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n Humongous gap between production and demand of fertilisers
Unfavourable government policies have led to stagnation in fertiliser production over the past 10 years, leading to supply side issues. This has led to a huge gap between production and demand of fertilisers in India, resulting in steep rise in fertiliser imports. In FY10, India has imported ~17 mn MT of fertilisers to meet the demand of ~53 mn MT.
n Burgeoning subsidy burden: Compelling case for domestic production boost
Government’s fertiliser subsidy burden has catapulted from INR 118 bn in FY04 to INR 966 bn in FY09. This is primarily due to increased fertiliser imports on account of higher demand not met by stagnant domestic production. According to FAI, India will require ~45 mn MT of primary nutrients (NPK) to produce 300 MT of foodgrains to feed the estimated 1.4 bn population by 2025. This indicates a CAGR of 4% over the next 15 years and entails a compelling need to improve the country’s fertiliser production.
n NBS scheme: Initiation of decontrol of non-urea fertilisers
The latest nutrient-based subsidy (NBS) policy announced for non-urea fertilisers has initiated the decontrol of non-urea fertiliser prices. This is expected to encourage fertiliser manufacturers to source cheaper raw materials and improve efficiencies. Moreover, the policy is expected to improve a balanced use of fertilisers, which has eliminated discrepancies in subsidy for the same nutrient in different fertilisers. Nitrogen subsidy is linked to urea price, phosphorus subsidy is linked to Di-Ammonium Phosphate (DAP) price and potash subsidy is linked to Muriate of Potash (MOP) price.
n Positive long-term outlook on account of structural changes in industry
The government is serious about encouraging investments in the fertiliser sector and reducing the subsidy burden by means of de-controlling the sector. This is evident from the latest policies by the government, viz., de-control of farm gate price for non-urea fertilisers by means of the NBS scheme, increment in urea farm gate price after eight years and linking urea realisations to import price parity of urea for new capacities. It recently reduced subsidy payment under the NBS scheme for non-urea fertilisers, which is expected to put pressure on international fertiliser prices and operating margins of Indian fertiliser companies in short term. However, over the long term, the policy changes will bring operational and working capital efficiencies, which will open new growth opportunities in the growth starved sector.
In the current report, we have initiated coverage on Chambal Fertilisers and Chemicals, Coromandel International, and Zuari Industries. Outlook for Coromandel International is positive on account of the decontrol of the non-urea space through the NBS scheme, coupled with the capex plans and long-term raw material linkages. Zuari looks attractive as well, on account of the operational and working capital efficiency that are expected to result due to NBS scheme as well as urea feedstock conversion. Though we have a positive outlook on the urea space over the long term, we await more clarity in terms of the urea policy which is currently being discussed by GoI. Owing to uncertainty in the pending urea policy, mixed outlook for non-fertiliser segments and profitability drag (due to IT subsidiaries), the outlook for Chambal Fertilisers is subdued. We initiate coverage on Coromandel International and Zuari Industries with ‘BUY’ recommendation and on Chambal Fertilisers with ‘HOLD’ recommendation.
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