Fertilizer stocks had underperformed the markets after the government reduced subsidy rates under the nutrient-based subsidy (NBS) scheme for fiscal 2011-12 (FY12). That was last November, when the government had proposed subsidy rates that were 20% lower compared with the subsidies it offered for complex fertilizers in FY11.
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But with prices of raw materials rising significantly, the government has revised the rates.
The new subsidy rates that will be offered to complex fertilizers in FY12 are 10-15% higher compared with FY11 and roughly 30-45% higher than the rates proposed in November.
Needless to say, this comes as a big relief for companies such as Coromandel International Ltd and Zuari Industries Ltd that manufacture complex fertilizers. Shares of the former have risen by over 14% since the revised rates were announced last month.
Prices of raw materials for fertilizers have risen sharply, thanks to strong demand from some countries. Besides, the unrest in some African countries has affected the supply of some raw materials, leading to a shortage in supply. If the government hadn’t raised subsidy rates, fertilizer companies would have taken a big hit on margins, because the leeway to increase prices for farmers is limited.
Of course, companies also had the option of contracting raw materials at competitive rates, especially since they had known the subsidy rates from November last year.
But despite this, margins would have contracted. With higher subsidy rates, companies should be able to maintain margins in FY12, according to analysts at Edelweiss Securities Pvt. Ltd. Also, they have increased their FY12 earnings per share estimates for Coromandel and Zuari by 27% and 15%, respectively.
The benefit for Zuari is lower because it derives only about 44% of its revenue from complex fertilizers, against a contribution of 79% in the case of Coromandel.
In fact, for this reason, while the latter’s shares have bounced back sharply in the past month, Zuari’s have continued to languish.
Graphic by Sandeep Bhatnagar/Mint
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