>AGRICULTURE SECTOR: Prefer Chambal over Coromandel & UPL over Rallis

• Decline in food grain prices (refer to our report on Rural steroid is ebbing) have affected farmers’ profitability and is likely to put pressure on agri input consumption
• We believe that complex fertiliser players will be affected more than the urea players while in agro chemicals domestic players will face severe impact than exports based players
• We prefer Chambal fertiliser (urea base player) over Coromandel (complex fertiliser base) and United Phosphorous (Agrochem exports) over Rallis India (domestic focus)
• Downgrade earnings and target price for Rallis India and Coromandel, maintain for Chambal and United Phosphorous

■ Complex fertiliser based players to be affected more than urea, Prefer Chambal fertiliser over Coromandel
Growth moderation in agri input consumption may have adverse impact on fertiliser consumption also (as witnessed in FY03, kindly refer to chart on next page). However domestic urea production is unlikely to be affected due to drop in demand (if any) since imports contribute ~23% total urea consumption and any reduction in demand is likely to reduce imports while keeping the domestic production intact. Complex fertilisers have been brought under NBS and companies have increased prices significantly to pass on higher input cost. However contraction in fertiliser demand may put pressure on complex fertiliser manufacturers and squeeze companies’ margins. As a result we prefer urea based players like Chambal Fertiliser over complex fertiliser players like Coromandel International.


■ Agrochemicals - export based players to benefit while domestic players may see demand pressure, prefer UPL over Rallis
Projecting a weak demand environment for agri input, we expect pesticide consumption to come under pressure and companies may also see contraction in margins. Exports oriented players may benefit from buoyant global demand environment and currency depreciation. Under the current circumstances, we prefer United Phosphorous which is largely a global player since India account for <25% of total revenues and profits over Rallis India (where exports contribution is ~30%).


■ Earnings and valuations to take a hit, downgrade Coromandel & Rallis
Affected by weak demand outlook and margin pressure in near future, we are reducing our earnings estimates for Coromandel and Rallis and subsequently downgrade these stocks from BUY to Hold. Though strong balance sheet (cash surplus) and higher RoE (28%+) are key strengths of these companies but we expect earnings multiple to contract owing to deceleration in earnings growth. Also we expect that the premium multiple which these stocks were enjoying over the peers is likely to come down.


To read the full report: AGRICULTURE SECTOR
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