"It's been a difficult time," CEO Sudhir Sitapati says when talking about the challenges for Godrej Consumer.
"This turbulent period is definitely not over," Whirlpool Chairman Arvind Uppal says about the coming months.
"We saw 12% increase in input costs at a group level in FY22. Even going forward, it remains unabated," CFO Ankush Jain of Dabur India notes.
We are in unpredictable times - countries are dealing with food and fuel price inflation, while some like Sri Lanka are in a fiscal crisis. Back home, the Centre finally acknowledged raging commodity price inflation, imposed export limits for sugar, export duties on steel and banned international wheat shipments.
But despite this upheaval, there was one particular sector and some companies which did surprisingly well.
In this week’s Analyticks we take a look at these rare winners:
- Agrochemical exporters cash in, thanks to higher agri-commodity prices globally in Q4
- Screener: Companies that beat inflation fears in a tough quarter, and expanded margins in Q4
Let’s get into it.
Agrochemical players end FY22 with strong growth and optimism
The world has gone back to basics, focusing on agriculture output and food security. International prices of staple cereals like wheat, corn and soya bean had jumped nearly 40% YoY in March '22 triggered by Russia’s invasion of Ukraine. The prices of wheat crops alone rose over 60% YoY in March and have risen another 15% in May after India banned wheat exports.
For the middle class and most businesses, the pinch of higher inflation has been sharp. But the agrochem sector is an exception, benefiting from higher agri-commodity prices in Q4FY22 as well as in FY22.
Agrochemical players with a higher share of exports like UPL, PI Industries and Sharda Cropchem saw healthy demand and better prices for their crop protection products in Q4FY22 and full-year FY22. These particular companies manufacture formulations used in fungicides, herbicides and insecticides.
Will these companies see growth momentum continue in FY23?
More demand and tight supply: Agrichem sees revenue growth in Q4
Higher crop rates led to more staples being planted which increased demand for crop inputs like fertilisers, seeds and crop protection products. This along with tighter supplies boosted the prices of agri-inputs. Sharda Cropchem and UPL’s Q4FY22 sales realisation grew 42% and 19% YoY, respectively. However sales volumes saw muted growth. In fact, Sharda Cropchem’s volumes fell 11% YoY due to subdued demand in Europe as well as shipping and logistic issues seen across geographies.
North American and Latin American regions are the growth drivers for these companies. According to Crisil Research and UPL’s management, strong demand for herbicides and insecticides is coming in from Latin American countries like Brazil and Argentina.
The North American region (NAFTA) aided the overall topline growth for Sharda Cropchem in FY22 as the revenues rose 59% YoY to Rs 1,159 crore. UPL, on the other hand, sold higher volumes and earned better sales realisations for glufosinate, an herbicide, in the NAFTA region.
Coming to PI Industries, domestic revenues jumped 47% YoY to Rs 281 crore backed by higher demand for herbicides for wheat. The export revenues grew 11% YoY to Rs 1,114.2 crore and made a higher incremental contribution to the company's overall revenue growth in Q4FY22. In FY22, the export revenues grew at a much faster clip of 20% as compared to the domestic revenues (4% YoY).
Among the top agrochemical companies, Sharda Cropchem saw a stellar YoY growth of over 30% in its revenue and profit in Q4FY22.
Notably, Sharda focuses on exports and has an unusual business model. It first identifies generic molecules with expiring patents and then registers the particular formulations under its name. It then outsources the manufacturing of these formulations and undertakes only the marketing and distribution part.
Thus, the company works on an asset-light model i.e., investment in fixed assets is minimal. It is also able to save time and capital required for research and development of new formulations. However, Sharda Cropchem still has to invest around Rs 25-40 crore on each product registration.
Agrochemical players to gain from the positive global agri-cycle in H1FY23
With global prices for cereal crops rising and demand robust, Sharda Cropchem and PI industries are confident of clocking revenue growth of 15-20% in FY23. PI Industries plans to launch four new molecules in the agrochemical exports segment and five new products for the domestic business in FY23. The company is seeing goodtraction in export-related enquiries. Analysts are also working with similar top line growth estimates (13% YoY on an average) for FY23, according to Trendlyne’s Forecaster.
Agrochemical companies expect higher export volumes to primarily drive their revenue growth in H1FY23, provided North American weather conditions are benign. They also foresee strong domestic demand on expectations of a normal south-west monsoon in 2022. Notably, the chances of further price hikes are lower unless there is a material spike in input costs. The companies are also likely to sustain their EBITDA margin levels of 20-22% in FY23.
All in all, Indian agrochem companies look well placed to deliver yet another strong financial performance in FY23 amid a tough global environment.
Screener: Some companies successfully tamed runaway inflation in Q4
Cost pressure is the buzzword for companies around the world. But there are some that have managed to walk through this minefield without hurting themselves.This screener shows 54 companies that saw their operating and net profit margins improve in Q4FY22. Out of these, 25 companies are part of the Nifty 500 group.
Commodity and speciality chemical companies like Gujarat Alkalies & Chemicals, GHCL, DCM Shriram and Gujarat Fluorochemicals feature in this screener. The sustained rise in prices of soda ash and caustic soda (up 2.5X YoY in Q4FY22) due to tight supply chains aided margin growth of companies involved in chlor-alkali and chlor-vinyl chemistry. Other than this, agrochemical companies like Anupam Rasayan and Bayer Cropscience saw their operating margins improve by more than 7 percentage points on YoY basis.
Sugar companies like Dwarikesh Sugar Industries, Uttam Sugar Mills are also part of this list of companies as higher sales growth in the distillery segment (ethanol) resulted in margin expansion.
While most pharmaceutical companies missed Q4FY22 earnings estimates due to muted growth in US markets and increase in costs, some companies like Abbott India, Procter and Gamble Health and Neuland Laboratories bucked the trend. Better product mix, lower marketing and other expenses aided the margin growth of these companies.
You can find some popular screeners here.
