The current article aims to highlight the key aspects of the business of agrochemical (pesticide) companies. After reading this article, an investor would understand the factors that impact the business of pesticide companies and the characteristics that differentiate a fundamentally strong pesticide company from a weak one.
Similarities with Pharmaceutical Industry
Agrochemicals/pesticides industry is very similar to the pharmaceutical industry in its structure. Just like human drugs, pesticides are drugs for crops. Let us understand the similarities between the two industries, which would help any investor attempting to analyse any pesticide company for the first time.
1) Classification into technical and formulations segments:
The agrochemicals industry is divided into technical products and formulation products. Technical products are bulk drugs like active pharmaceutical ingredients (API) in the pharmaceutical industry. These are concentrated chemicals, which form the base of pesticides; however, are not yet suited for direct application to the crops.
Formulation products in the pesticide industry are similar to pharmaceutical formulations (ready-to-consume drugs), which are made by adding various solvents etc. called formulants to the technical pesticides to make them ready for application on crops.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 1:
Pesticides can be manufactured and sold mainly in two forms- Technical and Formulations. Technical is the first stage of manufacture where the chemical is concentrated and unsuitable for direct use. This is then processed with other materials known as formulants to develop the finished pesticide, known as formulation.
Moreover, as in the case of the Indian pharmaceutical industry, where most Indian players focus on formulations by importing the APIs from China; similarly, in the agrochemical industry also, most Indian manufacturers are formulators who import technical products from China.
In fact, China produces more than 90% of the world’s technical production and has a very large overcapacity.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 6:
India is one of the major producers for pesticide formulations, however, it still imports technicals to a large extent which serve as the base chemical for the end-product, viz, formulations. China is the world’s largest producer of agrochemical raw materials, supplying 90% of the world’s technical raw material requirements
Further advised reading: How to analyse New Companies in Unknown Industries?
2) Huge investment of money and time in developing new pesticides; patents and generics:
Just like pharmaceuticals, pesticides also affect human health because from the crops they enter the food chain and human body; therefore, companies need to conduct many studies/trials to ascertain their safety before the products are approved for commercial use.
As a result, it takes a long period from the identification of any new pesticide to its commercial use on the farms, which is usually about 10 years.
All these studies take a significant investment of money and other resources. Therefore, countries grant patents to companies investing in research & development (R&D) of pesticides, which gives them a period of exclusivity for selling that particular pesticide to recover their investment in R&D and earn a profit.
After the patent protection of any successful pesticide is over, then just like in the pharmaceutical industry, many other companies start producing that pesticide, which is called a generic version. However, even the generic companies need to establish the safety of their product by conducting safety trials, which also takes significant time. As a result, it may take generics companies about 5 years to register their product.
Rating methodology – agrochemicals by ICRA, June 2022, page 5:
Being a regulated industry, it takes almost 10 years for an entity to bring a new molecule into the market and almost five years to get a generic product registered.
Moreover, patented pesticides sell at a higher price and at good profit margins due to limited competition during the exclusivity period. The prices decline sharply when numerous generic companies enter the market. As a result, generic pesticides have lower profit margins. An investor may notice the same dynamics in the pharmaceutical industry.
Further advised reading: How to do Business Analysis of a Company
3) Requirement of registration with authorities:
Just like the pharmaceutical industry, every pesticide needs to be registered with govt. authorities before it can be sold in any country. Registrations are country-specific and a company needs to register its product in every target country.
Just like the pharmaceutical industry, the registrations take time and money. In the pesticide industry, the registration process of a product in developed markets like the USA/EU may take about 3-5 years and a cost of about USD 10-15 mn whereas a registration in India may take about 1-3 years and a relatively lower cost. The requirement of registrations and the time & cost involved in the same may act as an entry barrier for new players.
Rating Methodology – Pesticide Companies by CARE, June 2017, pages 3-4:
Registering agrochemical generics in US / EU is a time-consuming process since it requires various types of studies to be carried out. One product registration takes about 3-5 years and costs about USD 10-15 mn. Registration process in India takes roughly 12-36 months. The investments both in terms of time and money act as effective entry barriers
Such registration requirements act as an entry barrier for newer players because in certain developed countries getting registration is very difficult with a very high rejection rate.
An agrochemical company, Sharda Cropchem Ltd faced a lot of difficulties in getting registration in Germany where the rejection rates are very high.
Conference call by Sharda Cropchem Ltd, July 2017, page 10:
Ramprakash Bubna: in Germany the things are very difficult. Our rate of success of registrations in Germany is very, very low.
In addition to the low success rate, the registration processes are also very costly because apparently nowadays, the govt. authorities have started to look at them as a profit-generating activity.
Conference call by Sharda Cropchem Ltd, October 2020, page 11:
Ramprakash Bubna: The cost of registrations is exponentially high. The government authorities, the sourcing authorities, who used to charge nominal fees, they now started at looking some more kind of profits in these regions because they feel the operators and players in the market are getting profits then why not the government
Obtaining registrations, especially in developed countries has become a challenging activity. As a result, the ability to obtain registrations is considered a key competitive advantage.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 5:
CARE views the ability of a company to obtain registrations in different countries as per their regulatory requirements and higher number of patents, product registrations and acquisitions in the global market as major strengths for sustainable growth.
An investor would appreciate that pharmaceutical companies face the same challenges when attempting to get registrations in different countries.
Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors
4) Demand is primarily influenced by local/domestic factors:
In the pharmaceutical industry, the demand for drugs in India or in any country is primarily driven by the local factors/diseases prevalent in that area and may not be influenced by global factors. Similarly, in the case of agrochemicals as well, the demand is influenced by local factors and not global dynamics.
Rating Methodology – Pesticide Companies by CARE, November 2019, page 1:
The prospects for domestic pesticide sector depends on multitude of factors like monsoons, crop yield, incidence of pest attack, etc. and is relatively detached from the global dynamics.
Looking at all these similarities between the two industries, if an investor has not analysed the pesticide industry before; however, she has analysed the pharmaceutical industry, then she can apply her learning of the pharmaceutical industry here.
An investor may read the following article to understand more about the business analysis of pharmaceutical companies: How to do business analysis of pharmaceutical companies
Let us now understand the key characteristics of the business of agrochemical (pesticide) companies and understand the major factors impacting them, so that we may understand, which pesticide companies have a stronger business model than others.
Key factors influencing the business performance of agrochemical (pesticide) companies
1) Seasonality, uncertainty and wide fluctuations in local demand:
Consumption of specific pesticides depends on the sowing of specific crops, which is seasonal in nature. Therefore, the demand for these pesticides peaks up during a couple of months of a particular crop season and declines sharply after the crop season.
Even within the season, the demand for pesticides fluctuates widely depending upon factors like rainfall (monsoon), pest attacks, pest resistance etc. Therefore, a company may be ready with full inventory; however, there might be a rain deficit leading to lower acreage of crops and less demand for pesticides. Demand may also get affected if a particular pest attack may not happen in any year or the pest becomes resistant to the existing pesticide.
Therefore, it is very difficult for agrochemical companies to decide the exact demand for their products in any year. However, they need to keep sufficient stock of pesticides so that they do not run out of the product when the demand comes.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 4:
Due to the seasonal nature of the business and the uncertainties related to timing and coverage of monsoon, level of pest infestation, etc., the level of inventories needed by the companies to stock is large.
In addition, due to the seasonal nature of demand, if any quantity of pesticide is not sold in the current season, then it is left unsold as inventory until the onset of the next season, which might be many months away.
Conference call by Sharda Cropchem Ltd, May 2017, pages 16-17:
Ramprakash V. Bubna: …it does take time to get rid of the inventories in agrochemical business these are seasonal businesses for some reason because of the weather or any other impact there has been a less demand, the companies are compelled to carry their inventory forward and then the next time is possibly after six or eight months.
Therefore, the seasonality and uncertainty in the demand for pesticides lead companies to keep an excess buffer of stock to meet the fluctuating demand and be ready to carry it over to the next season. This significantly increases the inventory requirements of agrochemical companies and makes their operations working capital-intensive.
An investor may read our detailed analysis of Sharda Cropchem Ltd in the following article: Analysis: Sharda Cropchem Ltd
2) Fragmented industry with intense competition and low pricing power:
In India, most of the pesticide players are formulators who import technical pesticides from China and then produce formulations in India. This business model does not require a large investment in manufacturing plants etc. because producing formulations is low capital intensive whereas producing technical products is highly capital intensive.
Rating methodology – agrochemicals by ICRA, June 2022, page 2:
formulations business is not capital and technically intensive…Technical and capital intensity is higher in case of production of technicals, which are generally higher value-added products.
Due to low capital requirements and easy availability of technical pesticides from China, the Indian pesticide industry has a presence of numerous formulation players making the industry highly fragmented.
Rating methodology – agrochemicals by ICRA, June 2022, page 1:
domestic agrochemicals industry is highly fragmented with more than 60 technical grade pesticides being manufactured indigenously by about 125 manufacturers, including almost 60 large and medium scale enterprises (including 10 MNCs), about 800 formulators and more than 145,000 distributors spread all over the country.
Moreover, the majority of these players produce generic pesticides, which are commodities i.e. the product of one company is non-differentiable from the product of another company.
Rating methodology – agrochemicals by ICRA, June 2022, page 1:
Most Indian companies manufacture and market generic and off-patent pesticides, which comprise ~80% of the technicals being produced by the domestic industry.
As a result, the Indian agrochemical industry has intense price-based competition, where many players undercut the prices of their competitors.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 2:
industry is characterized by overcapacity and low offtake leading to intense price competition among players.
Such intense price-based competition reduces the profit margin of the entire generics agrochemical industry.
Rating methodology – agrochemicals by ICRA, June 2022, page 4:
Generics are commodity products and hence, competition is intense with a large number of players present in the segment. Margins remain low in generics manufacturing
Only the innovator agrochemical companies whose products are protected by the exclusivity granted by patents are able to protect their profit margins.
Advised reading: How to do Financial Analysis of a Company
3) Price-sensitive consumer without any brand loyalty:
The key consumer of the pesticide industry in India, the farmer community is not very rich and has to manage with limited resources. As a result, they are very price conscious in their pesticide purchase decisions and are unwilling to pay a high price for any specific brand.
As a result, even though marketing spending by pesticide companies creates awareness about their products and may give them a slight premium in their pricing; however, they cannot price their branded pesticides at a significant premium because then the demand would shift to low-priced competitors’ products, which are already available in the market.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 6:
the market for pesticides is low brand conscious and highly price sensitive. Due to dominance of generic products, there are several ‘me too’ and spurious products available in the market.
4) Fluctuating raw material prices impacting profitability:
Most of the raw materials used as inputs for the production of technical products and subsequently formulations are derivatives of crude oil. As a result, the raw material costs of agrochemical companies witness a lot of fluctuation as the crude oil prices are very volatile.
However, generic agrochemical companies find it difficult to pass on the increase in costs to their customers because of low bargaining power. These companies sell generic-commoditized pesticides, where any increase in product prices would shift the customer to buy competitors’ products.
Rating methodology – agrochemicals by ICRA, June 2022, page 3:
Commodity price risks: Prices of most chemicals are exposed to input price cyclicality, which renders the profitability of the end-product vulnerable to these fluctuations. Given that many of the technical are produced from derivatives of crude oil, prices of the raw materials have witnessed fluctuation over the years as crude oil prices have remained volatile.
Companies, which have a high R&D strength and enjoy protection either due to patented drugs or exclusive marketing arrangements with innovator MNCs, are better at protecting their profit margins in the face of volatile raw material costs.
Rating methodology – agrochemicals by ICRA, June 2022, page 4:
few Indian entities also manufacture specialty products in-licensed from larger MNCs wherein the entities sign exclusive manufacturing and marketing arrangements with the MNCs in-lieu for royalty paid to the MNC. As a result, these entities face lesser competitive intensity and hence, profitability is protected to that extent
5) R&D: Companies must renew their product portfolio regularly:
Pesticide companies face a significant challenge of product obsolescence. There are multiple reasons for obsolescence.
First, over time, the pests develop resistance to existing pesticides that stop working. As a result, newer pesticides need to be developed, which requires a significant investment of money and time in R&D.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 3:
Also, due to growing pest resistance and newer pest attacks/diseases, it is essential for the companies to introduce new products/molecules at regular intervals and provide newer solutions to crop problems
Second, R&D by innovator companies keeps bringing out newer pesticides, which are safer for plants and humans. Therefore, governments ban the older version of more harmful pesticides. As a result, companies, which are significantly dependent on old pesticides for their business face a big challenge.
Due to these reasons, agrochemical companies must invest resources to continuously maintain a pipeline of newer pesticides so that they may stay relevant in the fast-changing business environment.
An investor would appreciate that developing a pipeline of newer pesticides would require a large investment in R&D. Therefore, the companies who spend significant money on R&D to develop new drugs/generics are in a competitively better position than others.
Rating methodology – agrochemicals by ICRA, June 2022, page 5:
Entities with strong R&D capabilities and high budgetary allocation for R&D work will be better placed in terms of tapping the opportunity arising from patent expirations.
Unfortunately, most Indian agrochemical companies have a small R&D budget and spend only 1%-2% of their revenue on R&D in comparison to multinational companies (MNCs), which spend about 11%-12% of revenue on R&D.
Rating Methodology – Pesticide Companies by CARE, November 2019, page 2:
Currently R&D expense as a percentage of turnover in India is about 1% compared to 11-12% globally.
One method by which Indian companies mitigate the risk of product obsolescence is by entering into an exclusive marketing arrangement with innovator MNC agrochemical companies so that they continue to get access to the latest pesticides to sell in the Indian market and maintain a healthy business with good profitability.
Therefore, an investor should analyse the R&D spending by the company along with its tie-ups with innovator MNCs to assess whether the company would be able to counter product portfolio obsolescence.
6) Working capital intensive business:
Agrochemicals (pesticide) business is working capital intensive because it requires maintaining high inventory as well as a large amount of trade receivables.
As discussed earlier, the demand for pesticides is seasonal as well as highly uncertain. Therefore, companies need to keep a large stock of pesticides to meet demand in case the rains and crop sowing are good while running the risk of large unsold inventories if there is a rain deficit, fewer pest attacks or lower crop sowing.
Rating methodology – agrochemicals by ICRA, November 2017, page 7:
Due to seasonal nature of demand, unpredictability of pest attacks and high dependence on monsoons, agrochemical players have to maintain high level of inventory to meet the seasonal requirements.
Moreover, the sale of pesticides happens in a specific season; however, the companies need to run their plants throughout the year, which adds to the inventory and the working capital levels of agrochemical companies.
Rating methodology – agrochemicals by ICRA, June 2022, page 9:
Working capital intensity of the agrochemical players (especially formulations) tends to remain moderately high owing to the long operating cycle as production and placement of products happens throughout the year while the sales of the product happen majorly during the cropping season.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
In addition, agrochemical companies need to sell pesticides with a large credit period to customers. This is because farmers buy pesticides at the last stage of the crop sowing cycle after they have already spent their money on preparing fields, seeds etc. By this time, the farmers are already low on resources. Therefore, usually, they buy pesticides on credit with a promise to pay for them after the crop is harvested.
Rating methodology – agrochemicals by ICRA, November 2017, page 7:
Agro-chemical entities normally have high debtor days owing to i) long credit period extended to the customers ii) sales made at the onset of the crop season with realisation from the same mostly coming post-harvest.
Agrochemical companies also need to offer a higher credit period to customers because they mostly sell commoditised generic products, which are non-differentiable from each other. As a result, offering a longer credit period offers an incentive to the customer to buy their product instead of competitors’ products.
However, the long credit period hurts the agrochemical companies because in the case of bad harvest, poor monsoon etc. the farmer is unable to pay the money.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 4:
Furthermore, the industry needs to offer long credit periods to farmers due to intense competition and low offtake. Also, farmers tend to have little surplus money left for purchasing pesticides, as applying pesticides is the last leg in the agriculture operation. This leads to higher bad debts in events of crop failure or poor monsoon.
Further advised reading: Receivable Days: A Complete Guide
7) Large and diversified companies have an advantage; big gets bigger:
The demand for pesticides is crop-specific, seasonal, and prone to obsolescence. Therefore, any agrochemical company, which is significantly dependent on any one product or geography is at a high risk of business disruption.
As a result, agrochemical companies, which sell many products in different geographies are at a comparative advantage because any deficit in rainfall, pest attacks, pest resistance etc. would not harm their business significantly.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 5:
Pesticide companies having large market share, wide distribution setup and geographic spread in the domestic markets are at an advantageous position to withstand the uncertainties due to monsoons and regional seasonality.
Moreover, in case, the govt. decides to ban any pesticide, then a diversified agrochemical player with a large product portfolio would not be impacted significantly. In contrast, concentrated agrochemical players relying on a single product may go out of business due to such a ban.
This risk is especially high for companies who have most of their products under the red label (extremely toxic) and yellow label (highly toxic) instead of products under the blue label (moderately toxic) and green label (slightly toxic).
Rating Methodology – Pesticide Companies by CARE, November 2020, page 5:
entities which are highly dependent on red and yellow triangle pesticides run the risk of losing their source of revenue from products falling under banned category.
In addition, diversified companies, which are usually large in size also have advantages because they have higher bargaining power over their suppliers as well as customers and distributors.
Rating methodology – agrochemicals by ICRA, June 2022, page 6:
Large-scale typically leads to greater bargaining power with suppliers and dealers, besides enabling superior competitive position on the back of cost and manufacturing process efficiencies.
Large agrochemical companies also benefit from economies of scale i.e. operating leverage resulting in cost competitiveness. These companies are better able to compete against other domestic as well as foreign players. One reason Chinese technical producers dominate the world of agrochemical technical is their large size resulting in cost-competitiveness due to economies of scale
Rating methodology – agrochemicals by ICRA, June 2022, page 6:
economies of scale play a big role in reducing cost of production and hence, domestically produced technicals have faced tough competition from imported technicals as manufacturers in countries like China operate on a very large scale giving them an advantage over domestic producers.
Large agrochemical players are able to enjoy the strength of a well-established distribution network, which acts as a competitive advantage as such companies are able to push their products close to as many customers as possible and are able to educate them for their use.
Rating methodology – agrochemicals by ICRA, June 2022, page 2:
While the formulations business is not capital and technically intensive, the profitability of the entities depends on their ability to develop a strong brand and distribution network, which may entail significant time and cost and act as key competitive strengths.
Moreover, if they are integrated players i.e. produce technical products as well as formulations, then they are able to capture a higher share of the value chain and earn a high-profit margin in addition to better control of the supply and quality of raw material.
Rating Methodology – Pesticide Companies by CARE, November 2019, page 3:
Integrated entities may have better protection against such risks due to better control on supply of technical and better profitability margins.
Geographical diversification by agrochemical companies in exports helps them as they can sell their excess production capacity due to the seasonality of domestic demand in foreign countries. In addition, the exports provide a better price and lower credit period as well as tax incentives from the Indian govt.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 6:
Increased export focus of the Indian pesticide industry is a consequence of seasonal demand, better price realization in the export markets, global outsourcing opportunity, low credit periods in export markets, domestic overcapacity and tax sops.
Until now, Indian companies have been able to perform well in the export market due to their lower cost of production as a result of the easy availability of a skilled workforce.
Rating methodology – agrochemicals by ICRA, June 2022, page 3:
India has the advantages of being a low-cost manufacturing hub with technical competence and manpower availability for producing quality agrochemical products, which has led to a substantial increase in exports over the past few years, primarily to the US, Europe and Africa.
8) Risk from organic farming, genetically modified seeds as well as fake-spurious products:
Organic farming promotes growing food without the use of agrochemicals like pesticides, fertilizers etc. However, in the absence of these additive factors, the production yield of organic crops is low, which results in a high market price for organic products.
If going ahead, improvement in technology and processes leads to an improvement in the production yields of organic farming, then a resultant decline in the price of organic products may lead to a large section of the population shifting to consuming organic foods. It may lead to a decline in the demand for agrochemicals like pesticides.
Rating methodology – agrochemicals by ICRA, June 2022, page 10:
innovations in the organic farming techniques, which could lead to increase in yields and lowering of the pricing premium for organically grown products, in the long term could weigh on agrochemicals demand.
Currently, a lot of agricultural research is focused on making crops resistant to pests by modifying their genetic composition. These crops called genetically modified (GM) crops have proved to be a success in the case of cotton, soybean and corn. In 2013, most of the crops sowed in the USA for corn, cotton and soybean were genetically modified.
FY2015 annual report of Sharda Cropchem Ltd, page 11:
As of 2013, GM seed weightings in the US have reached 90% for corn, 90% for cotton, and 93% for soybeans.
Advised Reading: How to study the Annual Report of a Company
As GM crops are resistant to pests, therefore, increased usage of GM crops leads to lower utilization of agrochemicals like pesticides. In fact, after the introduction of GM crops, the agrochemicals industry witnessed a long-term decline, which was evident from 1998 to 2006.
Red-herring prospectus of Sharda Cropchem Ltd, September 2014, page 46:
Following the initial introduction of GM crops in 1996, the market experienced a period of decline in real terms between 1998 and 2006. This reflected the increase in uptake of GM technology, particularly in North America and Latin America where a rapid switch to crop varieties containing traits conferring glyphosate tolerance and insect resistance led to declines in selective herbicide and insecticide applications
Even in the Indian context, it is expected that increased usage of GM crops would lead to a decline in the usage of agrochemicals.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 3:
Growing acceptance for the BT cotton which would adversely impact the pesticide demand and widespread use of GM seeds in other crops like soyabean, maize, canola, etc., makes it imperative for the companies to focus on other crops besides cotton, for future growth.
Apart from GM crops and the increasing trend of organic foods, agrochemical companies are severely impacted by fake/spurious pesticides present in the market, which as per some estimates constitute about a third of all pesticide sales.
Rating Methodology – Pesticide Companies by CARE, November 2020, page 2:
The industry is also plagued with spurious pesticide products which account for over one-third of the domestic market size
Therefore, an investor should be cautious about the possible impact of GM seeds, organic food and fake/spurious products on the business of agrochemical companies.
Summary
Overall, the agrochemical (pesticide) industry seems an essential segment of the economy like the pharmaceutical industry, which is essential to prevent damage to food crops due to pests. Developing newer pesticides is a very resource-intensive exercise due to multiple safety trials because pesticides enter the food chain and affect human health. This also makes it a heavily regulated industry.
Companies with higher R&D spending are at an advantage because they are able to get an exclusive period to see their products at a profitable price to recover their R&D expenses. However, once the patent period ends, then many generics players enter the market and bring down the prices as well as profitability.
Most of the agrochemical companies in India are generic formulation players that produce commoditised products, which is not a capital-intensive process. As a result, the industry is highly fragmented and intensely competitive where many players compete on the price to gain customers. Moreover, the customers are also highly price conscious with low brand loyalty. All this leaves a very low pricing power in the hands of generic agrochemical players.
Demand for pesticides is seasonal and uncertain due to weather changes and pest resistance. As a result, companies need to keep a large inventory to meet the seasonal increase in demand. In addition, companies need to update their product portfolio to meet regulatory and market demands for newer and safer pesticides.
Agrochemical operations are working capital intensive due to large inventory and trade receivables requirements. Farmers use pesticides at the end of crop sowing operations when they have consumed almost all their resources. Therefore, they need a credit period to pay after the harvest is over. If the crop is bad, then they are not able to pay leading to bad debt for companies.
As a result, large agrochemical companies with a significant R&D budget and a diversified product portfolio and extensive distribution are at a competitive advantage. These companies can develop new products, enter into an exclusive alliance with innovator MNCs, sell in different geographies, educate customers about their products as well as generate resources for working capital needs. Effectively, in the agrochemical industry, big players have a ready stage to become bigger.
The agrochemical industry is facing threats from the growing use of GM seeds, preference for organic food as well as the growing presence of fake/spurious products in the market, which may affect the business of agrochemical companies going ahead.
Therefore, an investor should keep in mind these multiple aspects for agrochemical pesticide companies to understand the true picture of their business position.
- Seasonality, uncertainty and wide fluctuations in local demand
- Huge investment of money and time in R&D for developing new pesticides, patents and generics
- Requirement of registration with authorities
- A fragmented industry with intense competition and low pricing power
- Price-sensitive consumers without any brand loyalty
- Fluctuating raw material prices impacting profitability
- Working capital-intensive business
- Large and diversified companies have an advantage; big gets bigger
- The risk from organic farming, genetically modified seeds as well as fake-spurious products
We believe that if an investor analyses any agrochemical pesticide company by considering the above parameters, then she would be able to assess its business properly.
As ready examples, an investor may read our detailed analysis of the following companies operating in the agrochemical sector.
Regards,
Dr Vijay Malik
P.S.
- Subscribe to Dr Vijay Malik’s Recommended Stocks: Click here
- Chennai “Peaceful Investing” Workshop | 26 July 2026: Register Here
- To learn stock investing through videos, you may subscribe to the Peaceful Investing – Workshop Videos
- 25% savings on buying our Stock Analysis Excel Template and all ebooks together: Analysis Package: Excel Template + All eBooks (25% savings)
- To download our customized Stock Analysis Excel Template for analysing companies: Stock Analysis Excel
- Learn about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
- To learn how to do business analysis of companies: e-book: Business Analysis Guide
- To pre-register/express interest in a “Peaceful Investing” workshop in your city: Click here
Disclaimer
I, Vijay Malik, am a SEBI-registered Research Analyst (Regn. No. INH100008364). This article is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. Investors should do their own research before making any investment decisions.
I, or my immediate relatives, do not have any financial interest in the companies discussed as on the date of publication of this article, nor do we hold one per cent or more of the securities of such companies at the end of the month immediately preceding it. I do not have any material conflict of interest and have not received any compensation or other benefits from the companies or any third party in relation to this article during the 12 months preceding its publication. I have not served as an officer, director, or employee of the subject companies, nor have I been engaged in market making activity for them.
4 thoughts on “How to do Business Analysis of Agrochemical (Pesticide) Companies”
Sir,
The risks that pesticide companies face are explained vividly by you. I have exposure to one of the good pesticide companies and could now assess the performance, and risks the company is facing. I found the analysis very useful to me. Thank you.
Dear T Sri Krishna,
Thanks for sharing your feedback.
Regards,
Dr Vijay Malik
Thanks for this insightful article, Sir.
Recently there have been a lot of companies that are doing capex for making technicals. What’s your view on it, Sir?
How will it affect the Indian agrochemical market, and would it lead to increased margins for the companies over what is the existing margins in technicals?
And from this CAPEX would the companies be able to compete with Chinese suppliers?
Dear Raunak,
Thanks for writing to us!
Raunak, we would be happy to provide our input. However, we would request you first share your current thoughts about the queries i.e. what do you think will be the impact of capex by agrochemical companies? Whether such an increase in manufacturing capacity will add to their margins and help them compete with foreign suppliers?
You may do an independent search for the answer on our website/Google and then think to come up with your own answers to these queries. Thereafter, please elaborate on your learning from such an exercise.
We would be happy to provide our input on your line of thought on this issue.
Regards
Dr Vijay Malik