India Market Strategy : Agri 101 - Cereals—advantage exports :: Credit Suisse

● Cereals matter less than widely believed. Of all agri. items, cereals
are impacted most by MSPs and are also most analysed. But they
were just 21% of FY05 agri. output, and likely lower now. They also
matter less for inflation, which is currently all about fruits & vegetables
and meat (and these are as important as cereals). Full report.
● Per capita consumption of cereals has been falling in India for
decades, as automation reduces need for calories. The decline
now exceeds population growth implying flat cereal demand. But
production is still rising with improving yields, creating surpluses.
Cereal inventory is at record levels despite surge in exports.
● A slowdown in Monsoons from mid-Aug has reduced the YoY
increase in acreage sown. Further, cereals, pulses, oilseeds,
fibres and sugar form 40% of agri GDP (only ~5.2% of total GDP)
● But the broader agricultural story remains robust. Rising yields for
laggard states will continue to push avg. yields up. Rising cereal
surpluses should aid exports; improving oilseeds/pulses acreage
should help cut imports. But for inflation to fall, fruits & vegetables
prices need to fall (and these are not as impacted by monsoons).

Heading for double-digit agricultural output growth? :: Credit Suisse

● Amid the intense gloom surrounding India’s economic growth
prospects, we believe many underestimate the impact of two
potentially positive factors. One is the powerful turnaround in net
exports in July and August, which we expect to continue. The
other is the focus of this note and relates to the agricultural sector.
● Over the past 50 years, India has had nine “droughts” which have
not been followed by a subsequent year of significantly deficient
rainfall, the last of which was in 2012. The key point is that on
each of the last eight occasions, real agricultural output surged,
with an average rise of 11.3% and a range of 7.2-15.6%.
● This suggests that forecasters are underestimating the likely
bounce in Indian agricultural production in 2013-14––it is normally
most evident in the December quarter of the year.
● While agriculture is no longer the force it was in the economy, the
fact that 50% of people still work on the land suggests secondround effects on incomes and consumption are likely. An increase
in food supply would also help depress inflation.

Apr’13 ‐ Complex fertiliser sales decline by 50%; urea up by 6% YoY :: Prabhudas Lilladher

Preliminary data from the Ministry of Fertilisers indicates that sales volumes of
overall complex fertilisers (incl. manufactured & traded) declined by 50% YoY for
the industry during Apr’13. On the contrary, urea sales increased by 6% YoY during
the same period. Imported complex fertilisers witnessed decline of 56% YoY during
Apr’13 as companies refrained from importing due to delay in subsidy fixation as
well as huge inventory in system. Similarly, manufactured complex fertiliser
volumes declined by 47% YoY during Apr’13. While we expect urea demand to
remain steady, complex fertiliser sales continues to remain under pressure due to
wide differential in urea v/s complex fertiliser prices and huge inventory in system.
Though few companies have already announced reduction in farm gate prices of
complex fertilisers, the bigger challenge is the existing inventory in system which
will be sold at reduced prices. Our channel checks/interactions with industry
suggest that major portion of the loss will have to be borne by the companies.
However, companies have already passed significant part of the reduction in the
form of dealers discounts, promotional offers etc. We maintain ‘BUY’ on Chambal
Fertilisers and ‘Accumulate’ on Coromandel, GSFC, Tata Chemicals, and Deepak
Fertilisers.
! Complex fertiliser sales continue to face demand headwinds: Preliminary
volumes data for Apr’13 indicates that sales volumes of overall complex
fertilisers (incl. manufactured & traded) declined by 50% YoY for the industry.
On the contrary, urea sales increased by 6% YoY during the same period.
Complex fertiliser sales continue to face demand headwinds due to windfall
increase in their prices over the last two years. Our channel checks suggest that
farmer is reluctant to purchase complex fertiliser at such high prices despite his
crop economics remaining favourable.
! Reduction of farm gate prices on existing inventory has emerged as a new
problem for industry: Complex fertiliser industry, which was already grappling
with the slide in demand and consequent build-up of inventory, is now facing
another challenge. Though few companies have already announced reduction in
farm gate prices of complex fertilisers, the bigger challenge is the existing
inventory in the system which will be sold at reduced prices. Our channel
checks/interactions with industry suggest that major portion of the loss will
have to be borne by the companies. However, companies have already passed
significant part of the reduction in the form of dealer discounts, promotional
offers etc. during the last few quarters.

Lifting ban on futures could drive guar gum prices up :: Business Line

Cotton could bloom on Chinese demand ::Business Line

Since the start of this year, cotton prices have recovered their earlier losses on demand from the top consumer, China, and hopes of a drop in acreage in the world’s third-largest producer, United States.

MCX Cotton futures have gained almost 19 per cent taking prices to their highest level in more than a year. Preceding the recent surge, cotton prices posted back to back losses for two years as cheaper synthetic alternatives battered the fibre demand and on a global glut.

LOWER ACREAGE

Easing demand and fragile prices of cotton has led to many US farmers shifting to more remunerative crops, leading to a lower acreage. According to the USDA forecast, the acreage in cotton would drop by 19 per cent to 4.1 million hectares this season. Escalating fears of delay in planting due to heavy rains in the major growing areas in the country and recent upbeat economic releases are likely to support prices.

China, India and US are the major players in the cotton market and usually the demand-supply situation is the key factor behind the price fluctuations. China is the key market driver being the top consumer, producer and importer of the commodity. China produces 27 per cent of the total global production and consumes almost 40 per cent of the world offtake. Also, China accounts for almost 38 per cent.

China has been purchasing and stockpiling domestic cotton to boost the country’s output and importing to meet textile companies’ demand. The country bought 5.14 million tonnes of cotton from the global market in 2012.

China started stock-building programme in 2011, providing more than global prices to support domestic farmers that created a tightening global supply outside China and this action supported prices and pushed it higher during the first quarter of this year.

According to the China Cotton Association, the country will pursue the policy of purchasing and stockpiling domestic cotton to urge farmers to produce more cotton. To meet domestic demand, the Chinese government issued import quotas.

Another hot name among the international participants is India as it is the second largest producer of cotton and exports a significant part. According to the USDA report, India’s cotton output in the new marketing year beginning October is seen at 34.5 million bales.

Cotton sowing begins in April and continues till September. India accounts for about a third of the global cotton area.

According to the Cotton Advisory Board, the country had a surplus of 8 million bales after exporting a record 12.95 million bales last year.

SURGE IN DOMESTIC PRODUCTION

In the past 10 years, Indian cotton production has surged 153 per cent due to high yield after the introduction of genetically modified seed called Bt cotton in 2002-03 which made it a next exporter.

Looking forward, the outlook of cotton is not too gloomy. Despite a forecast of record supplies by the end of this crop year, prices could possibly trade in a range of Rs 17,200-19,500/bale levels on the MCX.

Major rallies are anticipated only on a close above Rs 20,000/bale levels.

(The author is Whole Time Director, Geojit Comtrade Ltd. The views are personal.)

Wheat prices face downtrend pressure :: Business Line

Cotton testing key support ::Business Line

In this week's dissector we take a closer look at the cotton No 2 futures traded on the Intercontinental Exchange (ICE). It is the benchmark for the global cotton trading community. It fell 1.5 per cent for the week to close at 82.2 cents per pound on Friday. Cotton spot prices have plunged 12.5 per cent from its one-year high of 93.9 cents a pound marked on March 15 this year. The speculation-driven rally pushed the spot prices to a first quarter climb of almost 18 per cent.

Since peaking out from its March 2011 peak of 227 cents per pound, cotton has been trending downwards. Its long-term trend has been down since then, forming lower peaks and troughs. During this downtrend, cotton futures conclusively breached its key long-term support at 145 cents by gapping downwards and another at 115 cents in July 2011. However, the commodity found support at its subsequent key support zone between 66 cents and 70 cents in June 2012 and started trending higher.

The up-move since then failed to push beyond the significant resistance at 95 cents in March 2013. Cotton is hovering at around crucial trend-deciding level. It is trading just above key support level at 80 cents. An upward reversal from this support can take the commodity higher to 86 or to 90 cents. Further, an emphatic breakthrough of 95 cents can accelerate cotton northwards to 105 cents.

Next long-term resistances for the commodity are pegged at 115 cents and 145 cents. A strong rally above 145 cents is required to alter the long-term downtrend and take the commodity to 170 cents in the long-term.

MEDIUM-TERM VIEW

Conversely, a decisive downward breakthrough of the long-term support band between 66 and 70 cents will reinforce bearish momentum. In that case, the commodity’s prices can decline to 60 cents or even to the subsequent support at 50 cents in the long-term. Important long-tem supports below 50 cents are positioned at 40 and then at 30 cents.

The uptrend that started from the key support band between 66 and 70 cents in late November 2012, encountered resistance at 94 cent in March 2013. Since then, cotton has been on a short-term downtrend. While trending down, cotton decisively breached its 21- and 50-day moving average in early April and hovering well below them. It is now trading just above key support at 80 cents.

A reversal from this support can take the cotton prices higher to 86 and then to 90 cents in the short- to medium-term. Only a strong rally above 95 cents will strengthen its bullish momentum and take it higher to 105 cents in the medium-term.

But, a sharp fall below 80 cents will pave the way for a decline to 75 cents in the near-term. Subsequent important supports are at 70 and 66 cents.

Reap returns from farmlands ::Business Line

Real estate investment conjures up images of flats, villas or small plots of land, but there is yet another way to invest – farmland. “But I am not a farmer”, you protest? Relax. One could reap returns from owning a farm - an investment described as ‘gold with a coupon’, without getting one’s hands soiled.

The cost of land in rural areas is typically low, offering an affordable entry point for investment. An acre of farm land in rural areas of Tamil Nadu can be acquired for as low as Rs 1.5 lakh per acre, compared to Rs 1.5 crore for an acre for residential land (at Rs 350 per sq ft) in a town close to the farm.

Wheat futures testing lower support level ::: Business Line

Wheat futures traded on the Chicago Mercantile Exchange (CME) is considered the benchmark for tracking wheat prices in general. It was volatile last week, declining to an intra-week low of 692.7 cents a bushel before recovering its initial loss and finishing the week on an almost flat note at 713.2 cents. Wheat futures tumbled 9 per cent in February this year.

Ever since peaking out at its July 2012 peak of 947.2 cents, the commodity has been in an intermediate-term downtrend. While trending down, wheat futures broke through a key support at 850 and 750 cents in early December 2012 and early February.

In early January, the commodity conclusively breached its long-term moving average line (200-day). Subsequently, this average line acted as key resistance. Wheat futures is trading well below its 50- and 200-day moving averages.

Last week, wheat futures found base at around 700 cents and is currently testing this support. An emphatic breakthrough of this support will drag the commodity lower to 650 cents which is the next significant support level. Important support below 650 cents is positioned at 600 cents.

The daily as well as weekly relative strength indices are featuring in the bearish zone implying bearish momentum. Similarly, both daily and weekly moving average convergence divergence indicators are hovering in the negative territory.

However, an upward reversal from the present base level can take the commodity higher to 745 cents and then to 750 cents in the short-term. Next important resistance is pegged at 790-800 cents band. But only a strong breakthrough of the key trend-deciding level at 850 cents will reverse the intermediate-term downtrend and push the commodity northwards to 900 cents. Significant resistance above 900 cents is positioned at 950 cents.

The long-term trend has been up for wheat futures since its trough formed at 425 cents in June 2010. As long as wheat futures hovers above its key long-term base zone between 570 and 600 cents, its long-term uptrend will remain in place. Conclusive up-move above 950 cents will pave the way for a rally to 1,000 cents in the long-term horizon.

Pepper continues to be in bear grip :: Business Line

  

Coffee hovers above key long-term support:: Business Line

In this week’s dissector we take a closer look at the generic Coffee ‘C’ futures traded on the Intercontinental Exchange (ICE), it is the benchmark for coffee. It closed at 142.1 cents on Friday.

Ever since registering a high at around 300 cents in May 2011, coffee has been trending downwards. It has been on a long-term downtrend forming lower peaks and troughs. Coffee took long-term support at 150 cents in June this year and reversed upwards. However, this rally failed to sustain and move beyond its key resistance at 185 cents in July and October this year and started declining.

EDEL PULSE : Post Conference Notes - Poor monsoon rains on rural parade

We hosted 23 dealers and distributors at Edel Pulse 2012, our unique one-day investor forum meant to provide on-the-ground insights into Indian businesses as well as to gauge the rural demand scenario in the wake of poor monsoon and general slowdown. The distinctiveness of this forum is its peer review of listed Indian corporates via interactions with competing businesses, consultants, service providers, suppliers, distributors and even function managers in listed companies.

We also took investors to the APMC market, warehouse and made them meet agricultural dealers to help understand the food supply chain.

Our interactions reveal that the rural slowdown is limited to consumer discretionary, but seems severe in areas having a weak monsoon. Everyone is pinning hopes of a turnaround on the ensuing festival season. Following are the key highlights from the event:

Fertilisers - High distributor inventory dents volume; sector update :Edelweiss PDF link

Fertiliser sales volume declined in Q1FY13, as expected, owing to high inventory at distributors’ end (on account of inventory push from companies during Q4FY12) and delay in monsoon. While the inventory issue will be eliminated Q2FY13 onwards, progress of monsoon and exchange rate movement will be primary parameters which will determine fertiliser sales volume. In the domestic fertiliser space, we are positive on Coromandel International (Coromandel).

Ray of hope for urea producers :: Business Line,

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 After a policy limbo for several years, there could be some light at the end of the tunnel for urea producers. Three major policy announcements are expected to be finalised in the coming weeks. They are: A modified policy for deciding subsidy on existing urea production (New Pricing Scheme-III), a regime to encourage new investments and retail price increases, that have been held off for many years.

WHY A NEW INVESTMENT POLICY?

But first, some background on the urea sector. Both pricing and distribution of urea, the key fertiliser accounting for 58 per cent of consumption, are regulated by the government.

Prices of phosphatic and complex fertilisers, the other key segment, were partially de-regulated way back in February 2010, through the nutrient-based subsidy policy unveiled in February 2010. This has endowed producers with a modicum of pricing power and better margins.

However, with a cap on selling prices and restraints on profitability, the urea segment has been in the doldrums. There have been no major capacity additions in this space for over a decade. With the demand for urea growing at 3 per cent annually and the supply having remained stagnant, India has been importing close to 30 per cent of the urea requirement. This coupled with swift up move (41 per cent) in the international urea prices has led to a sharp spike in the subsidy bill over the last 4 years.

WHAT IT MEANS

A new regime for encouraging capacity expansion in urea (new urea investment policy) is expected to be taken up soon. The framework being discussed is on the following lines.

Under the new urea investment policy, producers will receive realisation linked to international urea prices on their expanded capacity.

On Greenfield expansion, they will receive 95 per cent of international price subject to a floor of $305/tonne and ceiling of $335/tonne. For new brown field projects, realisations will be linked to 90 per cent of the international price, subject to a floor of $285/tonne and ceiling of $315/tonne. For revamp projects, the benchmark has been fixed at 85 per cent of the international price with a floor and ceiling of $250/tonne and $ 260/tonne respectively. This has been calculated on a gas cost of $6.5/mmbtu (million metric british thermal unit).

While these floor and ceiling prices are lower than the existing regime, the positive aspect of this policy is the facility to pass on higher gas costs to government. Cost of gas up to $14/mmbtu is expected to be reimbursed by the government, with the industry bargaining hard to increase this ceiling to $20-22/mmbtu.

NPS STAGE III AMENDMENT

This regime promises a certain assured return for existing players who put up new capacity. A calculation shows that, at a gas cost of $6.5/mmbtu, players will in fact make a Return on Equity (RoE) of 12 to 17 per cent at the floor and ceiling price respectively. However, if gas costs increase beyond $20/mmbtu, for every 50 cent increase in the gas price the Return on Equity (RoE) will decline by 190 basis points.

The second big change is expected in the calculation of costs. Under the current pricing scheme, the fixed costs of urea producers were benchmarked to a ‘normative cost' determined in 2006-07. This resulted in under-recovery of fixed cost by urea units.

Now, additional costs of upto Rs 350/tonne are expected to be reimbursed for all units on a retrospective basis. Urea units with fixed cost lower than Rs 2300/tonne can claim additional reimbursement to make up for the shortfall.

Chambal fertilisers, Rashtriya Chemicals and Fertilisers (RCF) and Tata Chemicals are likely to be the key beneficiaries in the listed space. Chambal's earnings are expected to see an increase of 10 per cent; RCF 15 per cent and Tata Chemicals 3 per cent.

The retrospective changes may result in a one-time boost to the earnings of Chambal by 26 per cent; Rashtriya Chemicals and Fertilisers by 31 per cent and Tata Chemicals by 7 per cent.

HIKE IN UREA RETAIL PRICE

The proposal to increase urea retail price by 10 per cent from the current levels of Rs 5313/tonne is said to be under consideration too. Urea price was last revised in April 2010, after having remained unchanged for almost a decade (2000-2010).

Chambal Fertilisers, Tata Chemicals, Zuari Industries, RCF and IFFCO have expressed interest in setting up brownfield urea plants, subject to favourable policy changes.

Assuming that the brownfield expansion plan materialises, urea capacity of Tata Chemicals will almost double from the current levels while Chambal Fertilisers' capacity will go up by 55 per cent and Rashtriya Chemicals and Fertilisers' by 47 per cent.

While the policy, prima-facie, seems encouraging, the bigger challenge will be to ensure availability of natural gas, the key raw material.

In the current scenario of waning supplies from RIL's KG D6 the policy will have to address the issue of feedstock availability to ensure meaningful investment by the players.

Fertiliser subsidy creates dead weight loss :: Business Line,

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In recent times, there has been growing concern on the looming fiscal deficit situation in India. Reducing subsidies is definitely one of the measures to control the situation.

At the same time, regulating or subsidising prices of agricultural inputs such as urea has political and socio-economic ramifications. But what is the flip side of the current subsidy regime for urea?

HOW SUBSIDIES WORK?

Basically, the government fixes the price at which producers sell urea to farmers. Since this price is lower than the market price, the government compensates this difference in amount to the producers through its budget expenditure.

Such price supports, in this case to the farmers, are called subsidies. Typically, the government sources these funds from the tax payers. Put simply, the subsidy comes at the expense of the tax-payers in favour of farmers — no different from any other public distribution system.

Economic theory suggests that subsidy of any kind entails dead weight loss — the aggregate loss to the economy owing to government's intervention in market forces of demand and supply.

IS THERE A PARADOX

At a subsidised price, the quantity demanded of urea is greater than that supplied. At this artificially increased demand, the price that sellers face is higher than the market price.

Well, if buyers pay less and sellers receive more, where is the question of dead weight loss? Here is the catch!

SELLER'S AND BUYER'S LOSS

Conventional wisdom suggests that when sellers lower their prices, they would be able to sell more and, thereby, increase their revenue. Sellers are unable to take advantage of this approach when the government transfers a fixed subsidy amount.

Typically, it turns out that what sellers potentially lose because of the subsidy is greater than the transfer payment paid by the government.

From the buyer's side, when the price of a good is high, the (marginal) value of it is high. To explain, every unit of diamond is that much more precious compared to what it is for say, tooth paste. Reason? Higher prices of diamond!

Indian government, for more than a decade, has subsidised and retained the price of urea.

Since this price is fixed (and low) for the farmers, the incentive to efficiently use urea is that much lower. This is not to blame Indian farmers but point to basic consumer theory which states that, in the absence of incentives, resources are less efficiently used.

In essence, subsidy for urea prevents a more efficient use of it, and thwarts the opportunity for sellers to sell more, resulting in dead weight loss.

A COSTLY SUBSTITUTION

Farmers typically substitute the use of alternative fertilisers with urea, since the prices of substitutes are not subsidised. It has been well documented that such excess use of urea affects soil quality, lowering agricultural productivity and output.

WHAT IS THE FIX?

Providing “non-price” support and ensuring that farmers increase their productivity would be the appropriate and positive step in fixing this issue. The Government could provide technical support to marginal land owners to increase productivity.

Improving infra-structural facilities such as providing better and efficient power and water supply is another focus area.

The Government could also consider making social investments in acidic soil — to correct the degradation caused by excessive use of urea.

The Government is already exploring a direct subsidy targeted at farmers. A recent World Bank report shows that targeted compensation (identifying the most deserving farmers for subsidies) is a much better alternative to general subsidies with respect to effectiveness and efficiency of resource utilisation.

As the Chinese proverb goes, teach a child to fish rather than give him the fish.

Agriculture Medium-term hiccups :: Kotak Securities PDF link

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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily17042012.pdf


Agriculture
Medium-term hiccups.  The profitability of Indian farms has stagnated after an initial
boost due to a big increase in MSPs in 2008. Input cost inflation, led by labor, has offset
much of the gain from higher MSPs. Despite potential for long-term growth, we see
moderating medium-term growth for agri-inputs as farm incomes leave little for
investment. We see opportunity in agri-chemicals, where usage is low and in the
formulations segment, where RoCEs are high (>20%). We initiate coverage on Rallis
with a BUY rating (TP Rs160; 16.5X Sept 13 EPS). We have a SELL rating on
Coromandel (TP Rs260; 12.5X Sept 13 EPS) as valuations are expensive.

Fertiliser - Volumes surge on anticipation of robust kharif demand; : Edelweiss PDF Link

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Non-urea fertiliser sales volume surged in Q4FY12 on account of restocking by  distributors ahead of the kharif season, after weak offtake during Q3FY12 fueled by poor rainfall during rabi season. Owing to the robust sales volume growth, most domestic fertiliser companies are expected to post strong revenue and profitability growth for Q4FY12 YoY. While Q1FY13 is likely to register subdued sales volume vis-à-vis Q4FY12, the outlook for FY13 is positive on account of improved availability of phosphoric acid and lower raw material prices. In the domestic fertiliser space, we remain positive on Coromandel International (Coromandel).

Strong revival in non-urea volume in February-March

While the poor post-monsoon rainfall resulted in non-urea sales volume plunging ~18% YoY during December 2011-January 2012, demand surged in February on better rainfall and restocking of distribution network for the upcoming kharif season resulted in 107% YoY sales surge during February-March. On the other hand, urea sales volume declined 1.4% YoY. The strong non-urea fertiliser sales during the quarter pacify concerns of likely inventory losses in Q1FY13 (owing to lower NBS subsidy in FY13 vis-à-vis FY12) for fertiliser companies to a great extent. 

Outlook: Positive; upcoming monsoon season is key

Owing to the steep growth in fertiliser sales volume, we expect complex fertiliser companies like Coromandel, Zuari Industries (Zuari) and GSFC to post strong growth in revenue and profitability for Q4FY12 YoY. For Coromandel and Zuari, on account of the Q4FY12 sales volume being higher than our expectation, there is a likelihood of Q4FY12 numbers beating our estimates (Table 6) by 15-20%. While we expect subdued profitability from these companies during Q1FY13, on back of lower inventories being carried into FY13 and some losses on these inventories owing to lower subsidy from government in FY13 vis-à-vis FY12, the outlook for FY13 is positive. This is on account of the improved availability of raw materials like phosphoric acid and lowering of raw material costs in FY13 vis-à-vis FY12. While prospects for the fertiliser sector look bright, the key will be good monsoon in the upcoming kharif season.

In our coverage universe, we have ‘BUY’ on Coromandel and Zuari and ‘HOLD’ on Chambal. Based on DCF, we have a fair value target of INR395 for Coromandel (CMP: INR285), INR238 for Zuari (CMP: INR163) and INR84 for Chambal (CMP: INR82).

Fertiliser - Volumes surge on anticipation of robust kharif demand; sector update

Regards,

Fertiliser - Budget brightens prospects; :: Edelweiss PDF link

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The Budget 2012-13 provides for 150% investment linked deduction of capex for fertilisers from the current 100% deduction. In our view, the fertiliser companies incurring significant capex would eventually become MAT paying companies owing to these deduction benefits. Apart from this, govt announced various sops like custom duty exemption for fertiliser equipments, lowering of withholding tax on ECBs from 20% to 5% and moving towards direct subsidy payouts. While the budget is positive for the sector as a whole, Coromandel International (Coromandel) would be a key beneficiary in the near term.

:: ShareKhan PDF link

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Fertilisers      Non urea fertilisers show improvement in consumption  Key points Boost in consumption of non urea fertilisers: In February 2012, the aggregate sales of domestically produced fertilisers (by 15 leading manufacturers) declined by 4% as compared to that in the same period of the previous year. On the other hand, imports spiked up significantly during the month mainly due to the effect of a low base of last year. Import of diammonium phosphate (DAP), complex fertilisers and urea increased by 206%, 1562% and 30% respectively. Overall the consumption of fertilisers in the month of February 2012 has seen a 16% increase on a year-on-year (Y-o-Y) basis.

Budget 2012-13 (Fertiliser): Awaiting urea price hike, cash transfers ::Business Line

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Budget: Sectors in the spotlight

Fertiliser companies, even if they are completely off the radar of investors for the rest of the year, usually perk up around the annual Budget exercise. It may be no different this year due to the following reasons.

One, subsidy allocations for fertilisers announced in the Budget are usually a good indicator of realisations and profitability for producers in the year ahead. With about 50 per cent of the realised price for phosphatic fertiliser producers and 55 per cent for urea coming in through the government's subsidy reimbursement, it is subsidies that decide the volumes, profits and even product mix for fertiliser makers.

SUBSIDY EXPENSES

The government's expenses towards fertiliser subsidy have overshot the budget by about 27 per cent in 2011-12. With a new Food Security Bill also on the anvil, fertiliser subsidy allocations are unlikely to be generous this year.

In this backdrop, any signs that the government is now willing to push through direct cash transfers of subsidy to farmers, will spell great news for fertiliser companies.

Two, any initiative by the government to correct the imbalanced usage pattern, where farmers use too much urea and too little of phosphatic fertilisers, is also keenly awaited.

For 2012-13, the government has already trimmed the per tonne subsidy on phosphatic fertilisers by about a third. This leaves little room for reduction in DAP and complex fertiliser prices, which are at 2-3 times the selling prices of urea.

RESTORING BALANCE

The only option to restore some balance to the equation would be a steep hike in urea prices.

This move, if it comes about in the Budget, would save the government outlays towards subsidy. It will not alter realisations for urea producers such as Tata Chemicals, Chambal Fertilisers or Nagarjuna Fertilisers but may solve some of their working capital and cash flow problems.

The third significant policy move that is expected in the Budget is clearance to the new urea investment policy. Recently approved by the empowered group of Ministers, the new investment policy envisages reimbursing import parity prices to domestic fertiliser makers who set up new or expansion projects for urea. A similar policy in 2008 saw not much response.

If such a policy is announced now, firm commitments on gas allocations to urea and pass-through mechanisms for feedstock costs, will be the key details that investors must watch for.