Harvesting times for fertiliser firms

Further reforms for the industry will accrue more benefits

Fresh triggers after the note ban have helped fertiliser stocks not only gain lost ground but register good returns.
 
Expectations of a decline in subsidy receivables in FY18 after the Union Budget, hopes of demand improvement following the UP elections, as well as talk of fast-tracking fertiliser reforms have helped these stocks gain in the past few months.
 
With these gains, the one-year returns given by these stocks too have been phenomenal. Coromandel International, Chambal Fertilisers, GSFC, Tata Chemicals, Deepak Fertilisers, etc have gained 52-98 per cent in the past one year. There could be more gains ahead.
 
This reversal in fortunes for fertiliser stocks in FY17 comes after three challenging years. The deficient monsoons, high raw material prices, elevated subsidy receivables, and policy stagnation had contributed to their underperformance earlier. While substantial improvement in the monsoon in 2016 provided the first trigger, falling prices of natural gas and those of MoP (muriate of potash), DAP (di-ammonium phosphate) and urea in 2016 (down up to 30 per cent in the last two years) supported the process. With the government maintaining a budgetary allocation of Rs 70,000 crore in FY18, expectations of subsidy receivables declining substantially have also increased.
 

Satish Misra and Deepak Kolhe at HDFC Securities say more than two-thirds of the pending subsidy dues will be paid by FY18. The industry’s key concern was the subsidy of Rs 35,000 crore, according to Misra and Kolhe, and part of this will be paid out of the FY17 Budget allocation of Rs 70,000 crore (fresh requirement of subsidy reimbursement is Rs 55,800 crore and the total Rs 90,800 crore).
 
With the government maintaining the allocation for FY18 too, most of the dues will be taken care of. Consequently, interest costs for fertiliser players will fall by at least 40 per cent, analysts estimate.
 
Meanwhile, K Ravichandran, senior vice-president and group head, Corporate Ratings, ICRA, says the demand for fertilisers will witness moderate growth in the first half of FY18, given the low base of the first half of FY17, the improved purchasing power of the farmer community with higher MSPs (minimum support prices) of rabi crops, and strong sowing during the season.
 
ICRA expects a further thrust in fertiliser demand if the proposed farm loan waiver plans of various state governments are implemented.
 
The bigger benefits, however, can come through the roll-out of major reforms in the urea sector. Currently, pilot projects are going on, wherein the manufacturer is paid a subsidy for retail sales to farmers. It is hoped that this scheme will be rolled out countrywide in June. The buzz is that the transfer of subsidies will happen directly to farmers, thereby lowering the burden for companies. This will also help in plugging theft and prevent misuse of fertilisers (especially urea) by the non-agriculture sector. It can lead to significant savings for the government as well as reduce working capital requirements for manufacturers, say analysts.
 
The neem coating of urea has been done to prevent misuse. Analysts, however, are not confident of the dates when the scheme could be rolled out and hence are not yet building it into their estimates. Ravichandran says it can take a year before the scheme is implemented.
 
Looking at the straw in the wind, analysts are positive on fertiliser companies. Among them, LKP Securities’ analysts have GNFC (Gujarat Narmada Valley Fertilisers) as their top pick. They say that the Bharuch-based player is set to post record profits in FY17 and FY18. Both the business verticals of GNFC —chemicals and fertilisers — are poised to do exceedingly well.  HDFC Securities prefers Chambal Fertilisers and Coromandel International, as the brokerage sees substantial benefits from the prior-period subsidy reduction accruing to these two companies. For Chambal, capacity expansions will drive growth and analysts may start factoring this in after FY18.
 
Deepak Fertilisers can post healthy growth of 18 and 25 per cent in Ebitda (earnings before interest, taxation, depreciation and amortisation) and PAT (profit after tax), respectively, over FY16-19 respectively, according to analysts at Emkay Global, on the back of improving demand in the chemicals business, benign raw material prices, and firm realisations. In the fertiliser segment, the company has doubled its capacity to 0.6 million tonnes (mt) and intends to increase it to 1.1 mt through de-bottlenecking. Besides, the company will benefit from lower gas costs under the price-pooling mechanism, analysts say.