Renewed focus on regulatory intervention in the fertilizer sector: IIFL Securities

Key highlights of the said notification include:

• Each of the fertilizers – Urea, DAP, NPK, etc. - will be sold under the brands of Bharat Urea, Bharat DAP, Bharat NPK, and so on.
• The fertilizer bag also needs to contain the logo of the subsidy scheme – “Pradhanmantri Bhartiya Januvarak Pariyojna” (PMBJP).
• All printing will be done on one side of the bag and 2/3^rd of that side will have to be used for the new “Bharat” brand name and the PMBJP scheme logo. The remaining 1/3^rd can be used to display company information such as name, logo, brand, among other details, as required.
• The bags will be available to companies from 2^nd October 2022
• Companies have been advised not to procure any old-designed bags from 15^th September 2022. The fertilizer players have been allowed time till 2022 end, to exhaust old bags.

Analysts at IIFL Securities believe this move is not likely to dent overall volumes for companies, as India remains a net importer of fertilizers, and demand-supply situation remains largely tight. However, it is a setback for brand-building activities, and therefore, could result into lower brand recall in the long run, given that the bag will now have lesser space to display the company brand. Brand values and recall for Gromor (Coromandel), Uttam (Chambal) and Smartek (Deepak Fertilisers and Petrochemicals), could be at risk by this change.

Prominent fertilizer companies undertake activities like field demonstrations, testing the fertilizer across crops and raising farmer awareness of its brands. The notification is, therefore, likely to discourage such activities in the medium-to-long run.

IIFL view

The government believes it should have a lion’s share in branding space on the bag, that given that the subsidies (borne by Government) comprise of ~31-65% of the overall realizations for fertilizer companies. However, the move makes market expansion of company’s products difficult in the long run, since it curtails the differentiation and brand- building efforts. Though the move is not expected to dent volumes materially and marketing costs form a miniscule portion of these companies’ total expense, it does bring the focus back to regulatory intervention on the sector, which has been capping the valuation multiples in the sector.

While analysts at IIFL Securities do not expect this change to have a material impact on the EPS of any of these companies, they remain cautious on the sector, amidst the current market environment (volatile raw material prices) and lack of growth visibility amongst our covered stocks. They maintain Add recommendation on Coromandel and Chambal Fertilisers, and Reduce recommendation on GSFC.

Subsidies form 53-65% of complex fertilizer MRPs

Rs / MT	MRP			Current subsidy	Total realization	Subsidy as a % of total
	June 2021	June 2022	YoY
DAP	24,000	27,000	12.5%	50,013	77,013	64.9%
MOP	19,169	33,850	76.6%	15,186	49,036	31.0%
Amm Sulphate	15,319	20,714	35.2%	20,448	41,162	49.7%
NPK 20-20-0-13	21,002	28,858	37.4%	33,842	62,701	54.0%
NPK 10-26-26	25,728	30,419	18.2%	34,689	65,108	53.3%
SSP-Granular	8,067	10,669	32.3%	12,402	23,071	53.8%
SSP-Powdered	7,611	10,164	33.5%	12,402	22,566	55.0%
City Compost	4,614	4,623	0.2%	-	4,623	0.0%

Source: IIFL Research

Note: Urea MRPs have been stable at Rs5,360 for the past decade. The subsidies vary on a company-to-company basis, and are dependent on factors like gas cost, forex rates, policy under which the fertilizer manufacturer falls, etc.