Going to be a very tough quarter for all global agrochemical companies: Rohan Gupta

"On an aggregate basis, we see that there is going to be roughly 10 to 15% kind of revenue decline. Now this revenue de-growth will be a function of two things. One is the price drop because raw material prices are falling," says Rohan Gupta, Director, Nuvama.

What is your view right now on the industry with the kind of commentary that we have been hearing from the likes of Clariant, FMC etc.?
This is going to be a very tough quarter for all the global agrochemical companies. The pain will be sharper for the generic agrochemical players, the names which you are talking about like even FMC, UPL.

The primary reason for this is basically there is a lot of inventory in the system and we have seen that there is some slight pressure in demand. Also, what happens when the raw material prices which are falling very sharply right now, the trade is in mode of inventory de-stocking. So all of these companies actually have to take a cut on the high cost inventory that is going to put pressure on their EBITDA, the profitability.


And also, there is slight weakness in the demand side right now that is also putting the volume de-growth for all these companies. So that is where we see that there is a pressure across the companies in a global market.

Just maybe give us a ballpark as to what exactly would be the impact on profitability? How much do you think there would be a reduction in overall volumes, maybe company specific or just from the sector as a whole?
On an aggregate basis, we see that there is going to be roughly 10 to 15% kind of revenue decline. Now this revenue de-growth will be a function of two things. One is the price drop because raw material prices are falling.

We have seen that last year, a lot of raw material prices driven by crude has gone up. Now that prices have started falling, so there will be on a net sales basis price drop that is one. Second, we also see that in the first half, there is going to be volume challenges.

We are expecting the volume to decline by somewhere close to 6% to 10% depending on the company to company and then how much inventories they have in the market. But yes, that is kind of top line degrowth. The impact on profitability and EBITDA will be much sharper. We are expecting on an aggregate basis for our universe 35% kind of drop in EBITDA. It is primarily coming from UPL because we are looking at EBITDA level, quite a lot of decline for the company. Also, as I just mentioned, that high cost inventory, the liquidation of the same is going to impact the profitability. When your EBITDA is down by roughly 35%, we are expecting that bottom line cut will be much sharper because of the negative operating leverage. That is where maybe bottom line of players like UPL or our universe may be down by as much as 50% also.

If you could spell out more details over here, because as we understand that UPL as well as the FMC portfolio is pretty much along the similar lines and therefore this big impact?
Yes, you are absolutely right that yes, when the profit warning came from FMC we were already expecting the similar kind of drop in UPL's numbers as well.

So, when the FMC gave the guidance cut, it was not a surprise for us because we were already factoring this kind of drop in profitability for players like UPL.

As far as the Indian agrochemical companies are concerned, mainly players like Dhanuka, Rallis and all, their impact will be quite different because Indian markets definitely have started the season with late because of the delayed monsoon and initial fear of El Nino have impacted the trade.

Trade was not in inventory stocking mode. So, there will be some impact on domestic market but I see that domestic market and domestic agrochemical players may start showing some pickup in revenue growth with the monsoon picking up right now in month of July. Global agrochemical companies especially FMC, UPL and all, I think that these companies have yet to see some more pain. Maybe Q2 is also likely to be what we are going to see in Q1.

So tell me on an aggregate basis and in particular for UPL as well separately, how much of a price damage are you envisaging right now because clearly there would be derating in the stocks. We have already seen the negative impact play out yesterday, today as well some of these stocks are pressured. How much more of a derating and is it a sell for you across the board?
I think that the impact on stock price is more driven by the earnings downgrade which these weak earnings may trigger. As far as the valuations are concerned, I think that there is a comfort on valuation because these companies are not trading at a premium. Actually, UPL will be trading even at a discount to its last five-year average PE multiple.

But yes, there is a concern on earnings downgrade which I believe that may be up to the extent of overall earnings downgrade even if we assume that second half will recover. But as of now, it looks like that there may be an earnings downgrade in the range of close to 15% to 20% for most of these guys. That is what I think is already getting reflected in the stock price. There may be some more downside when we reach closer to the result time and more companies probably in a generic space may come with a profit warning. I think that the sentiments are going to remain slight negative in a current scenario and that may lead to further fall in the stock price.