Synopsis
- Despite the near-term challenges, the Indian Agrochemicals industry (excluding fertilizer) is envisaged to grow
by approximately 7 to 9% in FY25 led by robust domestic demand, import substitution, adoption of the
“China+1” policy, India’s low-cost manufacturing advantage, and opportunities arising from off-patent
agrochemical products. - After recording a remarkable growth in FY22-FY23 driven by exports, FY24 saw a significant 20.3% year-on-
year decline in exports due to channel destocking and pricing pressure from China’s re-entry into the market.
To address channel destocking, major exporters offered rebates to distributors, resulting in a price reduction
and pressure on operating profitability during FY24. Domestic demand also saw a decline of 19.3% due to the
lower prices offered by the Chinese counterparts and impact of EL Nino.
- De-stocking began in H2FY24, exerting pressure on sales volumes and potentially causing price erosion. Higher
inventory levels amid falling input costs led to inventory losses. However, with the subsiding of destocking and
stability in prices, recovery is expected from H2FY25 as input costs and realizations normalize. - Despite the envisaged moderate revenue growth in FY25, the profitability of the sector is expected to recover;
albeit remaining lower than in FY23. The overall credit profile of companies operating in the Indian
agrochemicals industry is expected to remain stable.
Turbulent FY24 after a period of growth
India’s agrochemical industry achieved remarkable growth in FY22 and FY23. In FY22, exports surged by an
impressive 28%, followed by relatively moderate growth in FY23. This positive trend can be attributed to consistent
capacity expansion, robust exports, and steady domestic demand post-pandemic. Over the period from FY21 to
FY24, the industry maintained a robust compound annual growth rate (CAGR) of 16%.
However, in FY24, exports faced a significant year-on-year decline of 20.36%, dropping from Rs.13,788 crore in
FY23 to Rs.11,456 crore. This decline was primarily influenced by channel destocking and pricing pressure resulting
from China’s re-entry into the market. A similar decline of around 19.34% was noticed at a domestic level mainly
due to cheaper prices offered to the farmers by the Chinese products and impact of EL Nino.
After recording impressive double-digit quarter-on-quarter (Q-o-Q) growth up to Q2FY23, revenues have
experienced a significant downward trend. This shift began in Q3FY23 with just 3% Q-o-Q de-growth, followed by
a steeper decline of 27% in Q1FY24 on a Q-o-Q basis. While Q2FY24 showed some signs of recovery, this was
short-lived as Q3FY24 brought another setback with a 15% revenue decrease. Headwinds, both, in the domestic
and the international markets, dragged down the industry’s revenues over the past few quarters. However, with
recovery in Q4FY24, led by an improvement in volumes, the industry’s revenues are expected to gradually recover
in FY25, largely from H2FY25.
To mitigate the impact of channel destocking, major exporters offered rebates to distributors, leading to a price
reduction. Unfortunately, this decline in exports, combined with channel destocking and pricing pressure, negatively
affected the Total Operating Income (TOI), resulting in a 16.3% decrease in FY24. Looking ahead, CareEdge
expects a moderate recovery in exports for FY25, projecting growth of approximately 7-9% compared to the
previous year.
Navigating the headwinds
The agrochemical industry maintained healthy operating profitability margins of 20.02%, 19.22%, and 17.69% in FY21, FY22, and FY23, respectively. During FY21 and FY22, domestic players capitalised on global demand by charging a premium on their products, resulting in substantial profits. The moderation in FY23 was due to the impact of declining input prices, leading to inventory losses, especially in the second half of FY23.
However, in FY24, operating margins were significantly impacted, declining to 12.23%. This decline stemmed from several factors: the El Niño phenomenon disrupted weather patterns and affected crop yields, global destocking with oversupply led to lower demand and pricing pressure, high-cost inventory, and substantial rebates offered to push sales. Additionally, with China’s resurgence, prices have reverted to pre-COVID levels, thereby exerting pressure on India’s exports as reflected in FY24.
Export demand, particularly from Latin America, North America, and Europe, faced challenges due to subdued
demand and prolonged destocking by global industry leaders. Notably, 55% to 60% of India’s agrochemical exports are directed towards the Latin American and US markets. The Indian Agrochemical industry heavily relies on exports, accounting for over 60% of its total revenues. The influx of supply from China further contributed to the decline in sales realization. China’s supply surged significantly after it abandoned its zero-COVID policy in December Additionally, China has expanded its capacities for key generic molecules.
According to data from the China Crop Protection Industry Association (CCPIA), China’s pesticide industry invested more than USD 9 billion in capacity additions between January 2021 and September 2023. Notably, Chinese manufacturers have revised pricing trends for key molecules downward by 40-50% since June 2022 as seen from the chart below.
With destocking most likely having almost bottomed out, the agrochemical industry is expected to see a rebound in demand and stability in prices in FY25. CareEdge anticipates industry recovery in FY25, with faster improvement
expected in H2FY25 as distributor stocks normalize and prices stabilize. Manufacturers may no longer need to
provide rebates and discounts, driving moderate overall revenue growth of 7-9% and maintaining operating
margins at around 13-14% in FY25.
Above Normal Monsoon – Blessing for Domestic Industry
FY24 saw a double whammy for the agrochemical industry – declining global demand and subdued domestic
demand due to a lacklustre monsoon season. Rainfall deficits of 6% and 8% during the southwest and post-
monsoon seasons, respectively, coupled with erratic distribution, led to insufficient soil moisture and lower reservoir levels. This directly impacts key crops like cotton, paddy, wheat, sugarcane, pulses, and vegetables, all of which rely heavily on agrochemicals.
Cotton production is estimated to have fallen by 7.5% in 2023-24 due to reduced planting, and overall grain output is expected to be down 6-7% compared to the previous year. However, a better outlook is expected for FY25. The India Meteorological Department (IMD) has predicted an above-normal monsoon for the ongoing season, which should improve soil conditions and boost crop yields. Consequently, domestic demand for agrochemicals is likely to see a rebound in FY25 compared to the challenging FY24.
CareEdge Ratings’ View
“Indian agrochemical industry is envisaged to grow by approximately 7 to 9% in FY25, despite facing near-term challenges. This growth is expected to be driven by several key factors. Firstly, there is a robust domestic demand with significant potential for import substitution and backward integration, which should reduce dependence on China for raw materials and intermediates and prediction of above normal monsoon in FY25. Secondly, the adoption of the ‘China + 1’ policy by foreign countries is anticipated to continue driving exports from India. Additionally, India is one of the world’s low-cost manufacturing hubs, and the government’s ‘Make in India’ initiative and adequate fertilizer subsidy budgets are expected to further stimulate demand,” said Arti Roy, Associate Director at CareEdge Ratings.
“With expected sales growth, operating profitability margins are also expected to partially recover to 13 – 14% in FY25 with stable input costs, large inventory write-downs already taken in FY24, expectations of no major
rebates/discounts going forward to push the sales,” said Hardik Shah, Director at CareEdge Ratings.