Slow-moving agrochemicals sector is suddenly booming
The formerly slow moving agrochemicals sector is suddenly booming. Apart from farm labour shortage, several other developments are fuelling
the increasing use of agrochemicals. Crucially, farmers are becoming
more aware of their benefits.
A farmer sprays pesticide in his fi eld at a village in Andhra Pradesh
An orange-like citrus fruit called kinnow, and cotton are the two crops Sanjeev Kumar Belu grows on his 100-acre farm in the Abohar region of southwest Punjab. Abohar, the biggest cotton producing belt of north India, is a highly fertile, well-irrigated stretch, and Belu - like most farmers in the area - had been prospering. But in 2008, a combination of factors led to an acute shortage of farm labour in the region. That's when Belu, who until then had relied on conventional farming methods, decided to use herbicides, rather than pay exorbitant wages to get his fields de-weeded manually. Going a step further, he also sprayed crop protecting and growth enhancing chemicals. The results surprised him: output shot up. While manual de-weeding would cost him Rs2,000 per acre, using herbicide and other chemicals halved the expense.
"I not only got a better yield, but my input costs also fell, more than doubling my income," he says. Like Belu, thousands of other farmers across the country have also woken up to the advantages of using agrochemicals - for a variety of reasons. As a result, this formerly sleepy sector has boomed, catching the eye of corporate investors. A 2008/09 estimate by the Working Group on the Indian Chemical Industry for the formulation of the 11th Five-Year Plan had put the sector's growth between 2003/04 and 2008/09 at 1.6 per cent. Today, industry insiders claim, it is growing at 10 per cent. The total sales of listed agrochemical companies, which stood at Rs7,319 crore in 2007/08, rose to Rs12,253 crore in 2010/11, according to the Centre for Monitoring Indian Economy.
Until 2007, agri business giant Godrej Agrovet paid little attention to agrochemicals, focusing more on animal feed and oil palm. Not any more. "Our CPC business has been rising at a CAGR of 20 per cent since 2007," says Rakesh Dogra, Associate Vice President, Agri Input Business. CPC is crop protection chemicals, while CAGR stands for compound annual growth rate. "Our CPC sales, which were merely Rs50 crore in 2007/08, will be around Rs 200 crore this financial year. We expect to touch Rs500 crore in another five years."
Godrej's rediscovery of India
The shares of companies in this sector have been surging. "The price-earnings multiples of agrochemical companies are increasing," says Vinod Wadhwani, Director at investment bank Ambit Corporate Finance. "They are currently around 10 for domestic companies and around 18 for multinationals."
Apart from farm labour shortage, several other developments are fuelling the increasing use of agrochemicals. Crucially, farmers are becoming more aware of their benefits. "In a recent survey by the Indian Agricultural Research Institute, 23 per cent of farmers said their yields had increased because of pesticide use," says V. Chaitra Narayan of research and consulting firm, Frost & Sullivan. The growth of organised retail is playing a key role too.
"Farmers realise if they want to sell to retail chains and get higher value, they need to take better care of their crops. This has pushed up fungicide sales,'' says Kapil Mehan, Managing Director of fertiliser and agrochemicals manufacturer, Coromandel International.
More and more farmers are also switching to cash crops. Reserve Bank of India data shows the area under cash crops has increased by 30 per cent between 2002/03 and 2010/11 - which typically require greater use of crop protection chemicals. Even those cultivating traditional crops such as paddy, wheat and sugarcane are earning higher profits than before, thanks to the government raising the minimum support price, or MSP, for these crops - the minimum price farmers have to be paid - by around 11 per cent every year between 2007 and 2010. (Earlier, MSP hikes were much lower. Between 2002 and 2007, they rose by around four per cent annually.) Now with more money in hand, farmers are able to invest in pesticides and herbicides. "Farmers are re-investing a part of their profits to protect their next crop,'' adds Mehan.
Corporate farming, redux
Finally, the quality of agrochemicals available in the country has improved after 2005, when India endorsed the international product patent regime, which barred domestic companies from copying exclusive products patented by multinationals and selling them cheap. "MNCs began to introduce their latest molecules in India, which delivered good results in the market,'' says Ramesh Srinivas, Partner, Management Consulting, KPMG, the audit firm.
Currently domestic companies such as Rallis India, United Phosphorus Ltd, or UPL, and PI Industries together control around 60 per cent of the Indian market. With excellent process optimisation abilities, low-cost manufacturing skills and a wide distribution network, Indian companies are well entrenched, though their primary focus - as with Indian pharmaceuticals - remains 'reverse engineering': taking up molecules manufactured by global companies that have gone off patent and working backwards to identify their components and produce them cheap. Such products, like in pharmaceuticals, sell widely not only within the country, but also abroad, making India a global hub for generic agrochemicals.
Firm on the farm
Nearly half of such generics manufactured in 2010/11 were exported to markets in the United States, Europe, Latin America and Africa. "We used to import the insecticide Cypermethrin of 92 per cent purity at $95 per kg. Today, India is exporting it at $12 per kg and that too at 98 per cent purity,'' says Rajju Shroff, Chairman and Managing Director, UPL.
Industry insiders feel the boom has just begun. "The average consumption of pesticide in India is 500 grams per hectare compared to three kg in Europe and 10 kg in South Korea," says Shroff. To feed its billion plus population, India has to increase its farm production, which means greater and more effective use of agrochemicals.
"India's crop yield is a poor 2.8 tonne per hectare compared to seven tonne in the US," says Ambit Corporate Finance's Wadhwani. It is this potential for growth that is also attracting foreign companies. MNCs such as Syngenta and Bayer Cropscience, are already in the market and keen to increase their share. "In most countries where they operate, multinationals in the agrochemicals sector have an annual growth of around two per cent," says Srinivas of KPMG.
"In India they are growing at 10 per cent. In these other countries, their market share is around 75 per cent, while in India it is still around 40 per cent."
{mosimage}But challenges remain. With their focus on generics, Indian agrochemical companies' presence in the high-end market for original molecules is minimal, that place is dominated by German, Swiss and Japanese brands. "Indian companies invest less than two per cent of their sales in research. In comparison, MNCs put in around 10 per cent. That needs to change,'' says Srinivas.
Lately, though, some Indian players have been making an effort to not only sell products but also to offer complete farming solutions: for instance, Rallis India, UPL and Dhanuka Agritech have set up seeds' divisions. Some like UPL have been acquiring companies abroad that specialise in research.
Even in the low-cost area, Chinese products are flooding the market and challenging Indian dominance. Agrochemical manufacturers also periodically face the wrath of environmentalists, though companies insist the new molecules have no adverse ecological effects.
But the biggest challenge remains the weather. Indians farms are still predominantly rain fed and a bad monsoon could dramatically reduce farmers' earnings and purchasing power and thereby hit the sector hard. The dream run, then depends heavily on the rain god.
"I not only got a better yield, but my input costs also fell, more than doubling my income," he says. Like Belu, thousands of other farmers across the country have also woken up to the advantages of using agrochemicals - for a variety of reasons. As a result, this formerly sleepy sector has boomed, catching the eye of corporate investors. A 2008/09 estimate by the Working Group on the Indian Chemical Industry for the formulation of the 11th Five-Year Plan had put the sector's growth between 2003/04 and 2008/09 at 1.6 per cent. Today, industry insiders claim, it is growing at 10 per cent. The total sales of listed agrochemical companies, which stood at Rs7,319 crore in 2007/08, rose to Rs12,253 crore in 2010/11, according to the Centre for Monitoring Indian Economy.
Until 2007, agri business giant Godrej Agrovet paid little attention to agrochemicals, focusing more on animal feed and oil palm. Not any more. "Our CPC business has been rising at a CAGR of 20 per cent since 2007," says Rakesh Dogra, Associate Vice President, Agri Input Business. CPC is crop protection chemicals, while CAGR stands for compound annual growth rate. "Our CPC sales, which were merely Rs50 crore in 2007/08, will be around Rs 200 crore this financial year. We expect to touch Rs500 crore in another five years."
Godrej's rediscovery of India
The shares of companies in this sector have been surging. "The price-earnings multiples of agrochemical companies are increasing," says Vinod Wadhwani, Director at investment bank Ambit Corporate Finance. "They are currently around 10 for domestic companies and around 18 for multinationals."
Apart from farm labour shortage, several other developments are fuelling the increasing use of agrochemicals. Crucially, farmers are becoming more aware of their benefits. "In a recent survey by the Indian Agricultural Research Institute, 23 per cent of farmers said their yields had increased because of pesticide use," says V. Chaitra Narayan of research and consulting firm, Frost & Sullivan. The growth of organised retail is playing a key role too.
| SPURRING GROWTH Why the sudden interest in this sector
|
More and more farmers are also switching to cash crops. Reserve Bank of India data shows the area under cash crops has increased by 30 per cent between 2002/03 and 2010/11 - which typically require greater use of crop protection chemicals. Even those cultivating traditional crops such as paddy, wheat and sugarcane are earning higher profits than before, thanks to the government raising the minimum support price, or MSP, for these crops - the minimum price farmers have to be paid - by around 11 per cent every year between 2007 and 2010. (Earlier, MSP hikes were much lower. Between 2002 and 2007, they rose by around four per cent annually.) Now with more money in hand, farmers are able to invest in pesticides and herbicides. "Farmers are re-investing a part of their profits to protect their next crop,'' adds Mehan.
Corporate farming, redux
Finally, the quality of agrochemicals available in the country has improved after 2005, when India endorsed the international product patent regime, which barred domestic companies from copying exclusive products patented by multinationals and selling them cheap. "MNCs began to introduce their latest molecules in India, which delivered good results in the market,'' says Ramesh Srinivas, Partner, Management Consulting, KPMG, the audit firm.
Farmers realise that if they want to sell to retail chains, they need to take better care of crops. This has pushed up fungicide sales: Kapil Mehan
Firm on the farm
Nearly half of such generics manufactured in 2010/11 were exported to markets in the United States, Europe, Latin America and Africa. "We used to import the insecticide Cypermethrin of 92 per cent purity at $95 per kg. Today, India is exporting it at $12 per kg and that too at 98 per cent purity,'' says Rajju Shroff, Chairman and Managing Director, UPL.
Industry insiders feel the boom has just begun. "The average consumption of pesticide in India is 500 grams per hectare compared to three kg in Europe and 10 kg in South Korea," says Shroff. To feed its billion plus population, India has to increase its farm production, which means greater and more effective use of agrochemicals.
"India's crop yield is a poor 2.8 tonne per hectare compared to seven tonne in the US," says Ambit Corporate Finance's Wadhwani. It is this potential for growth that is also attracting foreign companies. MNCs such as Syngenta and Bayer Cropscience, are already in the market and keen to increase their share. "In most countries where they operate, multinationals in the agrochemicals sector have an annual growth of around two per cent," says Srinivas of KPMG.
"In India they are growing at 10 per cent. In these other countries, their market share is around 75 per cent, while in India it is still around 40 per cent."
{mosimage}But challenges remain. With their focus on generics, Indian agrochemical companies' presence in the high-end market for original molecules is minimal, that place is dominated by German, Swiss and Japanese brands. "Indian companies invest less than two per cent of their sales in research. In comparison, MNCs put in around 10 per cent. That needs to change,'' says Srinivas.
Lately, though, some Indian players have been making an effort to not only sell products but also to offer complete farming solutions: for instance, Rallis India, UPL and Dhanuka Agritech have set up seeds' divisions. Some like UPL have been acquiring companies abroad that specialise in research.
Even in the low-cost area, Chinese products are flooding the market and challenging Indian dominance. Agrochemical manufacturers also periodically face the wrath of environmentalists, though companies insist the new molecules have no adverse ecological effects.
But the biggest challenge remains the weather. Indians farms are still predominantly rain fed and a bad monsoon could dramatically reduce farmers' earnings and purchasing power and thereby hit the sector hard. The dream run, then depends heavily on the rain god.
