Fertiliser stks prey to subsidy withdrawal risk, high input costs: Analysts

Fertiliser Stocks: The risk of a breach of the government's fiscal deficit target could play a spoilsport for the sector as it could prompt the Centre to cut back on subsidy support, analysts believe

Investors lapped up shares of fertiliser companies earlier this year, as expectations of a good monsoon and the government’s subsidy support drove the bullish sentiment on the bourses.

Shares of Mangalore Chemicals, Madras Fertilizers, Gujarat Narmada Valley Fertilizers, Coromandel International, Agro Phos India, Deepak Fertilizers, and Gujarat State Fertilizers surged 8-37 per cent between January-June, as compared to a 10 per cent fall in the Sensex and Nifty.

After firms reportedly hiked prices of unregulated non-urea fertilizers in April due to rising global prices, the government had increased subsidy on these fertilisers to Rs 60,939 crore till September, up 45 per cent from the entire fiscal 2022-23 (FY23) Budget Estimates for this group.

However, the risk of a breach of the government’s fiscal deficit target could play a spoilsport for the sector as it could prompt the Centre to cut back on subsidy support, analysts believe.

In June, while highlighting that India is currently staring at a twin deficit problem due to cuts in fuel excise duties, the government batted for rationalizing non-capital expenditure (wages, subsidies, interest) amid risks of fiscal slippage.

“There is a lot of pressure on the government to cut down subsidies, so there's a risk of subsidies being converted into bonds. Alternatively, there can also be a delay in payment, which can create working capital problems for fertiliser companies. It’s better to avoid fertiliser stocks,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.

Moreover, with the recent softening of global commodity prices – including fertilisers – due to recession fears, the government said that its expenditure on fertiliser subsidies has declined during Q1-FY23.

Disbursements of urea subsidies are regular, but there are delays in the disbursement of NPK (non-urea) subsidies, noted analysts at IIFL Securities in a result preview. Besides, the sharply elevated input cost is another headwind for the sector.

While India imports almost entirely its phosphatic and potassic (P&K) fertilizers either as finished goods or raw materials, global prices of these nutrients shot through the roof from March onwards as supply fell short from major exporters – Russia and Belarus. Other key inputs such as natural gas and ammonia also followed suit.

In the April-June quarter (Q1FY23), prices of ammonia, rock phosphate, and phosphoric acid were up 32 per cent, 23 per cent and 17 per cent, respectively, from Q4FY22.

Despite the elevated input prices, companies may post steady revenue in the recent quarter on the back of government subsidy aid, analysts believe.

“Fertilizer companies may continue to benefit from higher fertilizer prices but may see a pull-back in volumes in the recent quarter due to weak sowing activity. Capex done towards backward integration into phosphoric acid will incrementally add to margin support, while high prices of ammonia and gas will continue to hurt EBITDA/ton,” wrote analysts at B&K Securities in a results preview note.

All this, feels Gaurang Shah, head investment strategist, Geojit Financial Services, will remain an overhang on the sector’s fortunes in the short-to-medium term.

Although, Shah is positive on the sector from a long-term perspective due to the government’s focus on the agri-chemical space, he believes that the recent supply constraints due to the Russia-Ukraine war will keep the performance of companies, and hence their stocks at the bourses, under check.

“Good monsoon has always been positive for fertiliser firms for the last 3-4 years and policy efforts are also favourable, but investors need to be careful of what they buy from the space and be stock-specific if they want to invest from a long-term perspective,” he said.