Global inventory glut continues to impact growth & margins
Q4 numbers were on expected lines for this sector. Generic products in the global market have been stuck in an inventory glut, there was a stock up cycle at the peak of the COVID mania in FY21 and FY22. Once supply chains started normalizing in FY23, channel inventory was already stocked up leaving limited scope for further shipments. The other big factor was that shipping rates and transit times came down to their pre COVID levels, customers no longer needed to do just in case planning. The biggest agrochemical powerhouse in India had a very average FY23 and it reflects in its share price performance (UPL Ltd). Things can pick up here only if the restocking cycle starts in H2 this year and pricing stabilizes.
There has been pricing pressure across the board since raw material prices have been on a downward trend once China opened up. Chinese players have resumed their production schedules across many industries, we are seeing domestic players suffer due to this across industries like chemicals, pharma, wood panel boards and PU leather too. Realization and volume in the export market have been affected, barring players like PI Industries that make differentiated products for innovator companies. Domestic market offtake tends to be weak in Q1 and Q4, bulk of the revenue still happens in Q2 and Q3 for agrochemical & fertilizer players in India. Monsoon is expected to be normal but at the lower end of the range this year. With the country going into many state elections and the general elections coming up in 2024, the rural economy should be flush with cash if the crop season turns out to be good. Many FMCG and agrochemical stocks have seen a small spike on the back of this expectation already.
Our preference in the sector continues to be PI Industries. Coromandel International has announced a substantial capex into new forays in speciality chemicals and CDMO, they will start with existing customer/existing products and look to scale up over time. Dhanuka’s technical ingredient plant at Dahej starts in July this year, however there is no visibility yet on them signing contracts to supply this in the global market.
Our view continues to be that this sector hasn’t been viewed as a secular growth pocket so far by the market. These stocks tend to make for good cyclical bets when the outlook for the rest of the economy looks shaky, otherwise the market is hardly enthused about these businesses barring PI Industries. Valuation is cheap in pockets but there is no shortage of good opportunities in the market yet.
Wait and watch is our motto, we may consider incremental positions here only if the market gets overpriced in all the other segments later this year.
