Hopes of a better second half are fading for fertilizer companies. Late rains and comfortable reservoir levels led to optimism that sowing will pick up in the winter, helping fertilizer companies reduce channel inventory and push sales. But the crop sowing data released by the ministry of agriculture paints a bleak picture.
So far this season, rabi crops were sown on 51.75 million hectares, 0.3% or 140,000 hectares lower than in the same period last year. As on 21 December, area sown under wheat, the main winter crop, was lower by 1.5% or almost 400,000 hectares. The area covered under rice has fallen by more than one-third. Poor sowing in Uttar Pradesh and Madhya Pradesh has hit pulses acreage.
With winter crop sowing usually peaking by the last week of December, analysts fear the poor acreage may intensify the demand slowdown for fertilizers. Aditya Jhawar, analyst at Espirito Santo Securities, says, “Low sowing in crops that use heavy fertilizer inputs, like paddy, means the demand for fertilizers could continue to remain weak. We may even see reduced demand for urea due to electricity and water problems in Andhra Pradesh.”
Sales of fertilizer companies are already under pressure. Prices have more than doubled over the past two years. According to Emkay Global Financial Services Ltd, urea and complex fertilizer volumes fell 1% and 19%, respectively, in the second quarter of this fiscal. High prices impacted demand and untimely rains led to inventory piling up, affecting fertilizer offtake. According to Jhawar, high inventories at state-level cooperatives are weighing on the overall inventory drawdown process.
High inventories and subdued sowing trends mean fertilizer companies may continue to witness volume pressures in the rest of the fiscal year. R.G. Rajan, chairman and managing director of Rashtriya Chemicals and Fertilizers Ltd, told CNBC-TV18 that industry volumes dropped 20% in November due to poor offtake and he expects sales to remain muted “going forward” also.
Overall, the outlook for fertilizer companies remains bleak. Though the recent government measures to encourage investments in the sector have revived investor interest in some stocks, concerns about volumes continue to weigh on the performance of Chambal Fertilisers and Chemicals Ltd, Gujarat State Fertilizers and Chemicals Ltd and Coromandel International Ltd. It is not clear when the volumes will pick up, and investors would do well to wait for clear signs of a revival.