Should you invest in fertilizer stocks?

The International fertiliser industry is highly concentrated market. Most of the production for nitrogen, phosphate and potash is controlled by just few countries. Any major action by these nations has a huge impact on demand and supply which in turn impacts the prices. Due to the nature of industry, fertilser prices in most developing countries are set by the government as fertiliser plays an important role in the food security and agriculture sector.

In the first 6 months of the current fiscal year, the amount of fertilizer subsidy in India has exceeded 1.12 lakh crore rupees. The government has allocated a budget of 1.75 lakh crore rupees for the entire year, of which 64.4% has already been spent in the first 6 months. In May, the Cabinet approved a subsidy of 1.08 lakh crore rupees for the Kharif or monsoon season, while the estimated subsidy for the entire year for the central government is expected to be more than 2.25 lakh crore rupees. Last year, the total fertilizer subsidy was 2.56 lakh crore rupees.

The government aimed to ensure stability in the prices of DAP and urea during the season so that farmers would not be adversely affected, given the significantly higher prices in the international market.

The subsidy rates in May were determined based on the average cost of imported fertilizer in the country over the past 6 months. The international market has witnessed a significant surge in prices due to the Russia-Ukraine war that started in February 2022 and attacks by Hamas on Israel in October. While the increase in prices may not have directly impacted farmers, its effects have been observed in the financial results of fertilizer companies in the second quarter.

Companies like GNFC, FACT, Deepak Fertilizer, RCF, and Madras Fertilizer have seen a year-on-year decline in profits up to 86%. On the other hand, NFL has slid into losses from profit.
The companies that experienced growth in profits either did so due to cost reductions or because of a smaller base in the previous year. Zuari Agro and Mangalore Chemicals were incurring losses in the same quarter last year, while Chambal Fertilizer managed to increase profits despite a decrease in sales.

Market expert Ravi Singh suggests that the results for the second quarter are generally slow for fertilizer companies since most farmers use fertilizers after crops are either partially or fully grown. However, due to the subsidies not meeting expectations and geopolitical concerns, there has been a sudden surge in prices, causing significant losses for companies associated with fertilizer production. Additionally, the increasing awareness of organic farming and the production of Nano Liquid Urea by IFFCO has also impacted demand, as organic farming avoids the use of chemical pesticides and synthetic fertilizers.

In this scenario, the question of whether to invest in this sector becomes crucial. Ravi Singh believes that one should consider purchasing shares in this sector with a perspective of at least 1-1.5 years, focusing on selected companies. Among them, NFL, GSFC, and FACT are mentioned as companies that could potentially offer returns of up to 16% annually.

Overall, the majority of companies in the fertilizer sector have faced poor results in the second quarter, and experts are not very bullish on the sector due to its dependence on government subsidies. Therefore, investing with a long-term perspective in carefully selected shares is advised.