On June 10, PM Modi, soon after taking oath for the 3rd time,  pushed through the 17th instalment of the PM Kisan Nidhi scheme where about INR 20,000 Crore will be distributed and is set to help out 93 million farmers. 

Now, the agrochemical sector is holding its breath, waiting for a production-linked incentive (PLI) scheme to boost production and exports. 

Monsoons are predicted to be great this year.  

And with the US, Europe, the Middle East, and Africa slowly bouncing back, India’s gearing up to ramp up its agrochemical exports. 

It’s a wild ride, but the potential there for India to step up and make a mark.

You all know it. 

India is an agrarian economy. Even today, 50% of our folks depend on agriculture and related activities for their livelihood. With urbanisation, growing population and rising consumption combined with scarcity of natural resources, crop yields across the globe have started to plummet. 

Source: PI Industries Annual Report 2023

We should be hearing a lot from global leaders about ‘food security’ in the years to come.  

Food, like power, is always going to be in demand. Some seasons less, some seasons more. Thanks to the vagaries of our rain gods. That is why we are increasingly going to see Agrochemicals play a huge role in optimising crop yields.  

Also. People often lump agrochemicals and fertilisers together, thinking they’re the same thing. They’re not. Let’s clear up this confusion once and for all.

To explain it to you in the language of Marvel movies, Agrochemicals are the guardians, the protectors. They’re designed to shield crops from the onslaught of insects, diseases, and weeds. Think of them as the Avengers,  standing guard, ready to fight off anything that threatens the harvest. 

Note: They don’t nourish; they defend. 

Now, fertilisers, they are the nurturers. They feed the crops, giving them the nutrients they need to grow strong and healthy. Nitrogen, phosphorus, potassium—these are the holy trinity of fertilisers. They’re the meal ticket for plants and soil, ensuring they have enough sustenance to thrive. Without fertilisers, plants would starve, plain and simple.

So, the next time someone mixes them up, set them straight. Agrochemicals are the heroes in the field, fighting off the bad guys. Fertilisers are the caretakers, feeding the good guys. Both are crucial, but they play very different roles in agriculture. 

And for all those investors out there. Fertiliser companies are highly subsidised by governments and see no pricing power. They all look the same to end users, that is farmers, and they also have relatively less margins vs agrochemicals. 

That is why these are always trading at lower double digit P/E. So the next time you run a filter on screener.in, please don’t confuse such low multiples with ‘attractive valuations’.

The industry has experienced a significant slowdown in recent years. From Chinese dumping to global inventory destocking, the industry is still reeling. However, it is said to hit a market size of nearly $37 million by 2029 from $30 million in 2022. Now, this growth rate might not mean much, but we need to understand, and I’ve referred to it earlier as well, that just like ‘The Power’ and its ancillaries (Transformers, Cables, etc. ) theme has played out, we might see something similar happening in the agriculture space too.  

And the Agrochemical Sector might be what Transformers were to the Power Sector. Read on to know why we think so.

Welcome once again to our special sector analysis blog, where we’ll cover:

1. A Primer on Agrochemicals.
2. What Has Ailed the Agrochemical Sector?
3. Discussing the challenges and risks facing this sector.

Let’s dive into it.

A Primer on Agrochemicals

First off, did you know that India is currently the 4th largest agrochemical producer in the world? So, if things keep up, we may shake up the global agrochemical market. But before we explore the key reasons behind this, let’s understand what agrochemicals actually are. 

As mentioned at the start of the blog, agrochemicals are designed to protect crops from insects, diseases, and weeds. Remember, fertilisers = crop nourishment, and agrochemicals = crop protection. 

Agrochemicals are diluted in recommended doses and then applied directly to seeds, soil, irrigation water, or crop which then helps in increasing the crop performance and eventually improving the crop yield. Why do we require this, you may ask? 

Well, uncontrolled pests can significantly reduce both the quantity and quality of food or produce. Natural disasters and human activities already cause us to lose produce, but without agrochemicals? Man, the crop losses worldwide would double. 

Here’s a crude fact: Weeds, insects, and diseases cause 88% yield loss in India alone.

In India, farming revolves around two main seasons: Kharif and Rabi, each with its own distinct cycle and crops.

Kharif season starts with the arrival of the monsoon rains in June and lasts until October. During this period, farmers plant crops like rice, maize, millet, and cotton. The success of these crops largely depends on the amount and timing of the rainfall. Good rains can lead to a bountiful harvest, while poor rains can spell trouble.

Rabi season on the other hand begins in November and continues until April. This is the winter cropping season, utilising the moisture left behind by the monsoon rains. Crops like wheat, barley, peas, and mustard are sown during this time. The cooler temperatures and residual moisture help these crops grow, and they are typically harvested in the spring.

Each season has its own challenges and benefits. Kharif relies on the unpredictable monsoon, while Rabi depends on the cooler, more stable winter weather. Together, they form the backbone of Indian agriculture, ensuring a steady supply of various crops throughout the year. 

And what’s common? They both need good monsoons! This implies that there’s an inherent seasonality to the industry.

Anyway, the Indian agrochemical industry is broadly classified into three categories:

1. Insecticides
2. Fungicides
3. Herbicides

Source: CARE Ratings on Agrochemical Industry 2019

Insecticides protect crops from insects by killing them or preventing their attacks. Now,  we’ve all learned about the Kharif Season and Rabi Season in school, right? Let me just refresh your memory, anyhow. 

So, due to the tropical climate and the high production of insect-attracting crops like paddy, cotton, and sugarcane in these seasons, India usually has a high usage of insecticides. This is how the product mix of our consumption in the last 12 months looks like:

Next is Fungicides. As the name suggests, fungicides protect crops from fungi, which are a major cause of crop loss. Fungicides not only improve crop production but also enhance the quality and market value of the crops. These are generally applied to cash crops like fruits and vegetables. Sulphur is the major constituent in fungicide consumption in the last 12 months:

Source: Thurro

Lastly, Herbicides are used to kill undesirable plants. However, one factor to consider is the fact that here in India,  cheap labour is a major competition to Herbicides as labourers are employed to manually pluck weeds. Plus, herbicide sales are seasonal, flourishing in warm weather and dying out in winter. Herbicides are majorly applied on rice and wheat crops. Here’s how India’s herbicide or weedicide consumption looks like:

Source: Thurro

And overall, this is how India is consuming its Agrochemicals:

Source: Thurro

Now that we have understood the types of agrochemicals, let us understand their composition as it will help in understanding the value chain further. 

In any pesticide or agrochemical, there are two main components:

1. Technicals or Active ingredient
2. Formulations or Inert ingredient

A lot of R&D goes into this process of developing chemistries for the crops identified. Only a few companies in India tend to do this. But it doesn’t end here. You need to register your product – technical or formulations with the country you want to market it in. 

As discussed, the registration process for pesticides/agrochem is essential for market approval and involves several critical steps to ensure safety and effectiveness. Initially, manufacturers undertake extensive research to gather data on the chemical’s composition, efficacy, toxicity, and environmental impact. This data is compiled into a comprehensive dossier, which is then submitted to the relevant regulatory authority of that particular country along with the required fees.  Mind you, the process of getting approval for marketing their technicals or formulations usually takes years. 

Now naturally, you would want to know what these Technicals and Formulations I’m talking about here?  Let me try to explain both of these terms in a simple language. 

Technicals (Active Ingredient):

In the agrochemical industry, “technicals” refers to the pure active ingredient in a pesticide or herbicide. This is the chemical component that actually does the work of controlling pests, weeds, or diseases. Think of it as the powerhouse of the product. For instance, in a weed killer, the technical ingredient is what actually kills the weeds. Also, we need to understand that these technical ingredients are made for a specific crop/plant. 

And in case you’re wondering what these fancy scientific names in pie charts are doing there, well it shows which products are used in thwarting the pest issue. A small example is shown here along with the use cases of the products:

Source: Sumitomo Chemical 

Formulations (Inert Ingredient):

Formulations are the end products that farmers and gardeners use. They are created by mixing the technical ingredient with other substances to make it easier and safer to apply. These other substances can include solvents, carriers, stabilisers, and additives that improve the product’s effectiveness, make it easier + safer to handle, and ensure it works as intended.

In simple terms, the technical ingredient is the active substance that does the job, and formulations are the final products designed for practical use, ensuring the technical ingredient can be applied effectively and safely.

Here’s a quick analogy:

Technical is like a concentrated coffee extract.

Formulations are like the coffee you drink, which includes the extract, water, milk, and sugar to make it tasty and easy to consume.

For an agrochemical company, choosing between producing technical (active ingredients) and formulations boils down to margins and control. Let’s analyse:

Technicals

Pros:

• Higher Margins: More profit per unit.
• Market Control: Dominance over the supply chain.
• Export Potential: Strong global demand.

Cons:

• High Investment: Big bucks for setup and R&D.
• Regulatory Hurdles: Tough and costly compliance.

There are companies like India Pesticides Ltd, Rallis, UPL, Heranba, Astec etc who are into generic(off-patent) production of technicals or intermediates and companies like Bayer, Syngenta, Sumitomo, FMC, Kureha etc. Whereas,  PI Industries and Punjab Chemicals are into Contract Research and Manufacturing Services (CRAMS).  

Formulations

Pros:

• Value Addition: Ready-to-use products build brand loyalty.
• Market Flexibility: Tailored to specific needs.
• Lower Investment: Less capital required.

Cons:

• Lower Margins: More costs in processing and packaging.
• Dependency: Reliant on technical suppliers.
• High Competition: Crowded market.

There are usually small contract players who are into formulations. 

The Sweet Spot?An Integrated Approach.

• Max Margins and Control: Best of both worlds.
• Supply Chain Efficiency: Cost control and flexibility.
• Market Responsiveness: Quick to adapt.

Standalone Technical Production: Lucrative if you can meet the high standards and invest in tech.

Standalone Formulations: Good for quick market entry with lower initial costs but thinner margins.

Bottom line, an integrated approach—producing both technical ingredients and formulations—hits the jackpot. Higher margins, better control, and long-term gains. And this is what many small + new players like Dharmaj CropGuard are also doing. 

So, my dear investor friends. You will hear and see these terms being used frequently during the investor concalls and investor presentations. I hope I could give you some clarity on the  Agrochemical Industry. All in all, this is how the entire value chain of the agrochemical industry looks like:

These formulations are then marketed to the retailers – home and broad. Companies like Rallis, UPL, Dhanuka, Dharmaj. Best Agro, PI Industries  and Heranba are mainly into domestic marketing whereas Sharda, UPL Bayer, Dharmaj etc are into exports as well. 

If you want to learn more about the Agrochemical Industry, we had a 2- Part Series on it by the Chemical Industry Specialist @Jay Shah on our MissioN SMILE Platform. Those interested can subscribe to our investor education platform here:

With this out of the way, let us understand: 

What has been ailing the market?

The Indian agrochemical industry is at crossroads. We saw decent growth up to FY22, backed by strong domestic demand, improving exports, adequate budgets for fertiliser subsidy, and normal monsoons. However, in FY23, this growth slowed from 22% to 13%. This further slowed down in FY24. 

Source: CARE Ratings on Agrochemical Industry 2023

Well, the primary reason for this slowdown is high channel inventory—companies produced products that didn’t sell and the slump in demand magnified by Chinese dumping and poor rains, leading to an increase in inventory. This has forced continuous price reductions, impacting margins and bottom lines of agrochemical companies.

Add to it the two wars and stagflation in Europe/US. There’s a global inventory destocking going on. Now what is this Global Inventory Destocking? 

Folks. If you look at the global agrochem industry today, they are all reducing their stockpiles of goods. They sell off existing inventory rather than producing. There’s a fire-sale that is still ongoing. This firesale has consequences. Let’s take a note on each of these. 

Impact on Agrochemical Businesses

1. Reduced Sales Volume:
   • Immediate Effect: When distributors and retailers focus on selling existing stock, they place fewer new orders. This leads to a drop in sales for agrochemical manufacturers.
   • Revenue Hit: Lower volumes  mean reduced revenue. Simple. 
2. Price Pressure:
   • Discounts and Promotions: To move excess stock, companies often slash prices. This creates a competitive environment where everyone is cutting prices, leading to decreased profit margins. That is there is a Margin Squeeze. 
3. Production Slowdown:
   • Reduced Manufacturing Operational Efficiency: With fewer new orders, companies scale back production. This leads to underutilised manufacturing capacity, increasing per-unit production costs. Margin Squeeze Squared. 

4. Working Capital / Cash Flow Issues:
   • Delayed Payments: With lower sales and reduced revenue, cash flow becomes tight as to clear this stock inventory they give higher concessions to the buyer in terms of their payment terms. Companies might struggle to manage day-to-day operations and investments. Classic case of Working Capital Crunch. This might mean no more spending on R&D too!

So things were grim for these agrochemical companies worldwide. And it wasn’t any different for Indian companies  either.

However, despite these near-term challenges, the industry’s long-term growth prospects remain intact, thanks to strong domestic demand, improving export demand due to the China+1 policy, adequate government policy support, and a competitive cost structure.

Fact: Higher crop yields will increasingly depend on agrochemicals in the future. Currently, India uses only 0.6 kg/hectare of agrochemicals compared to the global average of 2 kg/hectare. 

Source: Times of India

So, what will drive this industry?

Let’s discuss.

Firstly, the government supports farmers through various initiatives like increased agri-credit targets, the Atma Nirbhar Clean Plant Programme, and digital and technological innovation.

Secondly, off-patent molecules—those whose patents are about to expire—present a big opportunity. Over the next 1.5-2 years, $4 billion worth of molecules will go off-patent. Consequently, many Indian companies have adjusted their capex plans. It’s estimated that by FY25, exports of these molecules could increase by 12-14%. 

Source: CRISIL, Dec 2022

Moreover, recognizing the future opportunities, the Indian agrochemical industry has undertaken sizable capex plans over the last couple of years with the aim of becoming backward integrated. It is these companies which will shine the brightest in the next cycle..

Source: India Chemical News

Thirdly, India’s diverse geography allows for the production of a wide variety of fruits and vegetables. Today, India is the second-largest producer of fruits and vegetables in the world. Horticulture production has outpaced grain production, driving demand for agrochemicals, especially fungicides.

Fourthly, erratic climatic conditions and increasing pest attacks will further boost the agrochemical industry. Rapid urbanisation will reduce available land, putting pressure on farmers to increase yield per hectare. To achieve this, farm productivity enhancers like agrochemicals will become even more important.

But we also need to keep an eye on the risk and challenges being faced by the industry.

Risks and Challenges

Despite being a crucial and important sector, the agrochemical industry is grappling with challenges and headwinds that seriously impact its growth and profitability. These issues are not just here to stay but are set to intensify.

The most significant challenge facing the industry is the slow registration process for new molecules, leading to high R&D and time costs. It’s a bureaucratic nightmare that eats into profits and innovation.

Then there’s the rising cost of raw materials. India imports nearly 50% of its technical grade active ingredients from China. This dependency, coupled with seasonal demand, results in high input costs that squeeze margins through expensive inventory. Raw Material prices then again are very much dependent on crude oil prices, which when shoots up also impacts the agrochemical industry negatively.

Another hurdle is the lack of contract manufacturing options for formulations and active ingredients in India. The industry struggles to find reliable partners to scale production, adding another layer of inefficiency.

Handling and safety of pesticides also remain significant concerns. Poor handling during production by local companies can harm both end-users like farmers and the crops they tend to. It’s a mess that needs immediate attention.

No doubt, agrochemicals are vital not just for the country’s agriculture but also for its economy. 

This sector plays a key role in India’s agricultural growth story. However, the need for reforms and technological innovation is pressing. Only then can our country truly shine as an agricultural and economic powerhouse.

Conclusion

And oh, before I draw the curtain down on agrochemicals, please remember that the working capital cycle here is usually stretched given the nature of the industry. There are high receivables and inventories in this business as they have to give credit and give out adequate stock across their distribution network i.e. Super stockists – >Dealer-> Distributor – > Farmer. The CFO to EBITDA ratio is going to be poor for a lot of these companies, and we believe that it should not be judged on the same parameters as you would judge an auto ancillary, manufacturing, or even a chemical business.  

Moreover, they also have to run on a tight payables schedule given that they don’t have much bargaining power, and paying as soon as possible means more discounts for these agrochem companies. 

Apart from this, they are obviously dependent on monsoon, due to which their product prices remain muted as a result of subdued demand. 

Today it looks like the industry is seeing some proverbial light at the end of the tunnel with raw material costs correcting and global inventory destocking almost done. Many are saying that India will be the agrochemical manufacturing hub of the world, replacing China! 

 We believe that those companies that were smart about their capital allocation and went with their capex designed to become backward integrated will be performing well in the coming times. 

Three key differentiators that will determine who leads the next cycle are: 

1. Can you quickly reach your farmers?
2. Are you comfortable with a short payment cycle? and 
3. How well is your branding and marketing executed?

Do you have any such company in mind? Write their names below in the comment box.

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