Cloudy days for farm stocks
Rains bring little cheer to fertilser and agro-chemical firms battling high raw material costs

As the sowing season is about to start after the timely arrival of monsoon rains, the stock market focus will now shift to agri input stocks like fertilisers and agrochemicals.

Already some agri input stocks are seeing traction, with the first week of rains cheering investors and companies projecting volume growth in the peak season of the year. However, rising raw material costs for fertiliser and agrochemical producers manufacturers and a tepid fourth quarter performance have made investors cautious.

Share prices of most fertiliser and agrochemical firms have fallen since April 16, the day Indian Meteorological Department gave a normal rains forecast for 2018.

But strong demand is expected for agri inputs this year as the monsoon is forecast at 97-98 per cent of the long period average.

“With the early onset of monsoon, this year is likely to witness plentiful rainfall, which will benefit the agriculture sector,” said Emkay Global Financial Services in a report.

However, availability of agri inputs on time during the sowing season will be crucial for raising farm productivity. Fertilisers being the key agri input sourced by the farmers during the sowing season, its timely availability is critical for a good crop.

The fertiliser sector is beset with a few challenges like rising raw material cost, difficulty in getting working capital and lower realisations for manufacturers.

Moreover, fertiliser prices are on the rise globally for the last few months. Pratik Tholiya, research analyst, Emkay Global Financial Services, said, “The fourth quarter performance of fertiliser companies was impacted by the high raw material cost. Prices of key raw materials such as phosphoric acid have moved up sharply while ammonia and natural gas have also firmed up.”

Globally also, prices of key fertilisers such as urea and DAP (diammonium phosphate) are on an upward trajectory while MOP (muriate of potash) prices have stabilised in the last one quarter, Tholiya said.

“Fertiliser companies reported a moderate performance in a seasonally weak quarter. While aggregate revenue growth stood at 13 per cent year-on-year, Ebitda growth was flat due to rising input cost,” the analyst said.

The agrochemical sector’s profitability suffered from the continuous rise in raw material cost that put pressure on gross margins. Consumption of agrochemicals also remained tepid due to seasonality and companies refrained from pushing inventory in the system.

Agrochemicals producers now expect better demand in FY19. Projections of normal monsoon rains have led companies to line up new product launches, too.

Bayer CropScience management, in its outlook after the fourth quarter results said, it expects FY19 to be a positive year for the company on the back of expectation of a favourable monsoon coupled with 8-10 new product launches.

Most company management have indicated that raw material prices would remain at elevated levels in Q1FY19 and expect prices to moderate only from mid-Q2FY19.

Care Ratings in an update on the fertiliser sector said, “Natural gas is used as a feedstock for the manufacturing of urea and accounts for 80 per cent of the raw material cost for urea manufacturing. Initially, the fertiliser sector was given the first priority for the usage of domestic natural gas, but it was later amended and now is given third priority. Additional requirement of natural gas is plugged through import of natural gas. Out of 31 urea plants in India, 28 are gas-based. The price of natural gas was the lowest during H1FY18, which aided in improving the profitability of urea manufacturers. When price of domestic natural gas was revised as per the New Domestic Gas Policy, it was increased by 17.5 per cent during H2FY18. Prices of natural gas were increased as prices of crude oil had also started firming up.”

“Prices of phosphoric acid were $730/tonne during the month of April 2018 (prices have increased by $50/tonne from its March 2018 levels). This could add pressure to the margins of DAP producers.”

“The only relief for the fertiliser manufacturers is that the subsidy for the raw material phosphorus (P) has increased by 26.7 per cent for FY19. Nutrient-based subsidies for nitrogen (N) and potash (K) have been reduced by 0.5 per cent and 10.4 per cent, respectively, whereas subsidy for sulphur (S) has been increased by 20.5 per cent for FY19,” Care Rating said.

The fertiliser subsidy for FY19 has been fixed at Rs 70,090 crore, out of which Rs 44,989.50 crore is earmarked as the urea subsidy and the remaining Rs 25,100.5 crore as the nutrient-based subsidy.

Care Ratings in its FY19 outlook for the fertiliser sector said it estimate the overall fertiliser production to increase during FY19. Analysts see challenges for fertiliser companies from the rising raw material prices.

“Rise in global oil prices, which has led to the rise in natural gas prices and R-LNG prices, will affect urea manufactures. As per our estimates the raw material cost for the fertiliser industry could increase by 5 per cent due to the increase in gas prices,” Care Rating said.

“The fertiliser sector could face issues regarding the liquidity of working capital,” the rating agency said.

“However, introduction of direct benefit transfer(DBT) will help bring relief to manufactures with the subsidies being transferred directly to them, but since the implementation is still picking up there are a few teething issues which need to be resolved, till then this could lead to a short-term liquidity crunch with the manufacturers in the collection of subsidies,” Care Ratings said.

No wonder, the stock market is still waiting and watching.

Ravi Ranjan Prasad