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Published: Dec 29, 2021
Updated: Dec 29, 2021

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While other segments of the Indian economy are yet to come out of the clutches of the Covid pandemic, fertiliser companies are rejoicing over the triple delight of a bumper rabi crop, plentiful rains and record kharif sowing. Adding to their delight is the Centre’s prompt increase in MSP, putting more cash in the hands of farmers for fertiliser purchase. According to Care Ratings, the combination of all these factors will lead to a prolonged period of buoyancy for fertiliser stocks. As if this were not enough, China’s domestic policy on curbing fertiliser exports so as to tide over that country’s foodgrains output shortage has opened more export doors for Indian fertiliser companies. The result: all Indian fertiliser stocks have spurted from previous lows to twice, and even thrice, their valuations.

The ‘landscape’ for the Rs 1,000 billion Indian fertiliser industry has turned distinctly ‘fertile’ as both rural demand and the markets are on an upswing despite the twin depressants of the Covid pandemic and the macro-economic uncertainty. Welltimed agricultural operations, a bumper ‘rabi’ harvest, plentiful monsoon rains and record ‘kharif’ crop sowing have ensure that sales of fertilisers have shot up by over 20 per cent this year. Prospects for the industry are even more encouraging, given the increase in liquidity of the farmers and the good moisture level in the soil leading to a fruitful ‘rabi’ season. Fertiliser consumption sentiment has been further buoyed by the government’s announcement of an increase in MSP upfront on the ‘rabi’ crop so as to provide a minimum of 50 per cent returns on the farmers’ cost of production. Experts at Care Ratings expect that with the normal monsoon this season and the good pace of the Covid-19 vaccination programme nationwide, economic activities will normalize during fiscal 2022. Currently, the IMD is forecasting a normal monsoon which will result in healthy moisture and elevated water levels, leading to better acreage output. From that standpoint, Care Ratings expects to see consumption and demand for fertilisers to continue, with a brightening outlook for the fertiliser industry. In fact, stocks of the fertiliser segment companies have already turned buoyant.

Deepak Fertiliser has shot up from the current-year low of Rs 133 to Rs 408, GSFC from Rs 59 to Rs 130, Zuari Agro from Rs 72 to Rs 130, SPIC from Rs 16 to Rs 53 and RCF from Rs 42 to Rs 82. National Fertilisers, which was friendless around Rs 29, is in demand around Rs 60 and Mangalore Chemicals, which had no takers around Rs 27, is sought after at around Rs. 75. The price of Coromondel International has moved up from a low of Rs 681 to Rs 796, Chambal Fertilisers from Rs 153 to Rs 339 and GNFC from Rs 183 to Rs 435. Even penny stock Madras Fertilisers, which was listless around Rs 15, is now quoted at Rs 30, reflecting a 100 per cent spurt.

The upswing in prices of fertiliser stocks is attributed to several positive factors, including natural, governmental and foreign. The monsoon season this year has turned out to be excellent, with abundant and well-distributed rains. Besides, taking heed of the prolonged nationwide farmers’ agitation, the government has started taking pro-farmer measures to pla- cate the agitators. New Delhi has not only started releasing subsidies but has also raised the MSP well in advance. Obviously, these developments have pushed up the valuation of fertiliser companies and investors are making a beeline for these stocks.

CHINESE ‘BOOSTER’

Besides, the market sentiment for fertiliser stocks has got a big boost from the policy changes announced by the Chinese government. The National Development and Reform Commission in that country has asked key fertiliser companies to suspend exports with a view to ensure enough supplies in the domestic market and enough domestic foodgrains production. Accordingly, some of China’s key fertiliser companies have temporarily suspended exports, thus opening up several overseas markets for Indian fertiliser companies.

China’s move to restrict exports of fertilisers was inevitable, given that Beijing is trying to tackle the soaring prices of major raw materials in the country. In fact, China’s food security faces a serious threat due to floods in the central province of Henan, which accounts for almost a third of wheat production and tenth of corn, vegetable and pork production. As on October 1, 2021, nearly 2.5 million hectares of farmland were affected by the floods, raising concerns in Beijing over food inflation and food security. China is a major consumer and producer of fertilisers, and prices of almost all fertilisers have hit record highs this year amid strong overseas demand, lower current domestic production and high energy costs. For example, prices of urea -- an important fertiliser -- have scaled an all-time high of 2,616 yuan on China's Zhengzhou commodity exchange. Interestingly, India depends on China for urea imports. Of all its imports of around 25 per cent of urea, 90 per cent of phosphates (DAP) and 100 per cent of potash, 35 per cent come from China. Inevitably, the high prices of fertilisers in China have pushed up the prices in India too. This in turn has given a boost to the balance sheets of Indian fertiliser companies and has encouraged investors to go for these stocks, prices of which have looked up smartly.

In the recent past, the fertiliser segment had failed to perform as the players were burdened by high outstanding subsidy dues. As demand for fertilisers had also fallen, this led to excess inventory with companies, stockists and retailers, necessitating higher working capital requirements.

WINNING FACTORS

But the tide has turned with a favourable environment from all sides. In the last few years, the on-time arrival of the South West monsoon followed by its quick spread across the region has resulted in higher sowing, augmenting the sales of fertilisers and leading to an increase in production during the 2019-20 season. Production has registered a growth of 3% in the current year if the actual production figures up to January 2021 are taken into account.

According to a study of the farm front during the first 10 months of fiscal 2021 by Care Ratings, the rural economy continues to be a bright spot with two consecutive years of above-normal rainfall. Further, the government has announced an upfront increase in the minimum support price on 'rabi' crops with the objective of providing a minimum of 50 per cent returns on the cost of production to farmers. Again, the government has announced a Rs 65,000-crore fertiliser subsidy for farmers as part of the stimulus package under the 'Aatmanirbhar 3' scheme. The allocated amount is being provided to ensure adequate availability of fertilisers to farmers and to enable timely access to fertilisers in the upcoming crop season.

Research agency ICRA too has finally revised its outlook for the fertiliser sector to 'positive' on expectations of healthy profitability in fiscal 2021-22, following a normal monsoon for the upcoming 'kharif' season. Additionally, the agri-economy witnessed a strong performance in fiscal 2021 with healthy farm incomes and ICRA expects the benefit of the current year to rub off on the next fiscal year as well.

Further, the ICRA analysis says the credit profile of the fertiliser sector is expected to witness a significant improvement in this new fiscal year, driven by the removal of the subsidy backlog following the pay-out of an additional subsidy of Rs 62,602 crore by the government under the 'Aatmanirbhar 3' package.

SUBSIDY FACTOR

Going forward, ICRA expects the subsidy receipts from the government to be paid in a timely manner, which will lead to lower working capital intensity.

Going a step ahead, the union government has hiked the fertilizer subsidy for the fiscal 2022 by Rs. 14,775 crore. This hike is primarily for diammonium phosphate (DAP) from Rs. 500 to Rs. 1200 per bag - reflecting an increase of 140 per cent. This follows the spurt in prices of raw materials of DAP including phosphatic acid and ammonia, which have shot up by around 70 pe rcent. On this basis the actual price of DAP now works out to be Rs. 2400 per bag, which could be sold to farmers at Rs. 1900, deducting the subsidy of Rs. 500. However deermined to placate agiatating farmers, the Prime Minister Mr. Modi decided to continue selling DAP at the older price of Rs. 1200 the central government deciding to bear the burden of the price hike.

Thus for the current year, the fertilizer subsidy outlay has been raised from Rs. 713.9 crore to Rs. 1.34 lakh crore - a jump of nearly 88 per cent.

"With the subsidy backlog out of the way now, the industry will be able to save on the interest expense it was incurring earlier. With lowering of the debt and the associated interest costs, the cash generation and the credit profile of the industry would improve substantially going forward," says the agency.

According to a study on India's fertiliser market over 2020-24 by Research and Markets.com, catalysed by strong growth in the country's population over the next five years, food demand is also expected to exhibit strong growth. Conversely, as a result of increasing urbanisation levels, the available arable land is expected to decrease. "We expect fertilisers to play a key role in increasing the average crop yields per hectare," the agency says.

However, despite strong historical growth, fertiliser consumption in India remains highly skewed. There are currently a number of states in India which still have a very low penetration of fertilisers. This leaves a lot of room for future growth.

PUSHING FERTILISERS

One can expect a number of government and non-government awareness campaigns to educate farmers on the benefits of fertilisers. Promotion of fertilisers through television, radio and customised rural workshops are also anticipated to increase the consumption of fertilisers in the coming years. Increasing rural incomes, coupled with easy availability of credit, are also likely to create a positive impact on fertiliser usage in the country. Contract farming, where inputs in terms of technology and training are expected to be provided to the farmer from the food processor (contractor), is also expected to create a positive impact on fertiliser usage. What is more, the size of the Indian fertiliser market, which is around Rs 6,000 billion today, is projected to cross Rs 11,000 billion by 2024.

With growing demand for fertilisers, a sharp spurt in subsidy amount and timely payment of subsidy to fertilizer companies, prospects for these companies for the current year are highly encouraging. The companies which wil be doing well this year include the following fifteen companies. With the fertiliser industry in this current state of delight, stocks of companies in the segment have naturally turned buoyant. Here is a list of five prominent stocks in this sector which have remarkable growth potential going ahead.

1. Coromandel International Ltd.
2. National Fertilizers Ltd.
3. Chambal Fertilizers & Chemicals Ltd.
4. Rashtriya Chemicals & Fertilizers Ltd.
5. Zuari Agro Chemicals Ltd.
6. Gujarat Narmada Valley Fertilizers & Chemicals Ltd.
7. Madras Fertilisers
8. SPIC
9. Rama Phospates
10. FAC Travancore
11. Deepak fertilizers & Petrochemicals Corporation Ltd.
12. Nagarjuna Fertilizers & Chemicals Ltd.
13. Mangalore Chemicals & Fertilizers Ltd.
14. Gujarat State Fertilizers & Chemicals Ltd.
15. Shiva Global Agro

Deepak Fert. & Petrochem Corp.
FACE VALUE 10
CMP 419.40
52 WEEK HIGH /LOW 493/133

Deepak Fertilisers and Petrochemicals: Pune-headquartered Deepak Fertilisers which started way back in 1979 as a manufacturer of ammonia is today a leading agro fertilisers companies in the country manufacturing industrial chemicals and fertilisers. The sharp hike in the subsidy for DAP will be highly beneficial to Deepak. During the last 52 weeks, its stock price has zoomed from 133 to 493 before settling around Rs. 405-410 range.

Coromandel International
FACE VALUE 01
CMP 803.30
52 WEEK HIGH /LOW 956/681

Coromandel International: Set up in 1960 by IMC and Chevron group of the USA, Coromandel International is a subsidiary of the well-known industrial house of the south India - the Murugappa and EID Parry is engaged in the manufacture of prosphatic fertilisers of various grades including DAP and single super phosphate. The company has tremendous growth prospects and has emerged as one of the most sought after fertilizer stock. During the last 52 week its stock price has spurted from Rs. 681 to Rs. 956 before settling around Rs. 795/800.

GSFC
FACE VALUE 02
CMP 134.30
52 WEEK HIGH /LOW 136/60

Gujarat State Fertilisers and Chemicals: Promoted by the Gujarat government as a public limited company GSFC is engaged in the development of crop nutrition solutions including fertilisers like urea, ammonium sulfate, DAP, ammonium phosphate sulfate and traded fertilizer products. One time blue chip company GSFC had gone down in importance. But once again it is on the radar of investors. The stock price which was available in the Rs. 75-100 range earlier in the year has shot up to Rs. 153 before settling in the Rs. 125- 130 range. Prospects ahead are all the more promising.

Chambal Fertilisers & Chemicals
FACE VALUE 10
CMP 338.45
52 WEEK HIGH /LOW 358/156

Chambal Fertilisers: A K.K. Birla group company Chambal Fertilisers is one of the largest private sector fertilizer manufacturers in India and was promoted by Zuari Agro Industries. It offers a range of agri products including crop nutrients, crop protection and seeds. Of late it has met with sizeable investor demand and its stock price has more than doubled in the last one year - from Rs. 153 to Rs. 368 before settling in the price range of Rs. 335-Rs. 340.

Rashtriya Chemicals & Fertilisers
FACE VALUE 10
CMP 82.85
52 WEEK HIGH /LOW 101/42

Rashtriya Chemicals & Fertilisers: A leading fertilizer and chemical manufacturing PSU, Rashtriya Chemical and Fertiliser company is one of the oldest player in the field. It manufactures urea, biofertilisers, complex fertilisers, micro nutrients, soil conditioners, 100 per cent water soluble fertilisers and a wide range of industrial chemicals. The stock has been in good demand and its price has more than doubled last year from Rs. 42 to Rs. 100 before settling in the range of Rs. 80-85.

The Minister instead wants the fertiliser industry to ramp up production of DAP (di-ammonium phosphate) to ensure sufficient supply during the ensuing ‘rabi’ season.

Meanwhile, industry leaders are scratching their heads to understand how Mr Mandaviya will devise the compensation mechanism without raising the subsidy. They are keeping their fingers crossed. Their concerns stem from logistics and transportation costs zooming due to non-availability of vessels and containers to bring consignments.

GLOBAL SHORTFALL

Fertiliser demand in the US and Brazil is strong following a sharp increase in area under corn and soyabean amid record prices for both crops.

As a result, demand for fertilisers has remained robust in these countries, limiting global supplies and pushing up fertiliser prices to decade-high levels. The Indian fertiliser industry relies on imports to meet demand as domestic supplies are limited.

After facing challenges in sourcing fertilisers last season due to Covid restrictions on logistics, Indian farmers are expecting a bumper crop of wheat, mustard, potato, onion, sugarcane and maize, which require more fertilisers, in the northern and central states.