Fertilizer stocks sow optimism

Second-guessing the budget proposals is risky but fertilizer companies have surely started 2017 on a strong note


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Fertilizer sales are showing signs of recovery after a subdued performance in the kharif or the summer crop season, and investors have taken notice.

Diammonium phosphate sales are up 10% so far this rabi or winter crop season, shows data from the ministry of chemicals and fertilizers. Muriate of potash (MOP) sales increased 34%. Sales of the widely used urea fell 12%. The fall in urea sales, however, masks ground realities.

A prolonged summer crop season delayed rabi sowing in some regions. This impacted urea sales in October which were down 40%. As winter crop sowing gathered pace, sales have recovered. In November, they fell slightly, while December saw 16% growth. Urea sales were also affected because of lower diversion for non-agricultural usage, since urea now comes coated with neem, according to industry participants. That has suppressed reported numbers to an extent.

Of course, growth also comes on a favourable base. Rabi acreage as of January last year was down 3%. Low groundwater levels had impacted sales. As a consequence, inventories in the retail system piled up, weighing on sales in the first half of the current fiscal year. Barring MOP, sales of all grades of fertilizers fell during the kharif season.

The recovery began from end-October. Analysts at Emkay Global Financial Services Ltd say channel inventories have reduced, based on their channel checks. Companies have extended credit period to dealers also. If January also sees good sales offtake, excess inventories will get cleared. This can give fertilizer companies a fresh start in fiscal year 2018.

Sales recovery is not confined to fertilizers. Ritesh Gupta, an analyst at Ambit Capital Pvt. Ltd, estimates that agrochemical sales have also risen in the mid-to-high single digits in the December quarter. Despite demonetization, 2016-17 has been a good year for farmers due to better rains and unless the weather plays spoilsport, demand for agricultural inputs should improve in 2017-18, he says.

That optimism appears to be shared by others, as fertilizer stocks have been moving up. Chambal Fertilisers and Chemicals Ltd, Coromandel International Ltd, Rashtriya Chemicals and Fertilizers Ltd, National Fertilizers Ltd, Zuari Agro Chemicals Ltd, and Gujarat Narmada Valley Fertilizers and Chemicals Ltd gained in the range of 12-52% in the past one month.

What’s also adding to the cheer are a decrease in production costs and easing liquidity pressures for companies. Expectations are that subsidy dues, which have been weighing down financials, will come down significantly in the next fiscal year, even if subsidy allocation is retained at current year’s level in the forthcoming budget.

Second-guessing the budget proposals is risky but fertilizer companies have surely started 2017 on a strong note. A sustained recovery in sales growth and support from the budget will be crucial for the shares to continue to outperform.

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