Fertiliser firms Q1 profits to jump 44% on monsoon-led sales volume bump

Govt's efforts to reduce companies' subsidies also resulted in better working capital

The profitability of fertiliser companies is likely to jump by a staggering 44 per cent in the April-June quarter due to a sharp increase in sales volume driven by expectations of normal monsoon for the second year in a row.

An ICICI Securities study attributes the estimated growth in net profit of non-fertiliser businesses to a lower base in the fertiliser segment of some companies. Increase in working capital of companies because of the government's efforts to help reduce their subsidy outgo has revived operating and net profits.

While Coromandel International is likely to gain from increase in mancozeb (a product that reduces fungal diseases in field crops) capacity, better retail profitability, increased proportion of unique grade fertilisers and weak base of the last year, GSFC will benefit from a better capro-benzene spread and lower tax rates. Profitability of Tata Chemicals will be aided by improvement in global operations and continued de-leveraging. Sale of shipping business would offset the improved performance of Chambal Fertilisers' trading business resulting in around 5 per cent deterioration in net profit in the first quarter (Q) of the financial year (FY) 2017-18.

"Sales volumes of urea, phosphorus and potassium (P&K) are likely to register a growth of over 9 per cent and 5 per cent respectively. The growth in volume, however, might have impacted due to de-stocking of inventory as [the] industry awaits clarity around direct benefit transfer (DBT) and implementation of goods and services tax (GST)," said Prakash Gaurav Goel, a research analyst, ICICI Securities.

Q1FY18 Result Estimates

Company	Sales in Rs crore (% change)	Ebitda in Rs crore (% change)	PAT in Rs crore (% change)
Chambal Fertilisers	1,778.5 (6.8)	187.8 (22.8)	133.4 (5.1)
Coromandel International	1,871.4 (7.1)	187.2 (111.1)	94.8 (1,109.7)
GSFC	1,068.5 (1.3)	106.7 (8.9)	53.5 (15.6)
Tata Chemicals	2,940.6 (8.5)	552.5 (3.4)	294.5 (48.8)
Total	7659.0 (6.8)	1034.2 (3.2)	576.3 (43.7)
Source: ICICI Securities, change over y-o-y

Meanwhile, fertiliser production in India has increased by compounded annual growth rate (CAGR) of 4 per cent since FY13 and is now estimated to continue its growth to touch 46-47 million tonnes (mt), thus, resulting in a sharp fall in its imports. Apart from that, the government has decided to incentivise the domestic production beyond reassessed capacity in order to achieve its goal to eliminate urea import by 2021.

Interestingly, the government along with cash rich public sector companies in coal and oil sector are jointly investing over Rs 50,000 crore to revive closed fertiliser plants and setting up gas pipelines, which would make the country self-sufficient in urea manufacturing.

"Benefitting domestic fertiliser manufacturers, the government's efforts to reduce subsidy helped companies reduce overall subsidy from Rs 35,000 crore in FY16 to Rs 20,000 crore in FY17. This has benefitted the fertiliser companies in reviving operating and net profits for over two years. But, to achieve the sustained growth, India needs to improve productivity, diversify production towards high-value agriculture and shift a major portion of farm employment to non-farm activities. Raising productivity requires large investments in agri research & development (R&D), irrigation and fertilisers, which throws huge opportunities to the fertiliser sector," said Madan Sabnavis, chief economist, Care Ratings.

Prices of all fertiliser raw materials have fallen sharply over the last 18 months. Prices of phosphoric acid have fallen by about 28 per cent from $810 a tonne in December 2015 to $580 a tonne in April 2017. Similarly, rock phosphates price has fallen by about 18 per cent from $146 a tonne in December 2015 to $120 a tonne in April 2017. While ammonia price has fallen by about 13 per cent from $427 a tonne since December 2015 to $371 a tonne in April this year, sulphur has also fallen by about 32 per cent to trade currently at $97 a tonne in April this year from the level of $143 a tonne in December 2015.

"The government has paid heed to the industry demand and the farmer community to reduce the GST on fertilisers from 12 per cent to 5 per cent, which is a positive for the farmer community. The new rate of 5 per cent will result in a marginal reduction in retail prices of fertilisers in majority of the states, while Haryana, Punjab and Andhra Pradesh, where fertiliser sales were exempt from value-added tax (VAT), will see a 4 per cent increase in the price of fertilizers," said K Ravichandran, senior vice-president and group head, Corporate Ratings, Icra.