Good monsoon to help fertiliser firms

Companies making fertiliser are likely to report strong second quarter (Q2) earnings on the back of a bountiful monsoon, which has led to an increase in fertiliser demand.

Fertiliser prices have witnessed a strong run-up during the quarter, with international diammonium phosphate (DAP) prices rising by 27 per cent, while urea prices have gone up by 44 per cent, as compared to the first quarter of the current financial year.

On an aggregate basis, such companies are expected to report revenue growth of 22 per cent. Operating margins are expected to move up 65 basis points, driven by a more than 200-basis point jump in margins from Tata Chemicals, GSFC and United Phosphorus. The net profit is estimated to go up 28 per cent, on the back of strong profit growth from Tata Chemicals, GSFC, Rallis and Deepak Fertilisers.

Companies like Coromandel International, Zuari Industries and Chambal Fertilisers are likely to benefit from higher trading, indicates the fertiliser analyst at Emkay Global. Analysts expect fertiliser segment revenues to increase by 20 per cent and margins to improve by 80 basis points. Chemical segment revenues are expected to remain flat, while margins are likely to decline by 183 bps. Chemical prices across the segment remained flat during the quarter.
 

LOOKING UP FERTILISERS SECTOR: Q2 GROWTH ESTIMATES
	Y-o-Y growth			Margins %
	Sales	OP	NP	Sep ‘09	Sep ’10
Chambal Fertilisers	16.24	2.03	-3.94	19.90	17.47
Coromandel Int	55.30	34.48	25.88	11.55	10.00
Deepak Fertilisers	9.72	22.88	29.20	20.32	22.75
GNFC	-14.47	-17.09	-6.43	17.49	16.95
GSFC	11.38	36.82	45.98	14.78	18.15
Rallis India	24.99	23.76	30.96	23.22	22.99
Tata Chemicals	26.11	46.65	44.48	17.99	20.93
United Phosph	12.35	29.62	23.22	17.12	19.75
Aggregate	21.90	26.62	28.01	16.78	17.43

The monsoon’s success has led to an increased demand for fertiliser. India accounts for around 45 per cent of the global fertiliser trade and thus has a significant role to play in the movement of their prices. The international market appears to be in the midst of a price correction of $10-15/tonne in the past week, after a two-month run-up of $100-120/tonne. DAP is currently stable at $560-575/tonne.

Key to the outlook for urea prices is the development of global grain prices which have also softened in the past week. Corn (maize) is down 11 per cent, while wheat and soy are down nine per cent, the Citi group reports on global fertilisers indicate. The Citi group analyst expects DAP prices may come under pressure in the medium term, as key new capacity comes on stream. For instance, Saudi Arabia is due to add 2.92 mt of annual new DAP capacity.