India Agro-inputs:‘Price control’impact likely to be low,but conceptually negative

Talks of price control on agchem products in media reports. According to an articlepublished in Financial Express on 28 September 2017, the Government has formed aseven-member committee to: 1) suggest a mechanism for price control for agrochemicalproducts; and 2) review the working of the Central Insecticides Board (CIB) (regulatorybody for the sector in India). This comes on the heels of the guidelines that the CIB hadannounced in August for disallowing import licenses for molecules for which technicalmanufacturing exists in India. The article also mentions that the Crop Care Federation ofIndia (CCFI) has agreed to reduce the prices for important molecules.

    Findings from our industry checks. We conducted industry checks to understand thepossible implications of this regulatory change:The CCFI has agreed to reduce the Maximum Retail Price (MRP) for someproducts, but our checks suggested that almost on an industry wide basis,farmers purchase agchem products at a discount to MRP. The discount issteeper if the farmer buys the product from the dealer on a cash basis. Only insome rural pockets, where farmers from multiple villages depend on a singledealer, does the dealer charge a price that is relatively closer to MRP. As aresult, many of our industry checks suggested that the realisations for agchemcompanies from distributors may not fall materially.

    The price control has been talked about mainly for generic products (c80% ofIndian agchem industry volumes are generic). Specialty molecules are likely tobe out of this ambit of price control. However, the point here is that the industry isalready very competitive in the generic space (more than 400-500 players) andthe prices of important but common molecules are already low due to highcompetition. Hence, the price cuts are likely to be reasonably moderate to low.

    Price control, if implemented, is a negative. As mentioned above, though the actualimpact on profitability may be low, the entry of ‘price control’ as a concept in the sector isa negative, in our view. Within our coverage, we believe pure domestic agchem playerswill be at most risk of some de-rating, while global players such as UPL likely have moremodest downside risk due to this possible regulation. UPL’s backward integratedbusiness model consisting of a strong manufacturing base in India also is an advantageconsidering the new guidelines on manufacturing/import licenses.