Agriculture and its allied sectors continue to remain central to the Indian economy, contributing nearly 17% to our GDP in 2019–20. More important, it is a source of livelihood for more than 50% of the country’s population. As a result, a sector like agrochemicals, is on a far stronger wicket than many others in the economy, driven by major government actions and interventions.
The Indian agrochemical market is worth ₹38,000 crore divided almost equally, between India’s domestic consumption at ₹20,000 crore and exports accounting for ₹18,000 crore. Despite the challenges of this lockdown, the agrochemical industry will continue to expand in the coming year with an expected growth in agricultural output. India expects a record 298.3 million tonnes of foodgrain production in 2020, of which 149.92 million tonnes in the kharif (summer) season and 148.4 million tonnes during the rabi (winter) season, representing a 2% projected growth compared to the previous year.
The government also expects an increase in production of non-foodgrain crops such as oilseed. Besides, data from the Department of Fertilizers shows a surge in all-India nutrient sales at 20.56 lakh tonnes (2.06 million tonnes) in April 2020, as against 14.17 lakh tonnes (1.42 million tonnes) in April 2019. Urea sales grew by 36.2% in April 2020 over the corresponding month last year. This year’s rabi harvest, despite some initial hiccups, is also nearly complete. As reported by the state governments, about 98%-99% of wheat crop has been harvested in Madhya Pradesh, 88%-90% in Rajasthan and 75%-78% in Uttar Pradesh. As an outcome, the government is estimating a record 106.5 million tonnes of wheat production in the current year. Additionally, with the hope of a decent monsoon, paddy sowing acreage is estimated to go up by 27% compared to the last season at 32.58 lakh hectares (3.26 million hectares), during the ensuing kharif season. All these signs point to the resilience of India’s agricultural industry and its close association with agrochemicals.
While this may seem counterintuitive compared to other sectors, China’s example is worth considering. China’s experience during SARS shows that the agrochemicals sector saw a short dip in growth initially, but fully recovered within two quarters. More recently, we have seen that agrochemical stocks have been more resilient than the overall index. While the Shanghai Stock Exchange has been largely flat at -1% since December 2019, agrochemical stocks have increased in value by about 3.6% as of May 4. The Covid-19 pandemic had Chinese agrochemical stock prices fall by almost 20% but have now recovered to pre-Covid levels [see Figure 1].
This is clearly a harbinger of good news for the Indian agrochemicals sector as well, which should see a strong recovery from the crisis after a short-term impact. Signs of improvement have already started to show in the Indian context with stocks of major agriculture-related firms showing a sharp increase after government’s policy boost. Disbursement of subsidies to farmers worth ₹18,000 crore under the PM Kisan Samman Nidhi (PM-KISAN) will improve liquidity for farmers and therefore the value chain.
In addition, farmers’ incomes will definitely get a boost with the government’s efforts to ensure a timely rabi harvest, vigorous drive by state-led procurement agencies like National Agricultural Cooperative Marketing Federation of India (NAFED) and Food Corporation of India (FCI) to procure rabi harvest of foodgrain, cereals and oilseeds from across the country. Promise of a good ‘on-track’ monsoon should also ensure strong domestic demand, with limited Covid-19 impact. Driven by these factors, as of May 4, major agrochemical companies have shown about a 38% improvement in stock prices since the initial lockdown started on March 24, compared to about 23% by the Sensex, overall [see Figure 2].
However, there may be some challenges on the supply side in terms of availability and cost of raw materials, packing/packaging materials as well as availability of labour for manufacturing to commence. Issues like availability of warehouses and trucks will also be crucial. Given the government’s support to the agriculture value chain, these issues are unlikely to make any significant dent in meeting the required demand. That being said, in a scenario where Covid-19 cases increase and restrictions are applied again, supply constraints could become much more crucial.
For the export market as well, similar demand and supply side forces are at play. Demand remains very robust given the need for global food security. In fact, demand for some specific agrochemical products have increased as buyers are trying to shift their sourcing away from China. Orders are coming in from key international markets like Brazil, Japan, the U.S. etc., which have neither the expertise of producing such a wide array of agrochemicals nor the capital for capacity expansion of their own plants, given the inherent cost advantages of China and India. Therefore, we estimate only a marginal revenue impact for the export segment. In India, supply side challenges continue to rise owing to local logistics issues. Major ports like Hazira, Dahej, Pipavav etc., are operating at partial capacity, with lesser trucks and labour shortages choking the ports due to slow evacuation of containers even though they are labelled as essential services. However, this situation is improving on a day-to-day basis. Any further downside will be largely dependent on how quickly individual firms are able to address their supply chain bottlenecks.
While the impact on agrochemical companies seems to be limited compared to other industries, the industry needs to be prepared for any eventuality. Despite the optimism, Indian agrochem players, both large and small, need to do four things right:
Manage liquidity tightly: Firms must focus on collections with detailed customer-wise tracking which will be critical to ensure that sufficient working capital is available to support the upcoming season. Additionally, it is important to work with suppliers to optimise payment terms to help improve the working capital flow.
Avoid or delay discretionary cost: Costs need to be controlled on a war footing. All discretionary costs, for example sales promotions, field assistants, discount schemes, sponsorships travel and training will need to be avoided or delayed, and additional costs like new manpower should be carefully evaluated.
Proactively manage supply side constraints: Enormous focus will be required to mitigate supply side constraints like availability of truckers and ports, raw materials availability and pricing, and warehousing capacity to ensure that the right product reaches the right location.
Engage deeply with customers: Despite the strong demand, it will be crucial for firms to follow up adequately to secure volumes from customers. Given the robust competition, customer engagement and service levels will be key to success. This will require creative methods such as digital engagements with the farmer and devising channels which may not have been used in the past.
From a more long-term perspective, CEOs will need to start thinking about how to leverage new opportunities that have appeared as an outcome of this crisis such as shifting manufacturing away from China. In wake of the government’s support of this shift, it could be a game-changer for the industry and first movers will benefit strongly.
Irrespective of how the pandemic unfolds, it is imperative for industry participants to engage with the value chain—both upstream and downstream—to deliver a strong kharif season and build the momentum for the remaining of FY21. This will essentially boil down to getting the basics right—keeping people safe, operating the plant efficiently (which includes a detailed plan to ensure availability of raw and packaging materials), and managing multi-vendor logistics, in addition to a strong cash focus.
Views are personal. Jain and Patra are partners and Mukhopadhaya is a principal with Bain & Company. They are leaders in the firm’s Energy & Natural Resources practices.