Fertiliser companies unlikely to pass on price cuts

Lower subsidies and higher input costs would impact profitability

Stocks of fertiliser companies fell steeply after the government’s announcement of price cuts for non-urea fertilisers by state-run firms Rashtriya Chemicals and Fertilizers and National Fertilizers on July 4 citing a drop in global raw material prices. The government had asked fertiliser companies to reduce per tonne prices of DAP or di-ammonium phosphate by Rs 2,500, muriate of potash (MOP) by Rs 5,000 and NPK (nitrogen, phosphorus, potassium) fertiliser by Rs 1,000.

Analysts at Emkay say such price intervention or advice before the start of the season will have some negative impact on companies’ profitability due to channel inventories. Financial implications apart, analysts say the negative sentiment is more from the view point that the government is interfering in a decontrolled sector. Except urea, companies are free to peg the retail price of fertilisers depending on their input costs.

K Ravichandran, senior vice-president and co-head of corporate ratings at ICRA, says if DAP manufacturers were to reduce the retail price by Rs 2,500 per tonne, it could impact their profitability and cash accruals with some reporting losses as the intermediate prices (phosphoric acid and ammonia) have not declined commensurately. The government has also reduced the subsidy on DAP by Rs 3,405 a tonne for FY17 and with international prices softening, imports could be more economical.

About 65 per cent of DAP demand is met locally and it is unlikely that prices will be reduced by Rs 2,500 a tonne across all regions unless the entire requirement is met through imports, Ravichandran adds. However, a partial cut to clear inventory is more likely. HDFC Securities analysts say a price cut by state firms will not change market dynamics much as they hold a combined DAP market share of three per cent.

Meanwhile, fertiliser companies have indicated that they might not follow the advice of the government but follow the lead taken by state-run firms given that the fall in prices of raw materials has been offset by subsidy cuts announced at the start of FY17. According to HSBC analysts' cost calculations, there is hardly any room for price cuts in the immediate future.

It is not surprising, then, that after falling steeply (up to 17 per cent), key fertilise stocks have recouped some of the losses. Coromandel International, the largest player in the segment, has gained seven per cent over the past few days.

Going ahead, analysts say companies will manufacture more NPK fertilisers compared to DAP as the price cut will be lower and there is scope to capture benefit of lower raw material prices. They prefer companies such as Coromandel with a higher share of NPK (75 per cent plus).