Crisil sees agro-chemical sector growing at 15-17% on strong demand

Agro-chemical sector will grow at 15-17 per cent this fiscal after a stellar 23 per cent growth logged last fiscal, primarily driven by continued strong exports and stable domestic demand.

The revenue will further grow by 10-12 per cent next fiscal as India continues to benefit from the China+1 strategy of global players and key molecules going off patent, rating agency Crisil said.

The higher operating leverage will help sustain operating margins at 15-16 per cent in the current and next fiscal (16.6% last fiscal), despite input prices remaining elevated. Capital spending will continue at similar levels as in the past, but elongation in working capital cycle will result in higher borrowings.

However, strong cash generation will keep credit profile of players ‘Stable’. An analysis of 50 companies rated by Crisil Ratings, accounting for nearly 90 per cent of the ₹66,000-crore agro-chemical sector, indicates as much.

“Export revenue is seen rising 18-20 per cent this fiscal, with the US dollar appreciating by about nine per cent so far and volume growing as global players continue to de-risk their China dependency. Next fiscal, exports will likely grow 12-14 per cent as players keep up capex with an eye on molecules worth $4 billion going off-patent over the next two years. As a result, exports will remain the major contributor to the agro-chemical sector accounting for about 53 per cent of the total revenue,” said Poonam Upadhyay, Director, Crisil Ratings, in a statement.

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The domestic segment, on its part, will grow 12-14 per cent this fiscal driven by a near-normal monsoon, higher realisations, and improving farm sentiment. Assuming a normal monsoon and continued government focus on improving farm incomes, the domestic segment will grow 10-12 per cent next fiscal, Crisil said.

Input costs

Prices of crude and yellow phosphorus, the key raw materials, shot up 40-45 per cent and 18-22 per cent, respectively, in the latter half of last fiscal. Continued high prices, despite some moderation lately, will dent gross margins by 90-110 basis points.

However, higher operating leverage, derived from better cost absorption, will ensure the overall operating margin remains at 15-16 per cent this fiscal, only marginally lower compared with fiscal 2022. Margins are expected to stabilise at similar levels next fiscal.

Shounak Chakravarty, Associate Director, Crisil Ratings, said, “Credit profiles of Crisil-rated agro-chemical players will remain largely ‘Stable’. Healthy cash generation will limit reliance on external debt even as capex intensity remains high at ₹6,000-6,500 crore over each of the next two fiscals. However, increase in share of exports mainly to countries in the La Am region — which require higher credit periods — will increase their working capital borrowings. That said, well maintained balance sheets along with higher cash accruals will help debt metrics sustain at comfortable levels.”