Fertilizers: Early policy unveiling: Clear path, sigh of relief

4 Mar 2024 , 11:34 AM

In a much-needed relief for Fertiliser companies, the Government of India (GoI) has increased the NBS rate for the upcoming Kharif season (Apr-Sep’24). The industry had concerns about potential delays in policy announcements, due to the impending elections. The early announcement provides clarity and flexibility for companies to plan production and sales strategies for FY25. However, the industry’s profitability will remain under pressure in the near term as NBS rates remain unchanged for Q4’24. Despite this, the increase in NBS rates for H1FY25 should result in a one-time inventory gain. Additionally, GoI seems to have removed the ad-hoc subsidy on DAP, raising the subsidy on “P” by 38% instead. Although there was no increase in subsidies for “N,” “K,” and “S,” it is still considered positive as input costs have undergone healthy corrections in recent months. Furthermore, the government has approved a subsidy allocation of Rs244bn for P&K fertilisers for the upcoming Kharif season. Although headwinds may persist for Q4, the policy is seen as positive; and profitability is expected to improve in FY25, provided the current input costs prevail. 

New rates: 

Subsidy per kg of phosphate has been ramped up by 38% while nitrogen, potash and sulphur sees no change for the upcoming Kharif season (Fig. 1). These revised rates translate to ~11-38% increase in product-wise subsidies (Fig.3). The subsidy hike in complex fertilisers ranges between Rs1,500-2,500/MT; while for DAP is around Rs3,600/MT. Complex fertilisers with higher composition of “P” are expected to fare better vs those with a higher composition of “K”. Despite the unchanged subsidy on MOP, analysts of IIFL Capital Services understand that the new contracts are likely to be at a lower level, which will improve profitability. Rates are w.e.f. from Apr’24 to Sep’24. Sales of SSP are expected to revive now, given the substantial 36% increase in subsidy to Rs4,800/MT. 

Falling input costs bode well: 

Prices of key inputs viz. ammonia and sulphur have declined 36-38% over Q3’24; while those of phosphoric acid and potassium are down 2-13%. Despite this, the status quo on “N”, “K” and “S”, coupled with an increase in “P” per kg subsidy, is viewed as positive. Additionally, the policy allowing reasonable pricing evaluation at the P&K segment level will compel companies to maintain MRPs for profitability; especially as trading in DAP remains non-remunerative. Further, with rock phosphate prices sharply correcting to $153/MT (down 56% over Q3’24), integrated players like Coromandel International are expected to perform well, enhancing their profitability further.