Reforms in the fertilizer industry can do what they have done for cement. From a production of 59 million metric tones in 1988, de-regulation of the cement industry led to a manifold jump in capacities to 178 million metric tones in 2007. According to Espirito Santo analysts, if the government takes further steps to de-regulate fertilizer industry, it can substantially change the landscape of that sector.
With an aim to revive agricultural output, the government has taken a series of steps to revive investments in fertilizer sector. It had introduced new pricing scheme for urea in 2003 and brought-in Nutrient Based Subsidy scheme for complex fertilizers in 2010.
The government is also encouraging investments in the sector by terming it as a sub group of the infrastructure sector. Further deregulation will come as a boon for the fertilizer companies. The government is regularly revising subsidy rates to sustain investors’ interest in the fertilizer industry. All these steps are leading to a renewed interest in fertilizer stocks.
Espirito Santo analysts led by Nick Paulson-Ellis note:
Given its political importance, the sector historically suffered from restrictive and unhelpful regulation, making it unattractive to investors, both in terms of companies investing in capacity and investors investing in the companies. But this is changing. With the advent of NPS (New Pricing Scheme) in 2003 and NBS (Nutrient Based Subsidy) in 2010, regulation has been more supportive, improving ROEs and profitability.
The baby steps taken by the government has revived investor sentiment in the fertilizer stocks. According the Espirito Santo analysts, the stocks of fertilizer companies have been outperforming the BSE 200 index by 6% per annum ever since the NPS I has been introduced in 2003.
With the investments in the sector reviving and the government keen on continuing investor friendly policies, analysts expect the companies in the fertilizer space to do well in the coming year. Fragmentation and huge demand-supply mismatch is expected to help the companies.
Markets for fertilizer companies are region-specific and confined to a fixed radius around their plant locations. Apart from regulatory steps, issues like product mix, brand and balance sheet strength are expected to play key roles in the performance of fertilizer companies.