Subsidy withdrawal risk rings warning bell for fertilisers

India’s import-dependent fertiliser sector is battling elevated prices and supply disruptions of key inputs such as phosphates and potash.

The pain has been aggravated by a depreciating rupee and a global supply crunch from the world’s major exporters Russia and Belarus. 

Despite this, investors have continued to lap up fertiliser stocks this year aided by the government’s subsidy support and expectations of a good monsoon. 
 

For instance, shares of Mangalore Chemicals, Coromandel International and Deepak Fertilizers have surged up to 78% so far this year versus a 6% fall in the Sensex and Nifty indices.

Analysts, however, caution that risk of a rollback in subsidy aid is a major threat to the sector.

Speaking to Business Standard, G Chokkalingam, Founder, Equinomics Research says, govt is under pressure to cut down subsidy. Subsidies could be converted into bonds. Delay in payment by govt can create working capital issues, he says. If passing on costs is allowed, demand & profitability will be hit. 

These risks further assume significance as the government batted for rationalising non-capital expenditure such as wage, subsidy and interest payments in June.

Besides, high input costs and supply issues reportedly forced state-run Gujarat State Fertilizers to shut its three diammonium phosphate (DAP) units in May.

On Monday, Mangalore Chemicals announced the shutdown of its phosphatic fertiliser plant due to non-availability of phosphoric acid.

Gaurang Shah, Head Investment Strategist, Geojit Financial Services says good monsoon, govt policy are positive factors. Currently, impact of supply side constraints an issue, he says. Investors need to be cautious in stock-picking from long-term.

That said, IT major Wipro will be on the Street’s radar today ahead of its Q1 results. Analysts expect Wipro’s margins to take a sequential hit of 50 to 70 bps due to wage inflation, while it may report modest revenues.