Shares of agrochemical firms did well in 2013, besting pure-play fertilizer firms. While healthy rains and an increase in demand for farm inputs benefited both set of firms, fertilizer makers had concerns such as delays in receiving government subsidy and the announcement of a gas price hike. Heading into 2014, there are few reasons to believe that the pattern of share price performance will change dramatically.

The outperformance in agrochemical stocks is being driven by healthy financial performance at the firm level. In the first half of this fiscal year, revenues of listed agrochemical firms grew in the range of 17-62%. Thanks to comfortable water levels in major reservoirs and a rosy outlook for the coming year, these companies are likely to continue to do well.

“Southwest monsoon has not only delivered a better kharif (summer crop), but also set up a potentially enhanced rabi season as well (winter crops)," Rajnish Sarna, executive director of PI Industries Ltd, an agrochemical firm, said in a conference call with analysts.

Agrochemical firms are also gaining from resurgent exports. Rallis India Ltd, UPL Ltd and PI Industries all earn at least 30% of their revenues from overseas sales.

Even if export markets are growing at a benign pace of 5%, the weak rupee is providing a competitive advantage and driving sales. It is also responsible for increasing order inflows and expanding margins.

For fertilizer companies, there are more concerns. Sure, volumes are improving, inventories are coming down and raw material prices are easing. But all of these are being overshadowed by subsidy delays and the gas price hike. Total subsidy payment pending from the last fiscal year is estimated at 32,000 crore, according to Sharekhan Ltd. The delay in subsidy payments is creating a liquidity crunch. Some companies are borrowing against payments, which is increasing interest costs.

The proposed gas price hike from April threatens to make things worse. According to Kotak Securities Ltd, the gas price hike can increase the fertilizer subsidy by as much as 20%. Considering that payments under the current mechanism already come with a huge lag, the price hike will squeeze fertilizer makers further.

Of course, the government can provide some relief to the industry by increasing the allocations for fertilizer subsidies and hiking urea prices. But it has only said that it will work out a mechanism to cushion fertilizer firms; details are not yet known. This uncertainly about government policy towards the fertilizer sector will continue to be an overhang on stock prices.

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