Markets
Forecast of rain relief aside, risks remain for fertilizer companies
Summary
- With limited upside on pricing, fertilizer companies are undertaking backward integration to lower their production cost
The stocks of fertilizer companies have surged by as much as 45% over the last one month. The India Meteorological Department's forecast of a good monsoon, after below-average rainfall in FY24, bodes well for fertilizer sales. However, it is still early in the monsoon season, and any delays or suboptimal rains could have negative effects.
The fertilizer industry in India operates under a controlled price regime. The government reimburses the difference between the production cost plus a fixed margin and the sale price as a subsidy. Despite this, the Ebitda margin of fertilizer companies ranges from 6% to 14% owing to the difference in efficiency, share of non-subsidy sales and economies of scale.
The subsidy rate and its timely payment are important variables that determine the financial performance of companies. “Lower NBS (nutrient-based subsidy) rates during the second half of the year were not commensurate with the raw material prices, and therefore, impacted the operational viability of the phosphatic players in the industry," said the management of Coromandel International Ltd in its March quarter earnings call.
FY25 is expected to be a strong year for the sector with an increase in subsidy from ₹20.8 per kg in the second half of FY24 to ₹28.7 per kg in the first half of FY25.
The MSP hike of up to 12.5%, announced last week, would also spur higher sowing. Additionally, the industry awaits a decision on the parliamentary panel's recommendation to exempt the fertilizer sector from GST.
Lowering production costs
However, with limited upside on pricing, fertilizer companies are undertaking backward integration to lower their production cost.
Coromandel is investing ₹1,000 crore to expand its capacity of phosphoric acid and sulphuric acid, key input materials, to be completed by early FY27. This would reduce the company's dependency on purchased phosphoric acid to 25% from the current 50% and generate additional Ebitda of ₹350 crore, as per a report by Antique Stock Broking. It has also purchased a stake in a rock phosphate mine.
Paradeep Phosphate Ltd is constructing a sulphuric acid plant, expected to be commissioned in FY26, which would increase its Ebitda by about ₹700 per tonne, currently at ₹4,500 per tonne.
Companies are also trying to increase their sales from non-subsidy-based related segments such as crop protection chemicals, even as their contribution would remain at less than 5% in the near term.
For now, investors are optimistic about the brighter prospects of the industry. Fertilisers and Chemicals Travancore Ltd (FACT) has risen almost 41% in the last one month, while Chambal Fertilizers, Coromandel, Paradeep and Rashtriya Chemicals and Fertilizers Ltd (RCF) have gained 28%, 24%, 24% and 22%, respectively. Notwithstanding the strong outlook, the stocks appear to have entered the overheated zone considering the associated risks.
