Gradual recovery in operating margins, lower capex, healthy balance sheets to support credit profiles
After a modest 5-6% growth in the current fiscal, the agrochemicals sector is poised to grow at 7-9% in the next fiscal. While this will be on the back of stable domestic demand and recovery in export volumes, a historically low realisations will continue to hinder a return to double-digit growth seen before the Covid-19 pandemic period.
Operating margins are also seen to be recovering slowly, rising ~100 basis points to 12-13% - still below the pre-pandemic levels of 15-16%. This will keep firms cautious with capital expenditure and focus on managing working capital to keep their cash flows and balance sheets steady.
Our analysis of agrochemicals makers that account for nearly 90% of the sector's total revenue of ~Rs 82,000 crore last fiscal, indicates as much.
Says Anuj Sethi, Senior Director, CRISIL Ratings, "Revenue from exports, which comprises half of the sector's total revenue, is witnessing change. Global firms have largely resolved their excess inventory issues related to low-cost Chinese supplies and are now ordering closer to the cropping season to better manage working capital. While we expect healthy volume growth this fiscal, revenue growth will be modest at 3-4% amid pricing pressures from competitively priced Chinese products. In the next fiscal, this may improve to over 7% as these pressures ease."
Conversely, domestic revenue is seen rising by 8-9% this fiscal due to good monsoon and adequate reservoir levels, which are boosting agricultural output.
This is despite continuing pricing pressures from oversupply in China, albeit less severe than last year. We expect this trend will continue, leading to fewer instances of inventory write-offs. Additionally, with improved volumes, the sector's profitability is expected to improve.
Says Naren Kartic. K, Associate Director, CRISIL Ratings, "We expect the sector's operating margin to improve slightly to about 12% this fiscal and ~13% next year, but ongoing pricing pressures will limit this growth despite higher sales volumes. Consequently, most companies will continue to prioritise maintaining healthy balance sheets by managing working capital and limiting capex intensity at less than 1x in each of the next two fiscals."
Control over debt and gradual improvement in operating profitability will lead to sustenance of stable debt protection metrics over the near to medium term. Interest coverage and debt-to-Ebitda1 ratios are expected at ~8 times and 1.1-1.2 times, respectively, this fiscal and the next, compared with 7.3 times and ~1.2 times last fiscal.
That said, factors such as Chinese oversupply, adverse weather conditions impacting demand in key geographies -the cropping season is about to begin in the Latin American markets - movement in raw material prices and any regulatory changes both in India and overseas will bear watching. |
