Tailwinds, hopes from Budget 2018 spark a fertiliser rally

Roll-out of direct benefit transfer and higher farm realisations should boost demand

Even as the broader markets have been weak over the past few days, shares of fertiliser companies have been making smart gains on brokerage upgrades and growth expectations. Government-owned National Fertilizers, Rashtriya Chemicals & Fertilizers, and Fertilizers and Chemicals Travancore led the rally, gaining up to 10 per cent on Wednesday. Among others, Coromandel International and Chambal Fertilisers and Chemicals were up two-five per cent.
 
The government’s decision to increase net additional spending in FY18 by Rs 333.80 billion, which includes Rs  203.52 billion for the fertiliser sector, boosted the sentiment for PSU stocks. The money will clear liabilities towards urea freight subsidy and write-off the loan and waiver of interest in respect of three fertiliser PSUs.
 
Analysts expect the government to announce a number of farm-specific measures in the Budget for 2018, which is expected to augment farm income, with benefits flowing to agri-input companies.
 
Analysts at ICICI Securities say the sector is steadily gaining profitability amid efficiencies drawn from a decline in power costs and better capacity utilisation.
 

Further with the national roll-out of direct benefit transfer scheme (DBT), the sector is expected to report an improved balance sheet, which can trigger re-rating in the stocks.
 
In addition to government initiatives of higher minimum support prices and crop insurance, improving agricultural scenario in South India, shift in cropping patterns towards cotton which has a higher agri-input use and higher realisations should also boost demand.
 
These measures are expected to improve farmer’s profitability in the medium term and their cash flows, according to Emkay Global. Their top picks in the fertiliser space include Chambal Fertilisers and Deepak Fertilisers.
 
What also acts as a tailwind is further liberalisation of the sector, with manufacturers getting their subsidy payments quickly which acts as an incentive to improve supply.
 
Further with reduced leakage on account of the roll-out of DBT, demand is also expected to improve. The changes are coming at a time when the Chinese are withdrawing from the export markets, which could be an opportunity.
 
Credit Suisse believes that with margins having bottomed out, if sales growth revives as a result of China exiting exports and policy changes in Indian improve demand, they could lead to higher return ratios for fertiliser companies. GSFC and Coromandel International are its preferred picks in the sector.