Locust attack may benefit these stocks as agrochemicals usage shoots up; check target prices

Large swarms of locusts were seen across the states of Rajasthan, Madhya Pradesh, and parts of Maharashtra in the past few days, prompting fear of how bad the agriculture could be hit by such pest attacks.

Large swarms of locusts were seen across the states of Rajasthan, Madhya Pradesh, and parts of Maharashtra in the past few days, prompting fear of how bad the agriculture could be hit by such pest attacks. Locusts, one of the most destructive pests in the world have the ability to destroy almost all the vegetation that comes their way, when in a ‘gregarious phase’ traveling in large swarms. Although the current attacks are not expected to cause any immediate damage owing to the lack of standing crop in the summer season, the possibility of repeated attacks does pose a major headache. However, this paves the way for a surge in demand for agrochemicals, prompting a few stocks to gain.

Brokerage and research firm ICICI Securities in a research report said that companies with strong Balance Sheets and moats like established brands and distribution will be likely winners here. “Though many insecticides or combinations can be used to control locusts, Chlorpyrifos is one of the key insecticides. While most agrochemical companies generate some revenues from Chlorpyrifos, Gharda chemicals (Unlisted) is one of the major players in India,” the report said. ICICI Securities has a buy rating on UPL, Sumitomo Chemical, and Insecticides. 

While UPL has a target price of Rs 466 per share, EPS estimates for the current fiscal stand at Rs 39.5. For Sumitomo Chemicals, ICICI Securities has a target price of Rs 263 and for Insecticides the target price is at Rs 832 per share, translating to an upside of 127% from the current market price. While UPL and Sumitomo Chemicals have both jumped over 50% from their March lows, the recovery staged by Insecticides has seen the share price jump 72%. Price to earnings ratio of UPL for the current discal stands at 9.3X, that of Insecticides is at 5.2X. Sumitomo Chemical’s price to earnings ratio is expected to be at 51.6X.

With the locust attack gathering headlines the consumption of agrochemical may increase in the near term as farmers get worried about the crops, said ICICI Securities. “We also expect such disruptive events to provide stimulus to usage of agrochemicals in India and expect structurally higher growth rates of agrochemicals in India,” The pest attack, currently is not expected to have an immediate impact on the farmers, as the rabi seasons got over in March. However, if the attacks continue till June, which is when the Kharif season starts, the locust swarms could prove deadly for the Indian agriculture sector.

(The stock recommendations in this story are by a research and brokerage firm. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)