Fertilizer firms: liquidity pressures ease; govt should make gains enduring
After years of underperformance, fertilizer stocks generated notable returns in 2016. Chambal Fertilisers and Chemicals Ltd, Coromandel International Ltd, Rashtriya Chemicals and Fertilizers Ltd, National Fertilizers Ltd and Zuari Agro Chemicals Ltd gained in the range of 22-83% in the last one year. While the Gujarat Narmada Valley Fertilizers and Chemicals Ltd stock more than doubled, the BSE 500 index rose 10% during the period.
Driving the gains are better crop acreages, reduction in costs, lower subsidy requirement and the hope that liquidity problems will end for fertilizer companies.
Rating agency Icra Ltd estimates the reduction in gas prices alone to lower the subsidy requirement by Rs4,500-4,600 crore in the current fiscal year.
For the full year, HDFC Securities Ltd estimates the subsidy requirement at around Rs55,800 crore, against the budgeted amount of Rs70,000 crore. The low costs will reduce companies’ immediate dependence on government subsidy, helping ease working capital pressures. Fertilizers are sold at below-cost price and subsidy payments to firms see long delays.
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Further, the savings are expected to be used to clear subsidy arrears, estimated at around Rs35,000 crore. Subsidy requirement for the next fiscal year is pegged at around Rs60,000 crore. If the government retains the current fiscal year’s subsidy allocation for 2017-18 as it has done in the previous budget, more than two-thirds of prior period subsidy dues will be cleared in the coming fiscal year, points out HDFC Securities.
If indeed the government shows such benevolence, then fertilizer companies can see material benefits, especially on the interest cost front. Pending subsidies and payment delays mean companies are depending on borrowings to alleviate liquidity problems. This is raising finance costs and hurting profitability. As receivables improve, HDFC Securities estimates the interest costs of all fertilizer companies to fall by at least 40% from the peak years, boosting earnings.
But the benefits can be seen only in 2017-18 as the volume performance in the current fiscal year is weighed down by high inventories. Also, according to Icra, profitability of non-urea fertilizer segments of companies may be hit due to the abrupt reduction in nutrient-based subsidy. “Although the profits in H2 FY2017 should be relatively better due to a further softening of raw material prices, the overall profits for FY2017 should remain weak due to overwhelming impact of weak H1 performance,” it adds.
But as excess inventory gets reduced, the industry can look forward to a fresh start next fiscal year. The key is subsidy allocation in the budget. According to K. Ravichandran, senior vice-president at Icra, industry stakeholders are making representations for higher subsidy allocation and it is crucial that the government finds a solution for payment delays as companies are hardly making any returns in the current scenario. If these concerns are not addressed, then it will be another poor year for fertilizer stocks, which are awaiting positive tidings from the Union budget.