Companies with high exposure to nitrogen and sulphur to gain

Changes in urea policy

Analysts are cautiously optimistic on the profit margins of fertiliser companies, following a change in the government’s policy on urea subsidy earlier this month.

Companies with high exposure in nitrogen (N) and sulphur (S), the two main nutrient-based crop fertility boosters, would tend to gain in the wake of the increase in subsidy. Those focusing on phosphate (P) and potash (K) based products might lose, on a cut in the subsidy.

Early this month, the Cabinet Committee on Economic Affairs (CCEA) approved a 20 per cent increase in the rate for nitrogen from Rs 15.854 a kg to Rs 18.989 a kg and for sulphur by 10 per cent from Rs 2.044 a kg to Rs 2.240 a kg. The subsidy for phosphate has been lowered from Rs 13.241 a kg to Rs 11.997 a kg (down 9.4 per cent) and that for potash was revised downwards 20 per cent, from Rs 15.470 a kg to Rs 12.395 a kg. 

According to government estimates, overall payment under the nutrient-based subsidy (NBS) scheme would reduce to Rs 19,800 crore in 2017-18, from Rs 20,700 crore in 2016-17.

“The benefit for fertiliser companies would be area-specific. Production in short supply in a region would see some price support and, hence, high benefit for producers. In case of oversupply, the price of any fertiliser would remain subdued, resulting in a proportionate decline in their earnings,” said Prakash Gaurav Goel, analyst with ICICI Securities.

The new subsidy rate for P&K fertiliser is in line with changes in input prices in the global market. Hence, the industry is unlikely to face any major inventory loss due to the reduction in subsidy on P&K nutrients. Currently, inventory in the system for diammonium phosphate (DAP) is around 1.5 million tonnes and for NPK is slightly higher at 1.8 mt.  Industry sources said this would be sold at current prices and should get consumed by mid- May, after which new supply will come into the market. 

“Prices of new inventory might not reduce significantly, as prices of ammonia and phosphoric acid have firmed up. However, the companies might also not be able to increase prices in cases where the subsidy has gone down, due to the looming threat of (the adverse) El Niño (weather phenomenon), which might impact consumption of fertiliser. Companies with higher contribution from NPK fertiliser are likely to be least affected, as they enjoy brand equity and less competition, which offers them better pricing power over commoditised fertiliser such as DAP or MOP (Muriate of Potash),” said Pratik Tholiya, analyst with Emkay Global Financial Services.

The subsidy on DAP, most widely used fertiliser after urea, has remained broadly unchanged. Ammonium sulphate phosphate, 40 per cent of all NPK fertiliser consumed, has seen a 6.6 per cent increase in subsidy. Key companies in this category are Coromandel, GSFC, Tata, FACT and Paradeep.

In contrast, the subsidy has been reduced on NPK-10 and NPK-12, the other two extensively consumed NPK ones (and 31 per cent of all NPK consumed in the country).