Pesticides ban proposal: Manufacturers diversify product basket to soften revenue hit, says report

"Considering the ban will be implemented in phases in the domestic market, we expect revenue growth for our sample set to moderate by 200-400 bps over the medium term, compared with healthy 10-12 per cent growth anticipated for FY21," Crisil Ratings Associate Director Rajeswari Karthigeyan said.

In view of the government's proposal to ban 27 pesticides, most manufacturers have started diversifying their product baskets to avoid any major hit on their revenues, according to a report. The government issued a draft ban order in May, citing high toxicity level of these 27 pesticides and their impact on soil health, Crisil said in its report.

The government has sought responses from various stakeholders on the proposal by mid-August 2020. The ban is unlikely to be implemented in the current fiscal due to the COVID-19 pandemic and as seen in the past, such bans are implemented in a phased manner, Crisil noted. Given the pandemic-induced challenges faced by both, farmers and agricultural input suppliers, the government is likely to implement the final ban only from the next fiscal, that too in a phased manner, it added.

Besides, over 50 per cent of annual sales of these products will be completed in the ongoing kharif season of the fiscal 2020-21, Crisil said. "Anticipating the ban, most firms had already begun to diversify their product basket and geographical reach in recent years. That, along with the expected phased implementation of the final order, will allow firms to realign their product portfolio through generic substitutes and co-marketing opportunities, and soften the blow on revenues," Crisil Ratings Director Sameer Charania said.

Additionally, the government is permitting exports, which account for 40 per cent of revenue for these products, on a case- to-case basis. Notably, 20 of these 27 pesticides are exported to regions such as Latin America, United States, Asia Pacific and European Union, where there is no ban on their usage. In the past, too, the government allowed exports of banned products where firms had contractual obligations, the report added. "Considering the ban will be implemented in phases in the domestic market, we expect revenue growth for our sample set to moderate by 200-400 bps over the medium term, compared with healthy 10-12 per cent growth anticipated for FY21," Crisil Ratings Associate Director Rajeswari Karthigeyan said. Also, operating profitability, which stood at 16-17 per cent in fiscal 2020, could moderate 100-150 bps, given that the banned products enjoy healthy margins, Karthigeyan added.

The ban is unlikely to impact the credit profiles of agrochemical firms, which have strengthened over time due to steady demand and profitability as well as prudent capital spending and working capital management, according to Crisil. The estimated median gearing and interest cover of the sample set stood at an estimated 0.47 time and 6 times, respectively, at the end of fiscal 2020, providing for sufficient loss absorption capacity, it added.