CRISIL expects prices of pesticide inputs (technicals¹ or intermediates¹) to decline 20-25% in fiscal 2020, because of improving supplies from China. That will help domestic pesticide manufacturers, who import over two-thirds of their input requirements, to improve operating margins by ~150-200 basis points (bps) to ~11-12% this fiscal.

Besides, they will also be able to lower inventory levels by ~10-15%, from ~120 days in fiscal 2019.

That will provide manufacturers an offset against modest revenue growth and higher receivables, which are possibilities in the event of below normal monsoon.

The Chinese government’s crackdown on pollution since early fiscal 2018 had led to almost half of chemical capacities shutting down. Consequently, prices of key inputs spiked from fiscal 2017 levels. For instance, prices of imidacloprid, chlorpyrifos and cypermethrin almost doubled, while that of glyphosate, fipronil and bifenthrin surged 50-60%.

Operating profitability of 32² pesticide companies that CRISIL rates fell 200-300 bps to ~9-10% in fiscals 2018 and 2019, despite partially passing on the cost increase. Their inventory levels also increased by ~20% to 120 days because of cautionary stocking of inputs.

“Recently, Chinese capacities that were relocated, especially in the Shandong province, are gradually coming on stream,” said Anuj Sethi, Senior Director, CRISIL Ratings. “Prices of inputs which have various industrial applications, have begun easing in recent months due to slower industrial growth in China. Certain crude oil-linked inputs such as chlorine, yellow phosphorus and bromine are also moderating.”

Further, tariffs imposed by the US have affected Chinese exports, and lowered input prices, which has benefited Indian importers.

Considering the situation, domestic traders of inputs are reducing their inventories, which will push prices south over the next few quarters. For fiscal 2020, CRISIL expects input prices to decline by 20-25%. Thereafter, they are likely to stabilise considering the need for Chinese suppliers to monetise their investments in relocating units and setting up pollution control infrastructure.

“Net-net, better operating margins of domestic pesticide manufacturers, will support cash flows, amidst modest revenue growth this fiscal” said Rajeswari Karthigeyan, Associate Director, CRISIL Ratings. “Further, reducing inventory levels and consequent freeing up of working capital lines will allow for absorption of higher receivables in the event of a below normal monsoon.”

Going ahead, how the input supplies from China and monsoon pan out will be the key monitorables.

1 Intermediates are chemicals used to manufacture technicals, which, in turn, are used to make pesticide formulations.
2 CRISIL rates 40 companies in the agrochemical industry including 32 pesticide manufacturers (producing insecticides, herbicides and fungicides, with varied levels of captive input facility) and 8 input manufacturers (producing largely technicals and intermediates).