Fall in RM costs, higher urea subsidy may buoy fertiliser stocks: Analysts

Shares of Coromandel International, Deepak Fertilisers, GSFC, Madras Fertilisers, National Fertilisers, RCF, and Zuari Agro Chemicals have soared up to 196 per cent so far this calendar year (CY22)

The recent fall in global fertiliser and natural gas prices are likely to bring respite to fertiliser companies after the Ukraine war triggered input prices to sky-highs. However, analysts caution that the Russian export duty on fertiliser exports may have a trickle down impact on the Indian industry.

"In order to cushion farmers from skyrocketing fertiliser prices, the government is likely to increase subsidies on urea in the upcoming budget, which will boost fertiliser stocks going ahead. Stocks like Chambal Fertilisers and GSFC look attractive for the long-haul," said Ambareesh Baliga, independent market analyst.

According to reports, the current subsidy for urea is Rs 266 per kilogram (kg), which might be increased to Rs 288 per kg. Therefore, this, in turn, would increase the subsidy bill to Rs 2.3-2.5 trillion in this fiscal year (FY23). That apart, Sanjeev Hota, Vice-President – Head of Research, Sharekhan said that the rise in maximum retail price (MRP) of phosphatic and potassic (P&K) fertilisers would bring margin relief to fertiliser firms amid high global input prices.

Last month, the government approved an additional Rs 51,875 crore subsidy for P&K fertilisers for the rabi season.

"We believe that the decline in fixed costs and oil prices would drive the fertiliser sector to profitability and suggest Coromandel Fertiliser, Sumitomo Chemicals, PI Industries, and UPL for long-term investment bets," Hota added.

After the outbreak of the Russia-Ukraine war, prices of key fertiliser components like urea and di-ammonium phosphate or DAP saw a sharp increase due to western sanctions imposed on Russia. With this steep rise in fertiliser prices, global fertiliser-manufacturing plants were forced to gradually slow down production or completely shut it.

However, as economic activity gained momentum post resumption of production across European and Chinese plants, prices of urea and DAP fell up to 50 per cent from April peaks. Moreover, prices of natural gas, a key ingredient to make nitrogen-based fertilisers, fell 100 per cent from June-highs.

That said, the high usage of subsidized fertilisers is raising crop yield fears, warn analysts. Experts believe that the farmers are using excessive urea and DAP for crop production due to subsidized prices. Therefore, the nutrient imbalance from the ideal NPK (nitrogen phosphorus potassium) use ratio of 4:2:1 could destroy soil health, affect crop yields, and trigger food inflation.

Russian export tax

Analysts believe that the Russian export duty of 23.4 per cent on all types of fertiliser may increase the cost for India by $70 a tonne.

"While the majority of Russian fertilisers are to Europe, a trickle down impact is expected on the Indian market as well. The cost of imports is likely to increase by up to $70 per ton as the Indian government has already closed their subsidy for FY23," said analysts at Prabhudas Lilladher.

According to reports, India's fertiliser imports from Russia surged 371 per cent to a record 2.15 million tonnes in the first six months of the year starting April 1. For the maiden time, Russia became the biggest supplier to India by offering discounts over prevailing global prices.

However, Baliga believes that Russia’s export tax on fertilizers will have limited impact on India as the domestic market will stock up imported fertilisers till the next kharif season.

At the bourses, shares of Coromandel International, Deepak Fertilisers, GSFC, Madras Fertilisers, National Fertilisers, RCF, and Zuari Agro Chemicals have soared up to 196 per cent so far this calendar year 2022 (CY22). In comparison, benchmark indices the S&P BSE Sensex and Nifty50 have surged 4 per cent each, during the same period.