Sector Update: Fertilisers

Government has announced the complex fertiliser subsidy rates for FY14E‐ while subsidy on DAP has been reduced by 14% to Rs 12,350/mt (FY13 subsidy of Rs 14,348/mt), subsidy on MoP has been revised downwards by 22% to Rs 11,300/mt (FY13 subsidy of Rs 14,400/mt). We believe the reduction in subsidy rates is in line with the decline in global prices of raw materials such as phosphoric acid (down by 27% YoY ) and potash (down by 17% YoY). Post the announcement of FY14E subsidy rates, we believe there is limited room (only Rs 1000‐1500/mt) for farmgate prices reduction as government has snatched away substantial portion of the benefit of raw material price decline. Maintain Accumulate on Coromandel, Deepak Fertiliser & GSFC.

The govt. has announced the complex fertiliser subsidy rates for FY14E- subsidy on “N” stands at Rs 20.9/kg (FY13 subsidy of Rs 24.0/kg), subsidy on “P” stands at Rs 18.7/kg (FY13 subsidy of Rs 21.8/kg), subsidy on “K” stands at Rs 18.3 (FY13 subsidy of Rs 24.0/kg) and subsidy on “S” remains unchanged at Rs 1.7/kg. Consequently, subsidy on DAP is revised downwards by 14% to Rs 12,350/mt (FY13 subsidy of Rs 14,348/mt) while subsidy on MoP is revised downwards by 22% to Rs 11,300/mt (FY13 subsidy of Rs 14,400/mt).

We believe the actual reduction in subsidy rates for FY14E is in line with the decline in global prices of raw materials such as phosphoric acid and potash. As compared to last year, phosphoric acid prices are down by 27% YoY, while potash prices are lower by 17% YoY. Industry had been expecting subsidy reduction to a similar extent due to the decline in global raw materials prices over the last few months India’s complex fertiliser consumption (excl, SSP) stood at 17-18m mt in FY13. Subsidy reduction to the tune of 15% would help the govt. save Rs 45bn in subsidy for FY14.

Our cost‐benefit analysis shows that companies have the cushion to reduce farmgate prices on DAP by Rs 1000 1500/mt.