Fertilizer stocks are back in the limelight. They gained in Monday’s trade on speculation that the government’s rural focus may help solve the sector’s problems.
The primary issue afflicting the industry’s growth is urea price control. The government makes good the production cost through subsidy, but unfortunately payments happen after long delays. Also under-allocation for subsidy requirement in earlier years means the budgeted amounts get exhausted in the first three quarters of the fiscal year.
For instance, agricultural inputs manufacturer Coromandel International Ltd has received subsidy payment only till September. As of December, it has subsidy outstanding of Rs.1,582 crore, payment of which may happen only in the next fiscal year.
The delay in payments is keeping the interest costs at elevated levels. Data compiled by rating agency Icra Ltd shows that interest expenses of 11 listed companies in the industry more than doubled in the last four years (between 2010-11 and 2014-15). During the period, key return ratios of these companies, such as return on capital employed and return on net worth, roughly halved.
Pooling of natural gas and the recent softening of the spot market rates have helped alleviate working capital pressure. As a result, barring a few companies like Gujarat State Fertilizers and Chemicals Ltd and Rashtriya Chemicals and Fertilizers Ltd, interest costs at most companies did not rise significantly so far this fiscal year.
But that provides no comfort. Prices of raw materials and fertilizers have fallen significantly in international markets, offering scope for subsidy cuts. Analysts expect the government to use this window to retain the overall subsidy amount at current levels and route the cost savings (on NPK grade or complex fertilizers) to clear pending subsidies. NPK is short for nitrogen, phosphorus and potassium.
This will not help the industry as it will widen the price gap between complex fertilizers and urea. The ideal step will be to rationalize urea prices, which will encourage balanced usage of fertilizers. But will the government bite the bullet?
“There is a pricing anomaly in the market with urea price being highly subsidized, leading to indiscriminate usage at the cost of NPK fertilizers,” K. Ravichandran, senior vice-president and co-head-corporate sector ratings at Icra, said. “While the government may resort to reduction in per unit subsidy on NPK nutrients in order to contain subsidy, farm gate price increase on urea remains to be seen with elections round the corner in five states,” he added.
The writer does not own shares in the above-mentioned companies.