with
industry-wide complex fertilizer sales declining to the tune of 14%YoY. Urea
demand has been less impacted due to lower sowing activity, as marginal
farmers shift from pricey complex fertilizers to Urea; total industry wide volumes
for urea in 1QFY12 have declined by 4% YoY.
Channel checks suggest more pain
Our channel checks in Andhra, Maharashtra and Gujarat suggest that volume
off-take of complex fertilizers and pesticides have been weak. Given late off take
of monsoon farmers have changed the cropping pattern which has significantly
impacted demand for herbicides. Late as well as lower sowing has also impacted
sales of pesticides in these regions. Most dealers in Andhra and Gujarat have
started selling complex fertilizers at new higher prices and are facing farmers’
reluctance given such high prices.
Remain cautious on the near term outlook
We had turned cautious on the sector’s near-term prospects in Feb’12 (click
here) on the back of deteriorating farm economics and rising prices, but had
foreseen improvement in demand post advent of monsoon. This does not
appear to be holding true given weaker rains. So our preferred long-term
holdings remain Coromandel, GSFC, Rallis and Bayer CropScience, but in the
face of demand weakness and deficient monsoon we would see any weakness in
share prices in the coming weeks as a buying opportunity.