Strong Rabi season offtake helps fertilizer stocks extend gains

Shares buck the market trend, advance between 3 to 8 per cent on Thursday

Shares of fertiliser companies extended their gains as the Street remains optimistic of higher offtake during the ongoing rabi season. Encouraged by abundant rainfall and higher soil moisture, farmers have started sowing rabi crops at a brisk pace this year, covering four per cent more area by November end than in the whole of the previous season.

Reservoir levels are estimated to be 19 per cent higher than the average of the last five years. This is seen aiding volumes of fertiliser companies, according to analysts. “Good water levels aided by beneficial monsoon along with good moisture availability in soil have led to the timely start of the rabi season. Improvement in crop sowing led by good reservoir levels has spurred fertiliser demand,” said Rohan Gupta, research analyst, Edelweiss Securities.

It is important to note that prolonged monsoon and delayed kharif season resulted in all-time high rabi sowing last year. Even as growth rates appear to be flat, analysts say underlying demand remains strong. “Given a high base of Q3FY20, we estimate the industry’s fertiliser volumes growth to be restricted to single digit. However, given the improvement in overall capacity utilisation levels, we do expect benefits of operating leverage to drive margins,” added Gupta.

Additionally, government measures both by the Centre and the states to support farmers and the rural economy have added to the cheer. Finance Minister Nirmala Sitharaman announced a new set of stimulus measures including a Rs 65,000 crore fertiliser subsidy to ensure adequate availability for farmers. An additional Rs 10,000 crore will be set aside for the PM Garib Kalyan Rozgar Yojana, which she said will accelerate the growth of the rural economy.

Structural changes and consistent government support are slowly changing the Street’s perception of the sector. “Fertiliser companies have underperformed in the past due to legacy issues like higher cost of inventories and pending receivables from government subsidies especially from urea sales. Post direct benefit transfer a lot of those receivable issues are getting resolved and also continuous communication from government to release further payments is expected to improve the working capital cycle,” according to Parthiv Shah, director, Tracom Stock Brokers.