Higher raw material cost to eat into fertiliser companies' margins

On the back of a 25 per cent increase in farm-gate prices of complex fertilisers to negate a surge in raw material prices and adverse exchange rate movements, fertiliser companies are expected to show a growth of 20 per cent in net sales in the third quarter.

On account of the latest price increases, the total rise in most non-urea fertilisers has been 80 per cent over the past year.

With normalcy returning in West Asia, imports of key raw materials like phosphoric acid are stabilising, says an analyst at Batlivala & Karani. The adverse effect of an appreciating US dollar has been mitigated ,with suppliers agreeing for a cut in prices of certain raw materials from December 2011.

The operating margins remain under pressure, down 125 basis points, owing to a depreciation in the value of the rupee. This is expected to increase the cost of imported fertilisers. While margin pressure will be significantly higher for Chambal Fertilisers, GNFC and GSFC, Tata Chemicals is expected to show an improvement.

The net profit of fertiliser manufactures is likely to increase a mere two per cent, thanks to a higher interest outgo, given the delay in subsidy payment. The losses for Chambal Fertilisers in its shipping business, low margin for GSFC in the caprolactam segment and a high base effect are expected to cancel strong net profit growth of 20 per cent for Coromandel International, Tata Chemicals and Zuari Agro.

According to Edelweiss Research, complex fertiliser volumes are expected to be stable, due to easy availability of traded fertilisers and raw materials, while those could remain subdued for urea. The manufactured volumes may be subdued, while traded volumes could be strong, given the improved availability of DAP (di-ammonium phosphate) and MOP (muriate of potash) DAP imports.

Meanwhile, an ICICI Securities report suggests the government has not made much headway on policy fronts. The reduction in P&K fertiliser subsidy to improve the fiscal deficit situation and the new urea investment policy to encourage investment in the sector, for example, have still not happened.

Analysts say the proposed NPK subsidy cut, without urea decontrol, could lead to an imbalance in fertiliser consumption, as DAP would become six times more expensive than urea after the subsidy cut. This might also lead to a soil imbalance, a situation similar to that seen in 1992, when non-urea products were completely decontrolled, while urea was subsidised.

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