Recovery in kharif sowing to boost fertiliser sales this year

Representative Image
Fertiliser companies are well placed to post higher top lines in the second quarter of the current financial year and onwards, following a rise in the overall kharif sowing area this year.

The Union Ministry of Agriculture, in its latest report released on September 7, has estimated a sharp recovery in sowing area this kharif season. With this, the deficit of about 1.21 per cent in kharif acreage till August-end has recovered fully, with a marginal surplus of 0.20 per cent to 104.17 million ha. This development raises hopes for an increase in overall sowing area in the days ahead.

The recovery has also raised the prospects of higher fertiliser consumption as the season progresses. With the Southwest monsoon expected to remain normal this year, the use of fertilisers in agriculture is set to increase in order to boost overall productivity. The September and October season, which sets tone of the entire financial year, is therefore crucial for fertiliser companies.

“So far the FY19 quarter has commenced on a positive note with an almost near normal monsoon and a healthy hike in the minimum support price (MSP) of major crops. We estimate overall fertiliser production to increase during FY19 to 42.2–42.5 million tonnes from 41.3 million tonnes the previous year. With normal monsoon rainfall, the soil moisture also remains favourble for rabi crop. Hence, we estimate overall fertiliser consumption to go up this year,” said Madan Sabnavis, Chief Economist, Care Ratings.

Fertilser companies posted a sharp increase in their top lines and bottomlines for the quarter ended June 2018, after a surge in their financial performance during the financial year 2017-18.

Meanwhile, the government has rolled out its popular scheme, the Direct Benefit Transfer (DBT), nationwide. Fertiliser companies have started aligning their sales through the DBT mechanism. The subsidy payout has started, and the government has to settle the claims within two or three weeks, which would provide major relief to fertilizer companies.

However, rising raw material costs pose a major challenge for fertiliser companies. A sharp increase in crude oil prices has led to a proportionate rise in the prices of natural gas. Analysts estimate five per cent increase in the cost of fertiliser raw material due to increase in gas prices.

“This could exert pressure on the fiscal spending of the government while disbursing the subsidies,” said Sabnavis.

The fertiliser subsidy for FY19 has been fixed at Rs 700.9 billion, of which Rs 449.89 billion is earmarked as urea subsidy and the remaining Rs 251 billion as the nutrient-based subsidy.

“Monsoon has been fairly well distributed in almost all key markets. However, lower opening channel inventory and positive market sentiments have ensured good offtake so far this financial year,” said Pratik Tholiya, an analyst with Emkay Global Financial Services, in a note on GSFC.

The price of natural gas was the lowest during Q1-FY18 ($2.48/mmBtu). This helped improve the profitability of urea manufacturers. As per the New Domestic Gas Policy, the price of domestic natural gas is revised every six months and currently (Q1-FY19) it is $3.06 mmBtu, or 23.4 per cent higher than the price in the corresponding period in the previous quarter. Natural gas has become more expensive due to a sharp increase in crude oil prices.

India imports the raw materials needed for making fertilisers. Raw material prices remained firm during the quarter, as plant closures in China and higher global demand impacted the availability. Prices of phosphoric acid, rock phosphates, and sulphur have risen 26 per cent, two per cent and 51 per cent respectively. The price of Ammonia, an input in urea, dropped 11 per cent in the Q1FY19.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel