Stock Fundamentals

Why investors need to take stock of the pesticide ban

Rajalakshmi Nirmal | Updated on June 07, 2020

Investors need to be cautious considering the proposed ban on 27 generic insecticides

After close to two years of a study on 27 pesticides, the Centre on May 14 finally released a draft order banning all of them. “No person shall import, manufacture, sell, transport, distribute or use the pesticides,” said the draft.

The banned pesticides include widely-used chemicals such as 2,4-D, chloropyriphos, mancozeb, acephate and pendimethalin which form a large portfolio for companies, including Rallis India, Insecticides India and UPL.

For the benefit of those who do not know the background, here is a recap: In 2013, the Central government constituted the Anupam Verma Committee to review the use of 66 hazardous pesticides. The committee submitted its report in 2015.


It recommended a ban on 13 pesticides, including DDT, and suggested that 27 pesticides, including monocrotophos, a Class I pesticide banned in 60 countries, be reviewed in 2018. It also suggested that six pesticides — alachlor, dichlorvos, phorate, phosphamidon, triazophos and trichlorfon — be phased out by December 2020.

Following this, in 2018, the Ministry of Agriculture and Farmers’ Welfare banned 11 pesticides (of the 13 suggested by the committee) and announced phasing out by 2020 of six pesticides as per the list of the Verma Committee. Further, it passed an order for evaluation of 27 pesticides named by the committee.

The proposed ban will hit the agro-chemical industry hard as they account for 30-35 per cent of the domestic pesticide consumption (in terms of volumes), according to the Directorate of Plant Protection, Quarantine and Storage.

Stock prices of agro-chemical companies witnessed a knee-jerk reaction from the market post release of the draft order. But in the past three weeks, all the stocks have recovered. While the draft order gave 45 days for the industry to submit its objections, if any, the news now is that the industry has approached the government to extend the time to 90 days. Associations of the agro-chemical companies have collected and presented information on safety aspects of many of the pesticides and are hopeful of a positive response from the Ministry of Agriculture.

The line of argument of the agro-chemical industry is that many of the pesticides in the ban list do not have exact replacements. For instance, chloropyriphos and malathion, which are used on locusts now, and pendamethylin, a pre-emergent herbicide that will be used in direct seeding of rice this season in Punjab, Haryana and other places, do not have exact substitutes. They also claim that there is no sufficient data to prove ill-effects on health due to use of these pesticides.

Investors, however, need to be cautious on stocks in the agro-chemical space given this overhang.

It may though take some time for the final order to come. Besides, companies, including PI Industries, Dhanuka Agritech and Insecticides India, are working on new molecules, which can cushion the blow once the ban is approved.

Given an expected good monsoon and the government pushing its MSP procurement of major crops over the next few months, stocks in the agro-chemicals space may inch up on bourses.

Caution on generic players

All the 27 pesticides which are proposed to be banned are generics. Many of the Indian agro-chemical players are manufacturers of generic products, which are much in demand from small and marginal farmers for their lower prices. So, the proposed move will hit most players.

The revenue impact for companies, including PI Industries, Coromandel International, UPL, Insecticides India, Dhanuka Agritech and Rallis India, will be to the tune of 5-25 per cent. PI Industries may suffer the least, given its relatively small presence in generics. If exports are allowed, UPL and Coromandel International may escape largely unhurt. The Indian market contributes only 10 per cent to UPL’s revenue. For Coromandel, too, there is a large export share in total revenue from agro-chemicals. Also noteworthy is that the company draws only 15 per cent of its revenue from agro-chemicals.

Dhanuka Agritech, Insecticides India and Rallis India may see a bigger impact.

Insecticides India does very little exports and Dhanuka Agritech doesn’t export at all. That said, the positive for Dhanuka Agritech is that it has been investing in R&D ofinew-age molecules for long and has filed for patents in many.

So, the company will stand to gain when generics go off the shelf. Also, since these molecules will generate better margins, they will push higher revenue and profitability.

Insecticides India has also been launching new products and has a good pipeline in new molecules in the current year. In the first nine months of FY20, the company launched eight new products. New products launched since 2012-13 accounted for 45 per cent of the company’s revenue.

Expectations of good rain

The ongoing kharif season is expected to see good normal rain at 102 per cent of LPA (long-period average). Monsoon hit Kerala on time on June 1.

With the water level in reservoirs being higher in most areas than in last year, and good rains also expected, sowing is expected to be higher, pushing up the demand for fertilisers and crop protection chemicals.

With rural indicators such as tractor sales and MSP procurement pointing to positive signs and higher rural spending, the coming season may likely be better for the agro-chemicals sector.

Results for the March 2020 quarter for Rallis India have not been bad (revenue up 2 per cent) despite the lockdown due to Covid-19 resulting in sales disruption. Domestic revenues were up strongly, but exports were down due to logistics issues during the lockdown.

For Coromandel International, the quarter was good; it beat market estimates on revenue (up 8 per cent), thanks to good increase in sales volume, and operating profit margins expanding on operating leverage. UPL, too, put up a strong show in the quarter with sales up 30 per cent (in rupee terms). Margin, though, contracted on forex loss and change in geographic-mix.

Published on June 07, 2020

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