Manufacturers of fertilisers, agrochemicals, and tractors stand to profit
Stocks of agriculture-related firms — like fertiliser, chemicals, seeds, and equipment makers — were focused on Wednesday, after the govt provided relaxation to farming and rural activities after April 20.
The measures bode well for these companies and put to rest concerns associated with the impact of lockdown on crop harvesting and procurement activities. On Wednesday, the India Meteorological Department gave a forecast of a traditional monsoon, adding to the relief.
Investor sentiment received a lift, with earnings outlook for agri-related firms like PI Industries, UPL, Rallis India, Coromandel International, Bayer Cropscience, and Dhanuka Agritech improving. It brought cheer even to tractor makers like Escorts.
Consequently, most of those stocks ended the day with gains of up to 7.8 percent.
Pankaj Bobade, fundamental research head at Axis Securities, said the relief provided to agriculture activities would boost rural economy and revive consumption demand. Besides agri input and equipment, Bobade expects demand for two-wheelers and lower-end cars to collect pace.
Over the past few days, investors had remained nervous thanks to the lockdown, and its inevitable impact on crop harvesting and procurement, despite a robust rabi season.
Credit Suisse, too, observed that despite anecdotal evidence of a bumper harvest, market arrivals have dropped 50-95 percent year-on-year (YoY).
Hence, the government’s new guidelines ease these concerns. CARE Ratings, too, says that agriculture and therefore the manufacturing of essential goods will benefit the foremost.
Meanwhile, crop protection and fertiliser players had not seen much impact on business, given the lockdown coincided with a seasonally soft period. In fact, many fertiliser players had taken maintenance shutdowns, considering the lean season.
For agrochemical players, restoration of supplies from China bodes well, with the Kharif season sowing still a while away. Further, channel inventories will ensure supplies don’t get hampered by any disruption, say analysts.
The analysts also said that while there was no clear directive earlier for seeds, it had been now included within the new guidelines. Shares of Kaveri Seed Company rose 4.2 percent on Wednesday.
This is a positive for Rallis too, which derives an honest portion of its income from seed sales during the June quarter. With harvesting and procurement of the rabi crop to select up the pace, it means farmer incomes are going to be steady and this, including the traditional monsoon, should boost demand for seeds, agrochemicals, and fertilisers for the Kharif season.
Fertiliser players also are expected to profit from lower input prices. PhillipCapital’s channel checks suggest that prices of DAP (a major grade) declined by 17 percent YoY (2 percent sequentially) in Q4, and an identical trend was seen for other complex grades.
However, a sharper fall in prices of raw materials like orthophosphoric acid (21 percent YoY) and ammonia (12 percent YoY) will support margins of P&K (phosphate and potassium) players, especially Coromandel International.
For Dhanuka Agritech and Rallis, too, Emkay Global expects an improvement in margins to be led by cost rationalization and operating leverage. On the opposite hand, analysts remain cautious on export-oriented players.
COVID-led supply disruptions in Europe and therefore the US may impact supplies. Europe and therefore the US has already seen a couple of soft quarters, and COVID-19 has piled on the pressure. Thus, analysts remain cautious on PI Industries, UPL, and Sharda Cropchem; UPL is best placed among the three because it derives quite a 3rd of its revenues and growth from Latin America (LatAm).
Labour shortages in Asia and LatAm countries are still manageable, say analysts. Overall, within the chemicals space, Ambit Capital says they like defensives.
Escorts were the sole gainer within the auto sector, ending the day up 3.7 percent. While other auto companies even have an exposure (Maruti, M&M, and Hero MotoCorp) to the agricultural space, there was no mention of resumption of services for auto dealerships.
Further, auto stocks had already rallied by 15-30 percent since April 3, while the benchmarks were up 11 percent. With sales expected to stay soft within the June quarter and discretionary large-ticket items likely to urge postponed, concerns on volumes will remain.