Fertiliser stocks are buzzing in the run up to the Union Budget, as the market speculates on quantum of subsidies for the sector and measures to reduce dependence on imports.
With raw material prices having fallen, investors are not expecting any increase in fertiliser subsidies. The widely held view is that the Finance Minister will stick to the estimate outlined in the interim budget. The interim budget had estimated the fertiliser subsidy requirement for FY25 at Rs 1.64 lakh crore, which is lower than Rs 1.89 lakh crore for FY24.
"While the budgeted amount is considered to be adequate for FY25 due to moderation in input costs and prices of finished products, the reduced subsidy bill (as compared to FY24) will enable the government to allocate funds to more productive areas," Axis Securities wrote in a note.
"Accordingly, we expect the government to increase allocations towards reducing dependence on (fertiliser) imports and building newer capabilities like nano urea," the brokerage added.
On the other hand, Nuvama Institutional Equities forecasts fertiliser stocks to react positively in case the government does surprise the Street with an increase in its subsidy bill. Higher subsidies reduce production costs and ensure price stability, boosting profit margins for fertiliser companies. Additionally, subsidies also provide a buffer against market fluctuations, aiding overall financial performance.
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Aside from this, expectations of an upward revision of subsidy for rabi crops are expected. In October last year, the government lowered the subsidy for nitrogen, phosphorus, and potassium (NPK) fertilisers for the 2023-24 rabi season amid falling international prices. However, with an increase in cost since then, Nuvama anticipates an upward revision in subsidies as well. Even though raw material prices eased, supply disruptions in the Red sea route which has led to limited supply of NPK fertilisers triggered a spike in prices in the global market.
According to the brokerage, a hike these subsidies will help drive margins for industry players.
Experts are also hoping to see more focus on boosting rural consumption, largely through an increase in spending for the government's core programs. According to Barclays, these measures are likely to support rural demand, which has been subdued for nearly a year. A bounce back in rural consumption also bodes well for fertiliser companies as farmers spend more on crop protection.
Fertiliser companies have struggled sub-par earnings in FY24, due to weak prices, muted demand and an influx of low-cost Chinese inventory in the global market. Most companies within the sector recorded a sharp decline in profitability as net profit as well as revenue struggled under weak demand and declining prices.
However, green shoots of recovery have been seen in recent quarters, with demand expected to make a comeback in the second half of the current fiscal, coinciding with the onset of the Rabi sowing season.
Expectations of recovery are also playing out well for the sector, as most stocks, including Fertilisers and Chemicals Travancore (FACT), Chambal Fertilisers and Chemicals, Deepak Fertilisers, and Coromandel International, bounced back from their lows of 2024 and gained 17-45 percent in the past six months.
Regardless, it is stocks like Fertilisers and Chemicals Travancore (FACT) and Coromandel International that are among the biggest beneficiaries of the government's focus on the sector, Axis Securities believes. Aside from these, stocks like Deepak Fertilisers, Chambal Fertilisers and Chemicals, National Fertilizers, Gujarat State Fertilizers, and Zuari Agro Chemicals are also in line to react to the government's measures for the fertiliser companies.
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