Exports will help the agrochemical sector maintain double-digit growth in revenue this fiscal and the next — at 12-13% and 10-12%, respectively, compared with 15% last fiscal — even as domestic sales growth will be stunted by uneven monsoon and slower increase in rural incomes.

Steep rise in prices of inputs, especially imported, will lead to a moderation of 150-250 basis points (bps) in operating profitability in the two fiscals. However, healthy cash accruals and balance sheets will ensure credit profiles remain stable despite an expected increase in working capital and capital spend.

An analysis of 28 companies rated by CRISIL Ratings and accounting for ~80% of the ~Rs 53,000 crore agrochemical sector indicates as much. The sector derives equal revenue from exports and domestic sales.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “The China +1 procurement model has been a key tailwind for Indian players as large export consumers are diversifying their supplier base. This along with continued healthy demand from Brazil and the US (~45% of India’s exports) and increasing supplies to Europe (~15% of India’s exports) will lead to exports growing by ~15% this fiscal and 12-13% in the next. Consequently, the share of exports in overall revenue is expected to rise to ~53% by fiscal 2023.”

On the other hand, after strong growth of ~20% last fiscal, domestic demand growth will see a sharp moderation to 8-9% this fiscal, with uneven monsoon impacting offtake during the key kharif season (June-October) and moderately impacting rural incomes. Also, area under sowing has grown just ~1% this rabi season (October-February).

Next fiscal, assuming normal monsoon and modest increase in area under cultivation as well as better rural incomes, domestic growth will remain stable at 8-10%.

Meanwhile, the prices of key inputs such as glyphosate, glufosinate, imidacloprid and bifenthrin, which are linked to crude and phosphorous, have increased almost 30% since March 2021. With slowing domestic demand and high competitive intensity rendering players unable to pass on the input price increase entirely, operating margins are likely to slip to ~13% in fiscals 2022 and 2023 from ~14.5% in fiscal 2021.

Says Sandeep Narayanan, Team Leader, CRISIL Ratings, “With export demand remaining robust and product registrations increasing, capital spend will rise to Rs 5,000-5,500 in each of the next two fiscals from Rs 4,200 crore last fiscal. Working capital requirement will also rise due to higher cost of inventory and increasing exports, where credit period is higher. That said, prudent funding of the incremental working capital and capital spend will keep gearing comfortable at 0.3-0.4 time until fiscal 2023 (0.24 time in fiscal 2021) while interest cover ratio is expected to sustain at ~9 times.”

In the milieu, intensity and spread of the next monsoon, sowing levels in the rabi and kharif seasons, and trends in raw material prices remain key monitorables.