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Despite sowing of the winter crop exceeding last year’s, fertilizer companies are not expecting sales to revive any time soon due to high inventories at dealers and co-operative societies. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)
Despite sowing of the winter crop exceeding last year’s, fertilizer companies are not expecting sales to revive any time soon due to high inventories at dealers and co-operative societies. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

Budget threatens to make downturn worse for fertilizer firms

With subsidy and urea prices remaining unchanged, the outlook for fertilizer firms has deteriorated further

Shares of fertilizer companies have seen a fresh bout of selling after the Union budget. For the next fiscal year, the budget has provided 65,971 crore toward fertilizer subsidies, marginally lower than the 65,974 crore in the current financial year. Conservative estimates peg the fertilizer subsidy bill at 90,000 crore to 1 trillion for the year to March.

In tune with the overall government strategy to lower the fiscal deficit, analysts were expecting finance minister P. Chidambaram to reduce the provision for fertilizer subsidies by 10%. But then the expectation was that urea prices would also be increased (thus passing on the extra costs to the farmers). The budget, however, dashed those expectations. Chidambaram was also silent on how the government will fill the gap, estimated at around 25,000 crore.

Under-provisioning of subsidies cost fertilizer companies dearly. In the current fiscal year, the budgeted amount for fertilizer subsidy was exhausted by the end of the second quarter. Most companies have not received any payout from the government for four months now.

The delay in payments is intensifying the financial pressure on fertilizer firms. Rashtriya Chemicals and Fertilizers Ltd (RCF), for instance, is borrowing from the market to finance delayed payments. Due to a rise in borrowings, RCF’s finance costs more than doubled in the nine months beginning April 2012 from a year earlier. Other companies such as Coromandel International Ltd, Deepak Fertilizers and Petrochemicals Corp. Ltd, and Gujarat State Fertilizers and Chemicals Ltd also reported a sharp rise in interest costs.

This problem comes at a time when high farm gate prices of complex fertilizers and untimely rains are impacting sales. In the April-December period, sales of complex fertilizers fell by 19%. Urea sales rose by a tepid 1%.

Despite sowing of the winter crop exceeding last year’s, fertilizer companies are not expecting sales to revive any time soon due to high inventories at dealers and co-operative societies.

After releasing third-quarter results, Kapil Mehan, managing director of Coromandel International, told analysts that the inventory in retail network is twice normal levels. With demand remaining subdued, analysts worry that bringing down inventory to normal levels could take at least two more quarters.

Overall, by leaving subsidy and urea prices unchanged, the government has further deteriorated the outlook for fertilizer companies. Investors are now pinning their hopes on better monsoon rains. Any disappointment on that front could worsen the correction in fertilizer stocks.

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