Narendra Modi’s UP election victory ups fertilizer sector’s reforms expectations
Narendra Modi-led Bharatiya Janata Party’s (BJP’s) election win in Uttar Pradesh has triggered another bout of gains in fertilizer stocks. Shares of Rashtriya Chemicals and Fertilizers Ltd, Chambal Fertilisers and Chemicals Ltd, and Gujarat State Fertilizers and Chemicals Ltd have all gained in the last two trading sessions.
The reason is that the BJP has promised to waive farm loans in UP. Similar demands are being made in other states such as Maharashtra and Karnataka. If implemented, farmers will get financial relief.
In short, farm loan waivers provide financial flexibility for farmers and can have a positive rub-off effect on rural consumption, says Ritesh Gupta, an analyst at Ambit Capital Pvt. Ltd. Due to wider usage, the fertilizer sector is seen to feel the positive impact of farm loan waivers more than agrochemicals.
But we have had loan waivers before and it’s useful to look at the impact then. For instance, a loan waiver in 2008 coincided with a 10% growth in fertilizer usage in fiscal year 2008-09, significantly better than the 4-6% annual rise in the previous two years, shows data compiled by the department of fertilizers. Of course, other factors too are important.
Over the subsequent years, weather, spread and quantum of monsoon rains, and farm produce prices had a determining impact on fertilizer demand. For example, fertilizer usage dropped 8% in 2012-13 when the monsoon in 2012 fell short of long-term averages. But headline sales numbers did not reflect the negative impact in 2014 and 2015 when India saw deficient monsoon rains as the companies filled the retail network with inventories. Nevertheless, as Ambit Capital’s Gupta points out, the coming year can be good for the fertilizer sector thanks to a better 2016-17 crop year.
That said the UP win and improved odds of the BJP-led coalition returning to power in 2019 can have long-term implications for the fertilizer sector. Analysts expect the government to implement reforms on the subsidy disbursements front. Recently the government asked all fertilizer companies to deploy point of sale devices at all fertilizer retail stores in preparation for the Direct Benefit Transfer (DBT) scheme, Mint reported on 9 March. If implemented, DBT can significantly reduce the time lag in subsidy payments and reduce the working capital pressures at the companies.
But according to an analyst with a domestic broking firm, it can take a very long time to implement the DBT scheme in the fertilizer sector as digitization of land records, which is crucial to identify the rightful beneficiary, is not yet over. However, the prospect of long-term political mandate can drive government to pursue these goals.
Also given its rural focus and promise to double farm incomes, analysts expect the government to promote balanced usage of soil nutrients. While this should aid complex fertilizer sales, the challenge, as K. Ravichandran, senior vice-president at Icra Ltd, points out, will be to implement the urea pricing reform. “Deregulation of urea prices will be the biggest reform. Certainly it is a politically sensitive issue and cannot be deregulated in one go. Staggered price hikes over a period of time can be an option,” Ravichandran adds.
With time on its side, will the government bite the bullet?