Agrochemical players will grow at 15-17% this fiscal after a stellar 23% growth logged last fiscal, primarily driven by continued strong exports and stable domestic demand. Revenue will further grow by 10-12% next fiscal as India continues to benefit from the China+1 strategy of global players and key molecules going off patent.

Higher operating leverage will help sustain operating margins at 15-16% in the current and next fiscal (16.6% last fiscal), despite input prices remaining elevated. Capital spending will continue at similar levels as in the past, but elongation in working capital cycle will result in higher borrowings. However, strong cash generation will keep credit profile of players ‘Stable’.

An analysis of 50 companies rated by CRISIL Ratings, accounting for nearly 90% of the ~Rs 66,000 crore agrochemical sector, indicates as much.

Says Poonam Upadhyay, Director CRISIL Ratings, “Export revenue is seen rising 18-20% this fiscal, with the US dollar appreciating ~9% so far and volume growing as global players continue to de-risk their China dependency. Next fiscal, exports will likely grow 12-14% as players keep up capex with an eye on molecules worth $4 billion going off-patent over the next two years. As a result, exports will remain the major contributor to the agrochemical sector accounting for ~53% of the total revenue (refer to Chart 1).”

The domestic segment, on its part, will grow 12-14% this fiscal driven by a near-normal monsoon, higher realisations, and improving farm sentiment. Surplus rain in September has recharged ground water level, laying the ground for a healthy Rabi season, in tandem with favourable weather conditions. Assuming a normal monsoon and continued government focus on improving farm incomes, the domestic segment will grow 10-12% next fiscal.

Prices of crude and yellow phosphorus, the key raw materials, shot up 40-45% and 18-22%, respectively, in the latter half of last fiscal. Continued high prices, despite some moderation lately, will dent gross margins by 90-110 basis points. However, higher operating leverage, derived from better cost absorption, will ensure overall operating margin remains at 15-16% this fiscal, only marginally lower compared with fiscal 2022. Margins are expected to stabilise at similar levels next fiscal.

Says Shounak Chakravarty, Associate Director, CRISIL Ratings, “Credit profiles of CRISIL Rated agrochemical players will remain largely ‘Stable’. Healthy cash generation will limit reliance on external debt even as capex intensity remains high at Rs. 6,000-6,500 crore over each of the next 2 fiscals. However, increase in share of exports mainly to countries in the LATAM region which require higher credit periods (refer chart 2) will increase their working capital borrowings. That said, well maintained balance sheets along with higher cash accruals will help debt metrics sustain at comfortable levels.”

CRISIL Ratings expects the gearing and interest cover ratios for its rated portfolio at ~0.4 times and ~10 times respectively until fiscal 2024, compared with 0.27 times and 12.6 times in fiscal 2022, respectively.

Supply chain disruptions, sharp volatility in raw material prices and the intensity and spread of next monsoon will bear watching in the road ahead.