Top 4 Chemical Stock Picks By Nirmal Bang

Tailwinds from Rabi sowing; decline in costs and freight

We see healthy outlook for the Indian Crop Protection Chemical (CPC) sector in 2HFY23 on the back of robust growth in area under crops and the decline in chemical prices as well as container rates – key freight indices are down 77-90% as per the latest trends. This is likely to offset the headwinds posed by carryover of higher cost inventory and the muted pre-season booking of pesticides. We are positive on the CSM leader PI Industries and CPC companies UPL and Sumitomo Chemical India (SCIL), with new product launches, pricing power and long runway for growth. Potential catalysts are a likely PLI scheme for Agrochemicals and concessions related to tariff restructuring to support value addition CPC. Key ‘BUYs’ are PI Industries and UPL in large caps and SCIL in midcaps- on dips. Coromandel International (CRIN) is a value Buy, with potential upside from new launches and the Rs1bn MPP start-up expected by Jan’23.

We have also discussed Glyphosate prices, and in Annexure -1 the changes in Brazil CPC distribution. Sector positives: Healthy farm incomes, good soil moisture and high-water storage levels augur well for the Rabi season. There are signs of a decline in some chemical input prices, which the industry expects to support volume growth and margin expansion. Also, shortage of containers and its impact on freight rates may be abating as we have seen container rates showing a declining trend of late, as per Drewery and Freightos.

The declining trend in international prices of key chemical intermediates seen in 2QFY23 continued in 3QFY23. Acetic Acid, Benzene and Methanol – 3QFY23 prices are down 52.2%/11.7%/11.5% YoY, as per Bloomberg data. Acetic Acid and Benzene prices are also down by 2.9%/16% QoQ but Methanol price is up 4.5% QoQ. The price of Ammonia, used in fertilizers, declined by 8% QoQ in 3QFY23, but it was up 29.8% YoY.

China prices of key herbicides – Glyphosate and Glufosinate – have declined by 44%/55% YoY as per third-party data. This decline in prices is positive for the CPC sector, which will benefit from rising demand, as CPC prices are cut to pass on the fall in input prices. Further, there is potential for expansion in gross margins if the CPC industry is able to retain part of the savings from lower input costs. We understand that the industry may pass on the lower costs to boost volume, which implies operating leverage gains, and hence is positive for topline/EBITDA growth for leaders.

We also see further momentum in the declining trend in global container freight index, which could reduce freight costs. We also learn from consultants that global container shipping industry is facing excess capacity amid a slowdown in demand and could be forced to operate near marginal cost.

Crop area cultivation in the ongoing Rabi season is up 4.7% YoY at 57.81mn hectares (ha) on the back of cumulative area sown (for all crops) as of last Friday (16th Dec’22), as per Government agency CWWG’s data. This compares with the growth in cumulative cropped area of 12.25%/3.86% YoY in the previous two weeks. Area under Wheat/Rice/Pulses is up 3%/13.6%/4.2% YoY and that under Oilseeds/Coarse Cereals is up 7.9%/7.7% YoY.

Copius rains support sowing. All-India cumulative rainfall for the period (1st Oct-14th Dec) was 24% above the LPA, while the trend for the week (8th Dec-14th Dec) was down 95% YoY. Moisture content in the soil is good, with water levels at 140.13BCM – 79% of storage capacity at full reservoir level. This is at 103% of last year’s storage and 119% of average storage for the last 10 years.

Infestations and diseases in crops are lagging the ‘economic threshold’ levels, barring a few instances in certain crops/states, as per the minutes of 16th Dec, 2012 meeting of government agency CWWG.

Freightos Asia-US container rates for the week ended 16th Dec: Asia-US West Coast prices (FBX01 Daily) increased 1% to US$1,415/FEU – but declined 90.5% YoY; Asia-US East Coast prices (FBX03 Daily) dipped by 3% to US$3,252/FEU, but declined 80.7% YoY (Source: https://fbx.freightos.com). Drewry World Container Index as on 15th Dec’22, down 77% YoY. The composite index declined by 1% this week – 42nd consecutive weekly drop.

The latest Drewry WCI composite index of US$2,127 per 40-foot container is 79.5% below the peak of US$10,377 the index touched in Sept’21. But it remains 51% above the average of 2019 rate (pre-pandemic) of US$1,420. The YTD average composite index is at US$6,547 per 40-ft container, up US$3,855 vs. 10-year average of US$2,692 (Source: https://www.drewry.co.uk/).