Stocks of fertilizer makers fell 1-5 per cent in trade on Thursday. However, Coromandel International was the only exception, gaining two per cent. Top loser among the pack was Deepak Fertilisers, which shed six per cent, followed by RCF (5 per cent), National Fertilisers Ltd (4.2 per cent ) and GSFC (3.6 per cent). While the reasons for the lukewarm market reaction may be many including profit booking and consolidation given the strong rally in Indian equities over the last few months, the fall in fertilizer stock prices is possibly more an overreaction.

The Finance Minister announced allocation of ₹1,00,340 crore towards subsidy for indigenous urea. While this is four per cent lower than the revised allocation of ₹1,02,121 crore, we believe that there is no reason for investors to fret.

For one, urea manufacturers get compensated by the Government for every tonne of urea sold on the basis of the cost of production. Of course, there are some incentives for companies to be efficient in terms of energy consumption, given that the process is energy-intensive. That said, fuel price escalation is a pass through for urea manufacturers and companies do not bear the brunt of any escalation in raw material costs, unless they are inefficient in terms of energy consumption and other fixed costs. So, the budgetary allocation does not really matter. Government can always revise the allocation and provide for higher subsidy. Further, this being an interim Budget, one need not worry about the subsidy allocation as this does not mean lower realisation for urea producers.

Second, as mentioned above, since the fuel costs are a pass-through for urea makers and fuel prices were volatile, the government increased the subsidy allocation in the revised estimate for FY24. Should crude oil prices remain in the current $75-80 per barrel levels and international gas prices also don’t see significant uptrend, the current allocation may well be sufficient. However, the Governmentcan revise the allocation depending on global energy price trend.

No reason for concern

Similarly, for domestically manufactured phosphatic fertilizers also the budgetary allocation for FY25 is lower by 18 per cent compared with the revised estimate for FY24. Interestingly, it is higher by four per cent compared to the budgeted estimated for FY24. In phosphatics, the government fixes the subsidy and companies charge the difference between the cost of production and subsidy as selling price from farmers. This is just the reverse of urea where selling price is fixed and the balance is provided by the Government as subsidy. Here again, we don’t see any reason for concern on two counts. One, raw material prices such as rock phosphate and sulphur (a crude derivative) prices have cooled off in the past year and hence the production cost and subsidy can be lower in FY25 than FY24, should commodity prices continue to moderate or atleast remain stable. Second, companies have sufficient legroom to pass on price increases to farmers, if input costs rise further and Government decides to keep the subsidy outgo constant.

Hence, we believe that the budgetary allocation is a non-event as far the fertilizer sector is considered. Interestingly, the Government has provided impetus to bio-fertilisers and has allocated ₹6 crore for organic fertilizers. This can have a positive rub-off on companies such as Coromandel Fertilisers, that are focusing on building an organic fertilizer portfolio.

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