fertiliser and agriculture
As the Indian government is all set to present the Union Budget on 1 February, the agriculture and fertiliser sectors will be closely watched for any changes in terms of allocation and subsidies.
Fiscal 2023 began with unprecedented climate change challenges and geopolitical risks. This was followed by deficient monsoon in the eastern parts of India, a heat wave in April-May 2022 that led to decline in wheat production, and finally a cold wave. All of these have impacted the overall crop production.
On the fertilisers front, international fertiliser prices saw significant increases, along with prices of key raw materials. Strong demand, and the ongoing geopolitical issues curtailed the supplies of certain fertilisers. However, prices have now begun to decrease as international demand is weakening at these high levels. As a result, allocation to fertiliser subsidy increased to a record high of Rs 2.15 lakh crore in FY23.
Performance of stocks in FY23 so far
In the first half of FY23, both the agri and fertiliser sectors reported surge in revenues due to increased prices, while operating margin and profit eroded due to higher input cost.
For the period April-September 2022, aggregate revenue for the 36 listed agriculture firms increased 12 percent, while net profit rose just 4.8 percent. Net profit margin and operating profit margin of these firms decreased; the former dropping to 9.53 percent from 10.17 percent, and the latter falling from 16.3 percent to 15.2 percent, compared to the same period a year ago.
Indian fertiliser companies reported a surge in revenue and profit, but margins shrunk due to higher prices of key raw materials in international markets. For the period April-September 2022, 27 listed fertiliser firms reported a combined net profit margin of 6.66 percent compared to 6.24 percent in the same period last year. Additionally, the operating profit margins of these firms declined to 10.45 percent from 12.5 percent in the same period a year ago. Net sales advanced 72 percent, while net profit rose 84 percent for these firms.
"The prices of fertilisers have begun to decrease, and this trend is expected to continue in the next revision of the nutrition-based subsidy (NBS) rates. How much the prices will decrease will greatly impact the profitability of fertiliser companies. In terms of sales, a growth of 1-3 percent is expected," said ICRA in its latest report.
Additionally, the new urea production facilities that have been established will reduce the dependence on imported fertilisers and will likely improve margins of the listed firms.
Another important development to keep an eye on is the emergence of nano fertilisers, which are said to be more effective and do not require any subsidies from the government. However, the key factor in their success will be the willingness of farmers to use them, ICRA added. In India, farmers are not taking advantage of nano fertilisers due to lack of understanding and knowledge about the technology. Furthermore, the government has not implemented policies or subsidies to encourage the use of these types of fertilisers.
The agriculture and fertiliser sectors have faced a number of challenges over the past year. The COVID-19 pandemic has led to disruption in supply chains and changes in consumer demand. Additionally, weather events such as droughts and floods have affected crop yields, leading to fluctuation in commodity prices. These challenges have affected the sentiment around stocks in the agriculture and fertiliser sectors.
What to expect in Budget FY24
Despite the upcoming state and general elections in 2024, the government is expected to reduce fertiliser subsidies for the next fiscal year starting April 2023 due to moderation in global commodity prices. Analysts predict that the government may lower spending on fertiliser subsidies to around Rs 1.4 trillion (Rs 1.4 lakh crore) from nearly Rs 2.5 trillion (Rs 2.5 lakh crore) in the current year.
The Budget is likely to include changes aimed at making domestic phosphatic fertiliser manufacturers more competitive, such as reducing import duties on raw materials like phosphoric acid and ammonia. Additionally, there may be a reduction in import duty on liquefied natural gas (LNG) for the urea industry, as the use of LNG to power fertiliser plants is increasing. To reduce dependence on foreign markets, the government may also take steps to boost domestic production through increasing investments in this sector.
The government is also expected to provide incentives for the development of infrastructure for storing and transporting agricultural products, such as warehouses, cold storages, primary pack-houses, and reefer vans through public-private partnerships (PPP). Improving the pre-sale and post-sale infrastructure could potentially transform the agricultural industry.
The Budget is likely to prioritise programs that aim at increasing crop yields and diversifying income sources. This may include a larger allocation of funds for MGNREGA, as well as initiatives that support livestock farming, horticulture, and food processing.
"Budget 2023-24 can give a meaningful direction to encourage agri start-ups in irrigation, information sharing, genetic seeds and such inputs that enable farmers to make smarter decisions based on real-time data. The Budget may revitalise the National E-market for selling agricultural produce through the futures market to lock in futures prices," said Narinder Wadhwa, President, Commodity Participants Association of India (CPAI).
