Fertilizer stocks deliver outsize gains for investors this year

Many of us live in cities and towns and don’t fully recognize how much our modernizing Indian economy depends on agriculture. Even today, an estimated 58% of India’s workforce works in this sector. As one of the most populous countries in the world, ensuring food security is a priority in India. The agriculture and fertilizer sectors are consequently a major focus in Indian government policy. The agrochemicals industry is essential to improving crop production and protection. There are many large and small players in the Indian fertilizer industry, and over the past year, most of them delivered stellar results to investors.

The agrochemicals industry is essential to improving crop production and protection. There are many large and small players in the Indian fertilizer industry, and over the past year, most of them delivered stellar results to investors. In the past month, we witnessed significant volatility in some of these stocks.

Anticipating a favourable performance, fertilizer stocks surge

FACT jumped over 80% and Madras Fertilizers by 36.1% over the past month. Among the larger fertilizer companies, FACT has gained more than 100% over a year. Except for Chambal Fertilizers, all other stocks delivered healthy returns this year, including RCF and GNFC, which grew more than 20%

The recent run-up in fertilizer stocks can be attributed to a few factors. Many analysts believe that the market is anticipating that the Centre will announce subsidies on fertilizers in the forthcoming Union Budget. In addition to this, there will be an export ban or increased duty on fertilizers from Russia, impacting global prices. Russia’s imposition of an export tax on fertilizers is likely to come into effect from January 1, 2023. It plans to set the export tax on all types of fertilizers at 23.5%, with a cut-off price of $450 per tonne.

The Indian government has also proposed a change in the policy of gas supply to fertilizer companies. It requires fertilizer companies to pay for at least 40% of gas under spot buying. Gas is the primary fuel used in fertilizer production. The Oil Ministry estimates spot gas prices to come down by up to 15% under the new mechanism. GAIL will act as the nodal agency to supply pooled gas to the fertilizer sector.

Some of the smaller fertilizer stocks have done much better than their larger counterparts. Madhya Bharat Agro, Madras Fertilizers and Krishna Phoschem gained more than 100% this year, with a standout performance of 500% gains by Madhya Bharat Agro. National Fertilizers and GSFC were the laggards of the sector.

For the past three quarters, the fertilizer industry faced margin pressure due to a rise in input costs. But thanks to a normal monsoon in India this year, fertilizer stocks have recently boomed. Rising Covid cases in China, while in distress to the global supply situation, could also prove to be a boon to Indian fertilizer companies.

Another supporting factor is the correction of raw material prices in the international markets, which is expected to aid the performance of these companies in the coming quarters. The prices have corrected for key input raw materials and fertilizers such as Phosphoric acid (30%), Sulphur (49%), Di-ammonium Phosphate [DAP] (39%), and Urea (34%).

Strong Q2FY23 builds investor confidence

The impressive rise in stock prices is supported by improving financial metrics. The market has proportionately rewarded stocks with higher quarterly YoY growth in revenues and net profits. The Q2FY23 results saw improving financial metrics in the majority of the companies.

Not surprisingly, among the larger players, FACT saw the highest quarterly YoY revenue growth of 147% and net profit growth of 296.7%. Consequently, its stock price also rose the highest. Chambal Fertilizers saw quarterly YoY revenue growth of 91.7%. But with net profit down by 45.8%, it is the only stock that has delivered negative returns over the year.

As a sector, the combined net profit increased by around 11% for Q2FY23, along with 62% growth in gross sales.

Fertilizers have played a key role in the success of India’s green revolution and self-reliance in food-grain production. The increase in fertilizer consumption has contributed significantly to the sustainable production of food grains in the country. As a result, demand for fertilizers saw double-digit growth rates over the past several years. Despite strong growth in recent years, the average intensity of fertilizer use in India remains much lower than in most of the developed and emerging countries around the world.

Fertilizer usage is also highly skewed, with wide inter-regional, inter-state, and inter-district variations. This offers a lot of scope for this industry to widen its reach, and help the country ensure food security for its population. A lot of this is dependent on the upcoming Union budget and how favourable it is for the fertilizer industry. A positive trigger, supported by a normal monsoon, could help these stocks perform well next year as well.

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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