26 Aug 2022 , 01:22 PM
Key highlights of the said notification include:
Analysts at IIFL Capital Services 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 Capital Services 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.
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