What is so hot about fertilizer stocks?

In the din and euphoria over steel and internet stocks, investors appear to have forgotten a silent multi-bagger in the last 8-9 months. Of course, we are referring to fertilizers. The robust Kharif output last year gave an impetus to fertilizer stocks. Since Sep-20 most fertilizer stocks have at least doubled. Then there are the likes of Chambal Fertilizers that is up 3 times and Deepak Fertilizers up nearly 4 times in this period. What exactly has been the trigger for this fertilizer stock rally?

During the last few months, the government has made a series of announcements, hiking the subsidy on fertilizers to reduce the burden on farmers. Yes, fertilizer input prices have gone up and most fertilizer companies have had to raise prices. In June, the government hiked subsidy on key fertilizers by 140%. For example, the government will now offer a subsidy of Rs.1,200 per bag of NPK (Nitrogen, Phosphatic, Potassic) fertilizers as compared to Rs.500 offered so far. When you combine with the robust MSP offered by the government to farmers for Kharif procurement, it puts fertilizer stocks in a sweet spot.

But, what is more interesting is that valuations of fertilizer stocks are still attractive. For example, Chambal Fertilizers is available at 9.2X P/E while Deepak Fertilizers is available at about 20X P/E. Then there are the PSU fertilizer plays like NFL and GSFC, that are still available at just about 10X P/E and GNFC at 8X P/E. These valuations are after the sharp rally. With the government willing to stretch its fertilizer subsidy bill higher, it surely spells good times for farmers and for fertilizer stocks.