Govt move to clear fertiliser firms' subsidy arrears gets tepid response

Combined market capitalisation of 10 fertiliser companies up 10% in Nov, against 12% rise in Sensex

The central government’s recent move to clear subsidy arrears of fertiliser companies has failed to fire up these firms’ stock prices as was expected initially.

While fertiliser stocks have done relatively better than the benchmark BSE Sensex in the last two weeks, the industry performance is in line with the movement in the broader market on a month-to-date basis. The combined market capitalisation of 10 fertiliser makers in Business Standard’s sample has risen 10 per cent so far in November against 12 per cent appreciation in Sensex during the period. (See the adjoining charts).

Two weeks ago, Finance Minister Nirmala Sitharaman announced a fresh round of fiscal stimulus to revive India’s economic growth, hit hard by Covid-19. A major part of the stimulus package was the additional allocation of Rs 65,000 crore towards fertiliser subsidy for the current financial year. This is expected to clear subsidy arrears that was hitting the working capital cycle of companies and the industry is expected to start FY22 with a clean slate.

According to estimates by the rating agency ICRA, total subsidy arrears were estimated to be around Rs 48,000 crore at the end of March, which was expected to grow by around Rs 60,000 crore by the end of FY21.

Fertiliser companies sell their produce below the cost of production and transport to farmers and they are eligible to receive subsidy to the meet the shortfall in their realisation. Total revenues or realisation for manufacturers comprises the farm gate or retail price plus the subsidy. In recent years, however, subsidy payment was getting delayed and rolled over from one year to the next. This was forcing companies to make borrow for working capital and the interest payments were raising their overall operating costs. 

The recent movement in fertiliser stocks is also in line with the rise in their mid- and small-cap peers.

For example, BSE MidCap and BSE SmallCap indices were up 5 per cent each in the last weeks against six per cent rally in fertiliser stocks during the period. The two indices have seen an 11 per cent rise so far in November against 10 per cent appreciation in fertiliser stocks. Due to their relatively low market capitalisation, fertiliser stocks fall in the mid- and small-cap space.

Analysts attribute the tepid rally to the stretched valuations in the industry. “While the clearance of subsidy arrears is positive, fertiliser stocks had run-up quite a bit prior to the announcement. At their current valuation, most of the earnings triggers such as good monsoon and strong demand growth are already priced in, limiting the upside,” says G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.

The combined market capitalisation of fertiliser stocks is up 35 per cent on a year-to-date basis, against 7 per cent rally in Sensex.

Besides, the latest fiscal move did little for the long-term growth outlook of the industry. Fertiliser demand is growing in low single digits. According to data from Fertiliser Association of India, demand grew at a compound annual rate (CAGR) of 2.1 per cent in the last five years.

The combined net sales of the industry was down 5.6 per cent year-on-year (YoY) during Q2FY21, making it unattractive for investors looking for growth stocks. According to a report by Edelweiss Securities, fertiliser volumes were down 3 per cent YoY in Q2.

Hyderabad-based Coromandel International is the most valuable company in the industry with market capitalisation of Rs 23,446 crore as on Thursday, accounting for nearly half of the industry’s combined market capitalisation.