Stocks that cater to agrochemical space are slowly gaining traction, according to market analysts. Shrinking arable land and loss of crops due to pest attacks lead to wastage, posing a critical challenge to ensuring food and nutritional security. This is where the agrochemicals industry comes into the picture. Despite a tough H1, the industry is expected to continue its growth with the market size projected to grow from $7.90 billion in 2023 to $12.58 billion by 2028. 

But as the horticulture and floriculture industries continue to grow, there will be an increase in demand for agrochemicals, especially fungicides. Favourable domestic policies, a supportive investment environment, and increased production capacities and infrastructure development by domestic majors too aid the trend, said experts tracking the sector. 

During the past six months, most of the biggies such as Bayer Cropscience (up 28 per cent), Gujarat State Fertilizer & Chemicals Ltd (12.60 per cent) and Deepak Fertilizers (10.48 per cent), yielded decent returns though the quarterly numbers are not stellar. However, it was a mixed show at the bourses on Thursday. While Bayer slipped 0.75 per cent at ₹5,272 on the BSE, GSFC was up 1 per cent at ₹182.65 and Deepak Fert gained 0.86 per cent at ₹605.45. 

Growth drivers

One key driver of the sector’s growth lies in the backward integration of production processes. Domestic companies have been investing in the production of off-patent molecules and reducing their dependence on China. They have also focused on registering off-patent products and boosting distribution networks to push volumes at affordable prices.

The World Bank Commodity Outlook said fertilizer prices are expected to decrease as more supplies come online, but they are likely to stay above historical averages due to some supply constraints and China’s ongoing fertilizer export restrictions.

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According to Kotak Institutional Equities, Q2-FY24 marked another quarter of sharp declines in revenues across most of the agrochemical industry, both in India and internationally, amid continued destocking by customers. The outlook offered by most companies suggests that destocking pressures will persist at least through the final quarter of this fiscal. The recovery thereafter is seen only as modest, says the report.

Abhishek Jain, Head of research at Arihant Capital Markets, told businessline, “The outlook for the fertilizer and agrochemical industry appears positive, buoyed by improvements in the agricultural sector. With the reduction in channel inventories and a decline in raw material prices, the sector is likely to see a favourable impact. Formulation companies, in particular, are expected to benefit significantly from these developments.”

The recent easing of destocking-related pressures and a decline in raw material prices bode well for the agriculture sector. “This positive shift is anticipated to result in reduced input costs for farmers, improving their profit margins and overall affordability. With lower financial pressures, there’s potential for increased investment in essential agricultural inputs and technologies, leading to enhanced productivity and efficiency,” says Amit Sinha, co-founder of Unnati Agri. 

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Shashank Kumar, Co-founder and CEO of DeHaat, said, “Kharif crop production is good but the season was not ok for agri input business or the industry. The reason is because the kharif season was dry and there was less disease or pest or fungal attack. Basically, there was less demand for pesticides and fungicides. That’s why the agri input industry had a tough time in the first half. We are seeing a very good rabi season. The harvesting has been delayed because of rains a few weeks ago and as a result the soil moisture is absolutely fantastic which means there will be demand for agri inputs.”

Key hurdles

But, the sector has its own set of challenges such as the impending El Nino threat, lower water levels in the South, lack of mega production facilities like those in China, regulating the import of agrochemical formulations, exclusion of the sector from the government’s PLI scheme, etc. “A notable challenge is the unpredictability of weather, which prevents accurate and reliable information necessary for informed decision-making. This unpredictability increases the risk of crop failure and reduced yields is high, especially in events such as El Nino, adding some market uncertainty,” says Unnati Agri’s Simha.

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But Jain is optimistic and said the overall situation seems to be improving on a quarter-on-quarter basis. “The challenges may affect sector performance and listed players, but the impact could be mitigated. The water requirement for rabi crops is generally lower, which might offset some of the difficulties caused by reduced water availability and El Nino effects. Some companies, especially those well-prepared for these conditions, might even perform better than expected.”

Overall, the combination of government support, manageable seasonal challenges, and improving market conditions points to a positive outlook for the agriculture and fertilizer industry. Timely subsidy payments by the government, particularly for CPC and urea players, are expected to provide further impetus.