Is the agrochemical industry on the verge of recovery?

Prashant Biyani, vice president of institutional equity research at Elara Capital, notes that the global phase of destocking is largely over. But while domestic companies are doing well, exporters face a different challenge: despite volume recovery, prices are not picking up due to steady supply from China, he said.

A June 19 report by ICICI Securities said, “Early signs of improvement in agrochemicals, especially in supply to innovators, are already visible.”The report noted that agrochemical inventory levels have come down below normal, providing some comfort, while underlying demand remains stable. US agrochemical companies are increasing outsourcing and adopting an asset-light model, opening doors for Indian specialty chemicals companies to reach a larger target market, the report added.

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The chemicals and agrochemicals sector struggled in fiscal 2024 due to shrinking export demand, aggressive dumping by China and continued price pressure. Disruptions in global logistics following the Red Sea incident in December 2023 further raised costs, deepening the sector’s woes. Despite reporting a rise in volumes in the June quarter due to lower global inventories, concerns persisted as Chinese agrochemical production rose almost 50% year-on-year in January-July 2024, raising concerns about a fresh inventory glut.

Time to bounce back?

Biyani said, “Domestic consumption is already rebounding and a revival in exports is also on the horizon.” Gaurang Shah, senior vice president at Geojit Financial Services, also sees strong long-term prospects for domestic agrochemical companies, and exports will also benefit from the China plus one strategy.

“Green shoots in the agrochemical industry are already visible. We are seeing an increase in inquiries.”

“Green shoots are already visible in the agrochemicals business. We are seeing an increase in enquiries,” said Gopal Agrawal, CEO, Anupam Rasayan India Ltd. He said the agrochemicals business, which accounted for 65% of the company’s consolidated revenue in FY24, is expected to recover by the end of FY25 and grow further.

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Analysts said agrochemical companies’ sales in fiscal 2024 were hit by inventory reductions and increased competition from Chinese companies, which led to a drastic decline in consensus earnings per share over the past year.

Gyanendra Shukla, MD and CEO of Rallis India, noted that the industry is facing a price slump due to a demand-supply mismatch, largely due to excess capacity in China. Indian companies, including some pharma companies, have been increasing their production capacity to take advantage of the China-plus-one trend. Moreover, uneven monsoon rainfall, particularly droughts in the northeastern and southern regions, has curbed consumption and led to excess inventory. However, he remains confident about the industry’s long-term growth prospects.

“According to our internal estimates, the Indian agrochemical market is worth around ₹40,000 crore and growing in high single digits. Despite having large amount of cultivable land, our consumption of agrochemicals is 0.4 kg/hectare as against global consumption of 2.6 kg/hectare, indicating significant growth potential,” Shukla said. Agrochemicals remain the dominant business for Rallis India, contributing over 75% to annual revenues.

“Increasingly erratic monsoon patterns have disrupted agricultural activities… which could impact the recovery timeline.”

Simon Wiebusch, president of Bayer South Asia, remains cautiously optimistic about the outlook for the agrochemical industry. “Increasingly erratic monsoon patterns have disrupted agricultural activities, delaying timely spraying, which could impact the recovery schedule,” he said, adding: “A clearer assessment of the ongoing Kharif season is expected in the coming weeks.”

Global demand tempers expectations

While the macroeconomics has started brightening in 2024, global demand remains moderate and is poised for a gradual recovery. Biyani notes that while good rainfall has tempered growth expectations somewhat, a high single-digit year-on-year volume growth is still achievable in the September quarter, compared to a healthy double-digit year-on-year growth in the June quarter. Nevertheless, he is optimistic that the second half of FY25 will be much stronger.

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The September 5 report by the Centre said: “Amid these challenges, companies did not curtail their capex in fiscal year 2024 and largely continued with their announced capex for fiscal year 2025E. However, the focus has now shifted to increasing capacity utilisation and driving/augmenting revenues from newly launched capex.”

Shah favours Aarti Industries, Pidilite Industries, PI Industries, Vinati Organics and UPL in the specialty and agrochemical sectors. He also believes that demand for agrochemicals in India has strong long-term prospects, supported by continued government support, increased mechanisation and advanced field technologies.