Fertiliser scrips tank on proposal to cut subsidies

The fertiliser sector stocks reacted sharply on the Budget proposal to reduce allocation for fertiliser subsidy to 50,200 crore in 2009-10 from Rs 75,900 crore in 2008-09. These scrips declined by an average of 21 per cent during the week ended July 10.

Chambal Fertilisers, Fertilisers and Chemicals Travancore, National Fertilisers and RCF declined sharply by over 29 per cent on delivery base selling. Nagarjuna Fertilisers was down 28 per cent, Deepak Fertilisers fell by 20 per cent while Coromandel Fertilisers came down by 16 per cent.

The Budget has announced the government’s intention to change the subsidy regime from being product-based to nutrient-based. Further, it has reiterated the plan to move to provide direct subsidies to farmers.

At present, the subsidy and prices are based on products. In a nutrient-based pricing scheme, the unit prices of N, P and K nutrients should be the same for all products. This would help farmers select most suitable fertiliser for their fields resulting in a more balanced application of fertilisers.

According to analysts at UBS Investment Research, moving to a system where subsidy is provided to farmers and not to companies will improve the working capital situation of the fertiliser companies. However, these measures are only for the medium term. No commitment has been made to provide fertiliser subsidies in cash which could be mildly negative for companies in the sector.