Is Fertiliser Sector in Danger Zone?

India’s fertiliser industry has announced sharp price increases in non-urea fertilisers in recent weeks, on the back of soaring input costs. However, the government’s directive to the industry to roll back the price increase creates some uncertainty. Besides, even if the industry eventually succeeds in implementing price hikes, farmer demand for non-urea fertilisers seems likely to take a serious knock, consistent with past experiences of 2013- 14 and the mid-1990s. Given these uncertainties, we remain cautious on the non-urea segment.

Industry announces sharp price increases:
While several companies announced price increases w.e.f. 1-Mar, IFFCO – which held out for a month – announced an even sharper increase w.e.f. 1-Apr. IFFCO’s new MRP for DAP – Rs1,900/bag – seems driven by the ~50% jump in international prices of DAP in recent months.

Caught between margins and volumes.:
While the industry has understandably opted to protect margins by raising prices, past experience highlights the risk of a consequent decline in non-urea sales volumes, especially as urea prices will remain fixed. Meanwhile, the government’s intervention in the matter by asking the industry to not raise prices adds another layer of uncertainty. The industry faces an unpleasant choice between margins and volumes.

International prices have sharply risen over the past six months

_{Source: Media Reports}

The above table shows that while the price of DAP has sharply risen in recent months, the price of its key input phosphoric acid has lagged behind thus far. Consequently, the spread between DAP and its inputs has sharply widened in the past couple of months, at least based on currently quoted prices. Consequently, producers of phosphoric acid (primarily based in Morocco) are likely to negotiate hard for a sharp price increase for 1QFY22.
In the face of the relentless increase in international prices in recent months, the Indian government has thus far refused to increase subsidy rates for non-urea fertilisers. Consequently, increasing market prices (MRPs) is the only way out for the Indian fertiliser industry.

Yet, following IFFCO’s announcement of price raises, the government intervened by directing the industry to not raise prices. It is unclear whether this directive applies only until the Kharif season begins. Minister of State for Chemicals and Fertilisers Mansukh Mandaviya said that “the Government of India had called a high-level meeting and directed fertiliser companies not to increase the price of DAP, MoP and NPK, and fertiliser companies agreed with it,"

If the industry is forced to sell at old rates even after Kharif sales gather pace, its profit margins will be severely impacted, unless the government raises subsidy rates. If the government eventually permits price increases, we expect a significant decline in sales of non-urea fertilisers. Past experience from the FY13-14 and FY1993-94 periods indicate that sharp increases in fertiliser prices tend to lead to sharp compression in sales volumes. This is particularly so, given that urea prices will remain fixed, further exacerbating the price imbalance between the urea and non-urea segments.

Stock Performance:
Nifty50 has rallied 78.4% from April 01, 2020-  May 06, 2021) Here, we have discussed Fertilizer sector stocks that have surpassed Nifty50 index performance or have given positive returns in the same period. 
 

_{Source: Ace Equity}

Fertilizers stocks have given skyrocketing returns in the past one year. Fertilisers & Chemicals Travancore Ltd. rallied the most 304% from April 01,2020-  May 06, 2021 followed by Mangalore Chemicals & Fertilizers Ltd. 293%, National Fertilizers Ltd. 239%, Gujarat Narmada Valley Fertilizers & Chemicals Ltd. 233%, Rashtriya Chemicals & Fertilizers Ltd. 192%. Coromandel International Ltd. jumped the list 36% in the same period.

Disclaimer: The above report is compiled from information available on the public platforms. These are not buy or sell recommendations.