Manali Bhatia
In lieu of improving the conditions of the farmers, the government has come out with various reforms such as, DBT (direct benefit transfer) subsidy with the help of POS (Point of sale) machines. As of yet, the DBT was given to fertilizer companies, which would then sell to farmers through POS.
In the recent past, the government is now planning on transfering the subsidy directly to the bank account of farmers. Though it could be quite fussy, as the usage of fertilizer varies and the fixed amount of subsidy cannot be determined, though the groundwork could be implemented by accumulating data from PM-KISAN in the future.
Government budgeted around Rs 70,079.85 crore for fertiliser subsidies for the FY19, but sources said nearly half of the money was used to settle dues from the previous year. Still the outstanding is around Rs 15,000 crore, down from Rs 30,000 crore due to the non-availability of funds, which is quite evident due to lower tax collections.
However, on an average, the DBT scheme has worked out well, as 55 million tonnes of nutrients have been sold to around 138 million farmers through around 2 lakh POS machines.
Already, higher allocation has been pegged for this sector with fertiliser subsidy pegged at Rs 74,986 crore for FY20 (interim budget). And we expect that government would work on subsidy delays for companies hovering with higher working capital borrowings and that the particular amount would be paid well on time, unlike in previous years.
Further, a Nutrient Based Subsidy scheme was implemented for P&K fertilizers, prescribing subsidy based on nutrient component present in it and also to save the farmers from the impact of an increase in international prices. This is extended for the upcoming year as well.
Moreover, the government has launched eNAM- an online trading platform, to optimize the use of fertilizers by the distribution of Soil Health Cards to farmers. And this has shown much of results, as till now more than 15 crore Soil Health Cards have been distributed.
In addition, the new investment policy initiated in 2015 is aimed at promoting the production of urea, and as a result, three new fertilizer plants are in line. Further, it is expected to reduce the import burden of urea by FY21, making India self reliant.
Chambal fertilisers | Rating: Buy | CMP: Rs 184 | Target: Rs 225 | Return 22 percent | Time Horizon: Medium term
Being the largest private producer of fertilizers, the company has delivered the highest ever PAT and EBITDA, with a surge in its EBITDA margin to 18.61 percent during the quarter.
Indeed, it has already commenced the commercial production of its urea plant, Gadepan-III, in Kota, which is already operating at healthy utilization and urea is supplied successfully thereon.
Interestingly, with its successful commissioning, the company would now reap the benefit of government schemes, and is planning to focus on overall debt reduction (currently at around Rs 8,500 crore) within the first 1-2 years of operation of the plant.
The Urea production and sale for the respective unit stood at 3.36 and 3.34 lakh/MT during the quarter. Going forward, we expect healthy cash flows with significant improvement in earning and margins.
National Fertilisers | Rating: Buy | CMP: Rs 39 | Target Rs 57 | Return: 46 percent | Time Horizon: Medium term
The company is eyeing a sales turnover of Rs 13,500 crore in FY20 on the back of strong performance of its non-urea business, which is 10 percent higher than previous year. High capacity utilization and energy savings soared operational revenue to Rs 12,245 crore during FY19 and sales in volume terms has been jumped by 14 percent.
A significant booster to this year’s fertilizer sale remained the biggest ever share of complex fertilizers like DAP and NPK, a quantum jump of 152 percent at 9.89 LMT.
Additionally, the company invested an estimated Rs 675 crore on energy saving projects at its Nangal, Bathinda and Panipat units, and is likely to be completed by November 2019. Besides, NFL is reviving a closed urea plant at Ramagundam in a JV with EIL, FCIL and the state government at an estimated cost of Rs 5,920 crore.
The plant is expected to produce 3,850 MTPD of urea and 2,200 MTPD of ammonia per day, and is likely to be completed by December 2019 and is expected to produce 13 LMT of fertilizers annually. After the commissioning of plant, NFL will become the largest indigenous Urea player in the country.
Company’s borrowing went up due to an increase in subsidy receivables, currently, and the company had a subsidy outstanding of around Rs 5,000 crores on March 31 and borrowing was needed to finance it. Interestingly, subsidy inflow has started in April 2019 and it will help to bringing down the borrowing levels as well.
Deepak Fertilisers | Rating: Buy | CMP: Rs 140 | Target: 168 | Return: 20 percent | Time Horizon: Medium Term
FY 19 has been a perfect storm for DFPCL, wherein several unprecedented circumstances have adversely impacted its performance. Its TAN Business continued to perform well, whereas the Crop Nutrition and its IPA businesses faced challenges on account of adverse market conditions and an increase in raw material prices. However, the softening in prices of major raw material are currently being witnessed, and it is indeed expected to benefit in coming quarters.
An important milestone for company was the commencement of commercial production for new Greenfield Plant at Dahej, Gujarat, which has been set up with an investment of about Rs 550 crore, has production capacities of 92 KTPA for CNA and 149 KTPA for DNA, is expected to operate at full capacity and make a positive impact from its first year of operation itself considering strong customer demand.
Additionally, more capacity expansion projects are planned for ammonia (500000 MTPA), IPA (100000 MTPA), TAN (376000 MTPA), and NPK fertilizer (200000 MTPA). In addition, company is planning to invest up to $160 million in capital expenditure, and will be backed by a $60 million investment package from IFC.
(The Author is Senior Research Analyst at Rudra Shares & Stock Brokers.)
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