Shares of fertiliser companies have declined after the government slashed subsidies for the upcoming Rabi season.
On Wednesday, the government approved a Rs 22,303 crore nutrient-based fertiliser subsidy. However, fertiliser companies may face margin pressures as rates for complex fertilisers were slashed from Oct. 1 to March 31, 2024, analysts said.
The revised subsidy rates for nitrogen have been reduced 39%, while those for phosphorus fertilisers have been cut 49%, according to an Oct. 25 note by Nuvama Institutional Equities. Potassium fertiliser subsidies have seen a 85% cut, driven by falling input prices, it said.
Given the aggressive reduction in potassium subsidies, companies with a higher share of di-ammonium phosphate may feel the heat on fertiliser margins, Nuvama said.
However, companies with a higher share of complex or NPK fertilisers or a unique grade of fertilisers, coupled with a strong brand, can charge premiums and would be able to raise prices for farmers and protect margins, the brokerage said.
“We expect players such as Coromandel, with a strong market share of NPK fertiliser in its key market of Telengana, will be able to protect their margins (company target Ebitda/mt of more than Rs 5,000). DAP trading players such as Chambal may face margin pressure as they are dependent on DAP trading,” it said.
Depending on their existing inventory positioning, companies may experience inventory losses in the near future as a result of subsidy cuts, the note said. The brokerage expects margins to stabilise, given declining raw material prices. The total amount of subsidies paid by the government for FY24 will fall due to any additional reductions.
The steep cut in subsidy per tonne by the government for hydrogen would in turn result in contractions in the gross margins for most of the complex fertiliser grades, according to Himanshu Binani, equity research analyst at Anand Rathi Share and Stock Brokers Ltd.
The sector will focus on manufacturing more NPK than DAP, as the former would be more margin-accretive than the latter, Binani said in a note on Oct. 25.
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