Every year just before the monsoons, there are certain sectors which attract market attention and see large trading interest. Th­ese sectors are fertilisers, ag­rochemicals and companies that are in the tractors business. This is because agriculture is the mainstay of the Indian economy, accounting for 18.5 per cent of India’s gross domestic product (GDP) and is growing steadily at 4 per cent. Agriculture accounts for 15 per cent of total exports. The agricultural sector employs nearly 58 per cent of the country’s workforce. Agricultural output, however, depends on monsoon as nearly 60 per cent of area sown is dependent on rainfall. Last year’s insufficient rains, coupled with an estimated 20 per cent loss in farming output to pests, forced the Indian government to pay more attention to agriculture and food security.

Global appetite

Looking at from the global perspective, the world would demand 50 per cent more food, 30 per cent more water and 50 per cent more energy by 2030. And expect an even more challenging scenario by 2050, by which time, food production will need to have doubled in a sustainable way, in order to feed the world’s growing population that is set to rise to 9 billion.

India, with a population of 1.13 billion, growing at about 1.6 per cent per year, is a large and growing market for agricultural and food products.

This year, many experts pointed out that there has been a fear about how the monsoons would fare. It is very likely that if the monsoons are normal, then sectors such as agrochemicals will do well. Nilanjan Dey, director, Wishlist Capital advisors, told FC Invest, “The top line, revenues and profit figures of India’s top six agrochemical companies, including Excel Industries, Rallis India, Bayer India, Monsanto and Syngenta reflect the bigger picture of how the sector is performing.” Rallis India, a Tata company, has posted a higher net profit of Rs 22 crore for Q4FY10, against Rs 10 crore in the same period last year. The company's gross sales also rose by 11 per cent at Rs 202 crore in Q4FY10, compared with Rs 187 crore in the corresponding period last year. The company has posted its highest-ever net profit after tax of Rs 101 crore for the financial year 2010, compared with Rs 72 crore in the previous year. Profit before tax at Rs 164 crore grew 37 per cent, compared with the previous year. Gross sales increased by 3 per cent at Rs 37 crore in financial year 2010, against Rs 911crore last year. According to Dey, the stocks of companies that are in the crop protection business such as Rallis and Bayer CropScience had gained over 50 per cent since the beginning of year.

Good outlook

The India Meteorological Department (IMD) has already made a forecast of a normal monsoons this year. This would in turn lead to a good run for these companies he said. Sageraj Bariya, research analyst, Angel Securities, said the monsoons always play a critical role in this segment. “In fact, while doing a SWOT analysis of the agrochemical segment, I would put it under the ‘threat’ head,” Bariya said.

He said the areas of strength are globally cost-competitive segments, such as generics (off-patent) agrochemicals, which would help boost farm income.

Rising food requirement would also boost consumption, he added, but a large unorganised market and a lack of basic research and development facilities for new products would hurt prospects. Under-penetration of agrochemicals, patent expiry of molecules and diversification of manufacturing base are also areas of opportunities.

He said India’s consumption of agrochemicals is one of the lowest in the world, standing at 0.48 kg per hectare. This compares very poorly with other countries that have less arable land under cultivation. For instance, countries such as Taiwan, Japan, Holland and South Korea have higher consumption than India. “We believe this again highlights the underusage of agrochemicals by Indian farmers and unexploited opportunity for agrochemical companies. India produces approximately 16 per cent of the world’s total foodgrains but uses only around 2 per cent of pesticides. Low consumption can be attributed to fragmented land holdings, low-level of irrigation, high dependence on monsoons and low awareness among farmers about the benefits of using pesticides.

The estimated size of the Indian economy is $1 trillion of which agriculture accounts for 18 per cent. The agrochemicals industry’s size is estimated at $1 billion (Rs 5,000 crore), which is 0.1 per cent of the country’s total GDP and 0.6 per cent of agricultural GDP. Meanwhile, the subsidy burden of urea for FY09 is estimated at $21.2 billion or 2 per cent of the total GDP and 12 per cent of agricultural GDP. This demonstrates the gross under-penetration of agrochemicals and the opportunity that is available to the companies in the sector.

Agrochemicals are protected by patents to encourage innovation similar to the pharmaceuticals industry. Going ahead, many molecules are likely to go off patent throwing the market wide open for generic players. As per estimates, the total likely available opportunity through patent expiry stands at $3.6 billion.

Global agrochemical companies have been reducing manufacturing capacity of low-value, off-patent proprietary products. BASF has cut its range of AI from 300 in 2001 to 130 in 2006. Syngenta has reduced its portfolio from 120 to 80. Bayer CropScience reduced its portfolio by 29 actives between 2000 and 2006. Most of these off-patent products are outsourced to third-party manufacturers. Approxim­ately, one-third of total agrochemicals sales are estimated to be proprietary.

Key challenges

Internationally, the agrochemicals industry is highly regulated. Every product launch, new or generic has to go through field trails, which are expensive and time consuming. Any change further delaying the approval process could demand higher investment.

Scientific research has come up with seeds that have self-immunity towards natural adversaries. This can be a potential threat to the business of agrochemicals. The best example of such an introduction in the Indian market is “Bt Cotton”, which resulted in a decline in the consumption of agrochemicals by the cotton crop. However, of late, there have been some reports of Bt Cotton being unable to develop immunity towards new types of pests.

Agrochemicals are the last input in any agricultural operation and protect the final output — the crop. In case of India, most agricultural production is rain-fed and hence highly dependent on the monsoons. Hence, climate uncertainties could affect the demand for agrochemicals and in turn impact estimates.

A recent report has indicated that the compounded annual growth rate of the sector could be anywhere around 10 per cent in the next three-four years.

Stock performance

Agrochemical stocks are likely to gain on the back of expectations of normal monsoons this year. The stocks from the counter have already surged between 5 and 85 per cent year-to-date. Stocks of PI Industries have soared 85.55 per cent, the biggest gainer among its peers. Dhanuka Agritech, Rallis India and Excel Crop Care have jumped 64.10 per cent, 58.47 per cent and 51.09 per cent, respectively.

Aimco Pesticides, Syschem India, Kilp­est India climbed 50.58 per cent, 48.48 per cent and 38.98 per cent, respe­ctively. Nagarjuna Agrichem, Sabero Org­anics and Meghmani Organics gained 15.14 per cent, 12.66 per cent and 3.30 per cent, respectively. In contrast, Astec Life, Chemcel Biotech and United Phos­phorus dipped 27.11 per cent, 17.25 per cent and 1.49 per cent, respectively.

(Inputs from Amit Mudgill)