Agriculture Inputs Sector Update - in A Bright Spot PDF

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INSTITUTIONAL EQUITY RESEARCH

Agriculture Inputs
In a bright spot

2 July 2020
INDIA | AGRICULTURE INPUTS | Sector Update
Agriculture inputs consumption had seen significant growth over the past two months Companies
suggesting strong kharif season despite covid‐19 led challenges. We interacted with
several dealers/distributors and also hosted an agriculture inputs conference on Jun 24thto Chambal Fert BUY
understand sustainability of rising consumption and the outlook for 2020‐21. We received CMP, Rs 148
extremely positive feedback from all channel partners/companies. Recent demand surge Target Price, Rs 190
was largely led by: (1) Timely arrival of monsoon,(2) advance procurement by farmers with
Coromandel Int BUY
some stocking on fears of limited availability, (3) better purchasing power to consume CMP, Rs 752
agriculture inputs with income support from the government,(4) farmers have very limited Target Price, Rs 755
options to spend on non‐essential items due to fears of covid‐19. Demand is expected to
remain substantially better compared to last year for FY21 due to: (1) Better rainfall PI Industries NEUTRAL
CMP, Rs 1563
distribution,(2) higher water storage, and (3) government’s continued support for Target Price, Rs 1500
agriculture. Hence, we remain positive on agriculture despite minor covid‐19‐led
challenges. We like leading players in agriculture inputs such as CRIN, CHMB, UPL and PI. UPL BUY
CMP, Rs 442
Target Price, Rs 660
Agriculture: On a strong footing
• Our interaction with many channel partners clearly suggests that timely arrival of south‐west
monsoon and expectation of better distribution of rainfall will continue to drive consumption
of agriculture inputs for kharif 2020.
• Also, higher water storage levels (1.9x vs. last year and 1.7x vs. 10‐year average) and normal
monsoon strongly indicates better rabi prospects. Therefore, agriculture inputs consumption
is likely to remain higher in FY21 compared to last year.
• Kharif planting areas had already reached 31.5mn hectares by June 26, with larger share of
cereals, pulses, oilseeds and cotton crops.
Agrochemicals: Witnessing sharp jump in volumes led by strong demand
• Based on our channel checks, Q1FY21 sales volumes of agrochemicals remained strong at 10‐
20%yoy; some companies have taken price hikes of 1‐3%. Better water storage, normal
monsoon, more cash in hands of farmers (PM‐Kisan) continues to support consumption.
• Organised players have started gaining market share as supply‐chain constraints faced by
unorganised players (raw materials) is supporting branded sales. Also, farmers’ affordability
to consume agrochemicals has risen with limited spending options due to lockdown or covid‐
19‐led fears.
• Dealers/distributors are facing shortages of Glyphosate (herbicide) due to supply constraints
from China. Some domestic companies (UPL, Sumitomo, Dhanuka) have started gaining. Also,
PI’s flagship product ‘Nominee Gold’ has so far seen c.30‐40% jump in volumes (no change in
price compared to last year) in the northern States. Some dealers are even facing shortages in
UP/Punjab/Haryana.
• Dealers in northern states are seeing strong herbicide consumption due to labour shortages
and larger planting areas compared to last year.

Fertilisers: Sharp jump in volumes despite minor covid‐19 challenges
• Fertiliser sales volumes (urea/DAP/NPKs/MOP/SSP) saw a substantial jump of 20% yoy to 14.4
mn tonnes in Q1FY21, despite minor supply‐chain challenges. Spike in sales was led multiple
reasons:(1) Advance buying on fear of limited availability due to covid‐19; (2) expectations of
good monsoon;(3) higher purchasing power because of income support.
• Many dealers/distributors have very minimum inventories due to substantial consumption
over the past 2‐3 months. Channel inventories are estimated at c.2mn tonnes by mid‐June vs. Deepak Chitroda, Research Analyst
c.5.5 mn tonnes last year. (+91 22 6246 4117) dchitroda@phillipcapital.in
• Companies have gradually reduced discounts on MRPs over the past two months in order to
Surya Patra, Research Analyst
cover rising costs on rupee depreciation. DAP/MOP were selling at about Rs 24,000/17,500 (+91 22 6246 4121) spatra@phillipcapital.in
per tonne.
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AGRICULTURE INPUTS SECTOR UPDATE
Highlights of Phillip Capital India “Agriculture Inputs Conference” on
Jun 24
We hosted “Agriculture Inputs” conference and invited key corporates (UPL,
PMFAI/Dhanuka Agritech/Chambal Fertiliser) and channel partners
(dealers/distributors from Punjab/Haryana/Rajasthan/Madhya Pradesh) to
understand the ongoing ground realities and outlook for agriculture inputs.

Summary:
• Higher consumption of agriculture inputs over the past few months was led by
advance buying by farmers, more cash in hands of farmers with the help of
government support, and timely arrival of monsoon leading to more planting
areas.
• Companies are not facing any major concerns in terms of labour availability, as
most of them are sourcing from nearby areas. Also, supply chain concerns were
also substantially lowered because of the opening up of the lockdown in the
past few weeks.
• The locust attack did not have major impact in Rajasthan, MP, Punjab, and
Haryana as various state governments played an important role in controlling
the attack. Also, limited standing crops in the field resulted in minimum
damages.
• PMFAI/UPL are not expecting any significant impact on the draft order for a ban
on molecules, as exports are allowed and the final outcome is likely to be a ban
on only few molecules that are already old and insignificant.
• Companies are not likely to face any major impact of short supply of raw
materials from China, considering recent tension between two countries. Many
Indian companies have gradually diversified their sourcing to the domestic
market. Also, the government cannot completely ban imports from China,
particularly agrochemicals, as it is a part of essential categories.
• Dealers/distributors have seen about 10‐20% yoy volume growth in
agrochemical sales over the past three months. Growth has been slightly higher
in northern and western regions due to labour shortage, where herbicides sales
were higher.
• Labour shortages initially hurt harvesting activities, but farmers are somehow
managing with family labour. Labour is expected to return in a few months,
mostly likely after the kharif season.
• In agrochemicals, domestic companies’ brands (PI/Dhanuka/Indogulf/UPL/IIL)
were doing better than MNCs, as the former are offering better discounts/credit
days.
• Dealers and distributors’ kharif season started with substantially higher
consumption, largely led by advance buying and the timely arrival of the
monsoon. They expect monsoon to remain normal and consumption of
agrochemicals to be higher than last year.
• The New Pesticide Bill (NPS) needs to clear in the parliament houses. The bill
aims to promote branded or genuine products so that farmers can benefits in
terms of increasing yields. After it is passed, the share of the un‐organized
market will reduce.
• Dealers/distributors are seeing increasing cash sales over the past few months;
they attribute it largely to better cash flow availability with farmers.
• Fertilisers and agrochemicals haven’t done any major changes in MRPs of
products. Some fertiliser companies gradually reduced discounts on MRPs in
order to cover rising costs due to rupee depreciation.
• Overall, everyone is expecting good kharif and rabi seasons for 2020‐21, led by
normal monsoon and better water storage. Impact of covid‐19 is not likely to
have a meaningful impact on agriculture.
• Government support via various schemes – such as income support (PM‐Kisan
etc), irrigation, crop insurance – has started benefiting farmers and is expected
to support consumption of agriculture inputs in coming years.


Key developments for kharif 2020 and beyond

Good start of monsoon indicates better kharif/rabi consumption
Thanks to the ‘Nisarga’ cyclone, monsoon is set on its normal course (June 1st) in
Kerala; earlier IMD (Indian Meteorological Department) was expecting a delay of
about four days. Monsoon has progressed well over the past few weeks, and covered
the entire country 12 days ahead of the normal date of July 8. Conditions are
becoming more favourable for better distribution of rainfall across the country. By
June 28, cumulative rainfall for the country was 21% (182mm) higher than normal
rainfall (historical average of 151 mm). Regionally, Central received better rainfall at
36% above normal LPA (long period average). South/North West/East‐North East
were at 4%/8%/20% above normal LPA. The progress of rainfall in July/Aug will
determine distribution across the country, as these months cover about 60% of
south‐west monsoon (Jun‐Sep). However, timely arrival and good progress of
monsoon so far strongly indicates better rainfall for the rest the season; this should
support agriculture consumption.

Cumulative rainfall for the country (2020)
200 Actual Normal
180
160
140
Rainfall in mm
120
100
80
60
40
20
0

Source: IMD, PhillipCapital India Research

Rainfall in July/Aug will determine prospects of monsoon 2020, as both months
have 60‐65% share of the monsoon season
Sep Aug Jul Jun
100%
Rainfall share % (Jun‐Sep)
80%
60%
40%
20%
0%

Source: IMD, PhillipCapital India Research,



Well‐distributed rainfall across the country so far

Source: India Metrological Department, PhillipCapital India Research,*As on Jul1



Better water availability is likely to stay for the entire year
India’s water storage of 123 major and important reservoirs was at 57 BCM (billion
cubic metres) as on June 25 vs.29 BCM last year or 33 BCM ten‐year average. In terms
of utilisation, storage was at 33% of the capacity vs.17% of capacity last year. Better
water storage of last year (1.9x) due to extended rainfall and expectation of a normal
monsoon is likely to substantially create higher water availability for the full year
2020‐21. Hence, farmers are likely to expand planting areas for the current kharif and
upcoming rabi season. Therefore, better water storage for the full year is likely to
keep better consumption of agriculture inputs

Water storage of major reservoirs is at 1.6x of the 10‐year average
Reservoirs status : Live storage
160 Current year (2020) Previous year (2019)
10 year avg
140
120
100
in BCM
80
60
40
20
0
12/Mar
26/Mar
09/Apr
23/Apr
07/May
21/May
02/Jan
16/Jan
30/Jan
13/Feb
27/Feb
04/Jun
18/Jun

Source: Ministry of agriculture, PhillipCapital India Research

Kharif planting is progressing rapidly
Farmers have started sowing across the country with the good progress of the
monsoon. Some large farmers in Punjab, Haryana, WesternUP, Maharashtra, and
Gujarat are experiencing labour shortages because of reverse migration. These
farmers are managing with limited labour by using farm equipment for planting
(direct seeding), taking help of family members, and reducing labourneeds by
planting crops such as pulses and cereals. These states are seeing higher usages of
herbicide on labour shortages. On the opposite end of the spectrum, UP, Bihar,
Jharkhand and Chhattisgarhhave better availability of labourers – and this situation
has not only reduced the cost of cultivation for farmers, but also supported larger
planting areas.

A low base of last year led by delayed rainfall for about a month and timely arrival of
monsoon this year is largely supporting high growth of planting areas. By June 26,
sowing areas were at 31.6mn hectares (ha), up by 104% yoy or covering about 30% of
the normal kharif area.Paddy or rice (major kharif crop) planting areas were at 3.8mn
ha, up by 35% compared to last year. Major planting progress was seen in states such
as Punjab, UP, MP, Jharkhand, AP, Bihar, Rajasthan, Telangana, Gujarat and West
Bengal. Other important crops or non‐traditional crops such as pulses, cereals, and
oilseeds are seeing continued rise in planting areas. By Jun 26, planting areas for all
three crops combined were up by 244% yoy to 15mn ha. Cotton planting areas were
up by 165% yoy to 7.2mn ha with contributions from Maharashtra, Gujarat,
Telangana, Rajasthan, MP, Punjab and Haryana.



Kharif planting areas expanding rapidly
35 2019 2020
30
25
in mn hectares
20
15
10
0
5/Jun 12/Jun 19/Jun 26/Jun


Kharif crop planting areas were up by 39% yoy up to June26
Crops Normal Area (in mn ha) Planting areas as on Jun 26, 2020 (in mn ha) YoY %
Rice 39.6 3.8 35.0%
Pulses 12.0 1.9 221.7%
Coarse Cereals 18.8 4.8 95.9%
Oilseeds 18.2 8.3 525.6%
Sugarcane 4.8 5.0 1.3%
Jute & Mesta 0.8 0.6 ‐11.7%
Cotton 12.1 7.2 164.7%
Total 106.4 31.6 104.3%

Continued government support is helping demand
The government’s continued support (income support, crop insurance, irrigation
projects and e‐NAM) for agriculture activities is gradually starting to benefit farmers.
However, concerns persist about post production areas for crops, where farmers
struggle to get fair realisation due to: (1) Limited flexibility in selling beyond APMC
(Agriculture Produce Market Committee);(2) limited or no storage facilities; and (3)
limited or no assurance of getting the right price. The government’s recent measures
under ‘Atma Nirbhar Bharat’ largely addresses post‐production concerns and are
expected to be a game changer for the future of farming activities.
1. Amendment in Essential Commodities Act 1955: The government de‐regulated
production, sale, and stocking of cereals, edible oils, pulses, onions, oilseeds,
and potatoes. Limits will be imposed only under exceptional circumstances.
These changes in regulationsshould allow food processor or other buyers to
hold inventories up to their capacity, which will bring in investments in cold
storage, warehouse, and processing facilities, and indirectly support farmers to
get better realisations.
2. Agriculture marketing reforms: The government has already brought in an
ordinance called “The Farmers’ Produce Trade and Commerce Ordinance 2020”,
which will bring in freedom of choice for farmers and trade partners to
sell/purchase crop produce at a fair price. It would also promote efficient,
transparent, and barrier‐free inter‐state and intra‐state trade. Therefore,
farmers would be in better position to get better realisations by selling directly
to larger trade partners.
3. Legal frame work for contract farming: The governmentbrought in an
ordinance called “The Farmers (Empowerment and Protection) Agreement on
Price Assurance and Farm Services Ordinance 2020”, which will provide a
national framework on farming agreements by protecting farmers (to get a
mutually agreed price) who will engage with trade partners such as processors,


wholesalers, exporters or larger retailers. Thisshould enable farmers to receive
assured returns and minimise their risk.
• Benefits of PM‐Kisan are spreading wider: PM‐Kisan, an income‐support
scheme, was launched in FY19 with an objective to support farmers by crediting
Rs 6,000 per year in three instalments of Rs 2,000. The scheme has started
benefiting more farmers since its inception– from about 45mn farmers initially
to 84mn farmers presently (India has about 140mn farmers in total). Also, PM‐
Kisan disbursement amount supported many farmers in spending on agriculture
inputs in the present uncertain covid‐19 scenario. Therefore, continued income
support by central and state governmentswould support farmers and indirectly
lead to better consumption of agriculture inputs.

PM‐Kisan: Number of beneficiaries almost doubled since the launch in Dec 2018
PM‐Kisan: Nos of beneficiaries paid
(in mn) Duration Dec 18 to Mar 19 Apr 19 to Jul 19 Aug 19 to Nov 19 Dec 19 to Mar 20 Apr 20 to Jul 20
Dec 18 to Mar 19 45.0 44.2 43.0 38.9 37.7
Apr 19 to Jul 19 ‐ 29.3 28.1 26.3 25.5
Registration Period Aug 19 to Nov 19 ‐ ‐ 11.2 10.4 9.8
Dec 19 to Mar 20 ‐ ‐ ‐ 9.1 8.7
Apr 20 to Jul 20 ‐ ‐ ‐ ‐ 2.4
Total 45.0 73.5 82.3 84.7 84.2

PM‐Kisan: Amount paid to beneficiaries*
(Rsbn) Duration Dec 18 to Mar 19 Apr 19 to Jul 19 Aug 19 to Nov 19 Dec 19 to Mar 20 Apr 20 to Jul 20
Registration Period Dec 18 to Mar 19 90.0 88.2 86.0 77.4 74.3
Apr 19 to Jul 19 ‐ 58.4 56.0 52.4 50.7
Aug 19 to Nov 19 ‐ ‐ 22.3 20.7 19.5
Dec 19 to Mar 20 ‐ ‐ ‐ 18.1 17.2
Apr 20 to Jul 20 ‐ ‐ ‐ ‐ 3.4
Total 90.0 146.6 164.2 168.6 165.1
Source: Ministry of agriculture, PhillipCapital India Research,*Estimated



Our ground checks in pictures

Paddy planting is progressing well across states

Source: PhillipCapital India Research

Retailers are busy selling agriculture inputs


Despite limited outbreak of covid‐19 in rural areas, some retailers are following social distancing



There have been very limited stocks with retailers/dealer due to good demand

Valuation
Companies CMP Reco TP FY20‐22E CAGR % PE (x) EV/EBITDA (x) ROE (%) ROCE (%)
(Rs) (Rs) Revenue EBITDA EPS FY20 FY21e FY22e FY20 FY21e FY22e FY20 FY21e FY22e FY20 FY21e FY22e
Coromandel Int 752 BUY 755 4.1 8.4 7.6 20.7 19.6 17.8 13.6 12.5 11.1 24.7 21.1 19.2 26.9 24.1 22.5
Chambal Fert 148 BUY 190 (0.8) (0.1) 3.9 6.4 6.2 5.9 7.8 7.1 6.5 27.2 22.4 19.3 13.9 14.0 13.9
UPL Ltd 442 BUY 660 8.6 10.3 19.5 14.1 12.2 9.9 5.1 7.6 6.4 12.5 12.9 14.1 9.6 10.5 12.0
PI Ind. 1,563 BUY 1,500 20.7 22.8 22.9 47.2 39.8 31.3 30.6 25.3 20.2 17.4 17.5 18.5 20.1 21.3 23.1




Rating Methodology
We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one
year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation
stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks
Rating Criteria Definition
BUY >= +10% Target price is equal to or more than 10% of current market price
NEUTRAL ‐10% > to < +10% Target price is less than +10% but more than ‐10%
SELL <= ‐10% Target price is less than or equal to ‐10%.

Mid cap and Small cap stocks
Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%
SELL <= ‐15% Target price is less than or equal to ‐15%.

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PhillipCapital (India) Pvt. Ltd.
Registered office: 18th floor, Urmi Estate, Ganpatrao Kadam Marg, Lower Parel (West), Mumbai – 400013, India.

DEEPAK Digitally signed by DEEPAK HASMUKH
CHITRODA
DN: c=IN, o=Personal,
HASMUKH
postalCode=400101, st=MAHARASHTRA,
serialNumber=ec10b1cdfac5a0c7bad8c3
dfc8c9a38e8ac62cdb21086bf515503a10
281387c1, cn=DEEPAK HASMUKH
CHITRODA CHITRODA
Date: 2020.07.03 09:38:33 +05'30'


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