The hope of a normal monsoon is boosting sentiment in fertilizer company stocks. Last week, Skymet Weather Services Pvt. Ltd forecast normal rainfall between June and September. It means there will be timely sowing of summer crops, which can lead to higher use of fertilizers and other farm inputs.

Sales of fertilizers have been hit due to untimely rains and high prices. According to Edelweiss Securities Ltd, overall dispatches fell 11.1% last fiscal year. As companies pushed sales, inventories rose. A recent note by Prabhudas Lilladher Pvt. Ltd says inventory of complex fertilizers is double the normal levels. Despite the late revival in Rabi crop sowing, dispatches continued to decline in January-March owing to excess inventories in the retail network.

A normal monsoon can change this scenario. A channel check by Espirito Santo Securities India Pvt. Ltd in Andhra Pradesh found that dealers expect inventories to be normalized by the end of July if the monsoon is normal. “A normal monsoon can improve demand outlook for fertilizers," Espirito Santo said in a recent note. “There is certain sense of uptick in demand for fertilizers with the onset of monsoons. Dealers expect the fertilizer demand to be driven by the acceptance of the prevailing high prices of complex fertilizers as the new normal, renewed demand from farmers who were on a crop holiday… and improving farm economics."

That said, the financial performance of fertilizer companies may not improve substantially till the second half of the current financial year. Some analysts also fear high inventories of complex fertilizers may take more time to liquidate and sales at the company level may remain sluggish in the medium term.

“Such high level of inventory remains our core concern as even if consumption improves in FY14E supported by normal monsoons, huge inventory in system is likely to limit company level sales volumes," Prabhudas Lilladher analysts wrote in a recent note.

Overall, the hope of a better year ahead is leading to gains in the stocks of fertilizer companies. Stocks of firms such as Coromandel International Ltd, Chambal Fertilisers & Chemicals Ltd, Deepak Fertilisers and Petrochemicals Corp. Ltd and Rashtriya Chemicals & Fertilizers Ltd have outperformed the broader market in the past month. For the rally to sustain, it has to be supported by a growth in earnings.

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