As domestic agrochemical companies struggle as a result of worries about the monsoon season being affected by El Nio, brokerage Nuvama Institutional Equities believes that fertiliser companies are now in a better position.
Due to a moderate system inventory, the brokerage expects fertiliser demand to remain consistent; nevertheless, realisations are expected to decrease as a result of falling prices for important raw materials (phos. acid and ammonia).
According to the analysis, Coromandel International Ltd is anticipated to see stable EBITDA/mt as a result of declining raw material prices (Q4FY23E EBITDA growth of 24% YoY).
"We expect fertiliser companies to witness improvement in free cash flow generation with reduction in working capital as raw material prices comes down. We prefer domestic fertiliser players given strong demand growth visibility amid monsoon concern due to presence of imports and strong margins with falling raw material prices and cash flow generation," said Nuvama in its report.
On the other hand, despite the fact that margins are projected to increase, the brokerage advises investors to stay away from local agrochemicals companies due to worries about the monsoon. However, the brokerage is positive on players with international exposure in its agrochemical universe.
As a result, the brokerage favours Coromandel International Ltd, UPL Ltd, and Sharda Cropchem Ltd in its universe and has recommended a 'buy' rating for the companies, avoiding domestic agrichem due to concerns about the monsoon.
"We expect domestic agrochemical players to report tepid volume growth in Q4FY23E given weak demand and near-term concern over monsoon. Although margins are expected to expand by 420 basis points year-on-year (YoY) in Q4FY23 on account of moderation in raw material prices and a low base.
We expect players with global exposure (PI, UPL and Sharda) to clock relatively healthier growth on account of strong growth in US and other geographies, which will slightly be offset by lower growth from LATAM and EU. Domestic players (Dhanuka, Rallis) are likely to witness lower growth and margin pressure and should be avoided," said the brokerage.
