A mere hint of reforms can spark a rally in share prices. On Thursday, shares of Rashtriya Chemicals and Fertilizers Ltd, National Fertilizers Ltd, Chambal Fertilizers and Chemicals Ltd, Deepak Fertilizers and Petrochemicals Corp. Ltd and Gujarat State Fertilizers and Chemicals Ltd surged 2-5% when the broader BSE-500 index gained 1%.
The rally was triggered by the cabinet committee on economic affair’s decision to clear a proposal to track the fertilizer sales at the retail level. As the government effectively gathers information, it is expected to formulate policies that will eventually lead to direct transfer of fertilizer subsidy to the farmer.
This hardly justifies a rally in stock prices. A direct transfer of subsidies is still a couple of years away, if not more. The government has just begun tracking end user sales. It has to decide on the subsidy transfer mechanism and iron out technicalities like whether the subsidy will be paid in advance or after the incidence of sale. “We see recent announcement as non-event for the fertilizer companies,” Emkay Global Financial Services Ltd said in a note. “However, it is a positive move in subsidy payment directly to the farmers in future. Industry expects that government may establish a mechanism for direct transfer of subsidy to the farmers in two-three years.”
The development is more of a sentimental positive. It does not address the structural problems the industry is facing. Investments in the sector have dried up due to lack of policy clarity on returns and raw material costs. Approval of the much-awaited urea investment policy is expected to revive investment flows into the industry.
The industry is also lobbying for a 10% hike in urea prices. Such a hike is expected to lower the price gap with complex fertilizers, thereby increasing the appeal of the latter with farmers. While these two issues continue to remain unanswered, fertilizer stocks on Friday predictably pared most of the gains they registered on Thursday.
Having said that, the outlook for fertilizer companies is slowly improving. Sub-par monsoons and high farm-gate prices of complex fertilizers have adversely impacted sales in second quarter. HDFC Securities Ltd and MSFL Research expect non-urea fertilizer sales to fall by 23-25% in July-September.
But with rain deficiency falling to 7% of average and water levels at major reservoirs reaching 105% of the 10-year average, the environment has turned conducive for winter crops. Late rains have created favourable moisture levels for crop sowing, thereby improving the outlook for fertilizer usage. “Revival of monsoon in September has provided respite for the fertilizer industry. Volumes can thus be strong in Sep-12/Oct-12,” HDFC Securities said in a note. “This augurs well for a better rabi (spring harvest) season (2HFY13).” A firm rupee is also expected to marginally lower the prices of imported raw materials for complex fertilizer manufacturers.
Nevertheless, for the stocks to see a structural recovery in prices, the government needs to approve the much-awaited new urea investment policy and increase prices.