Why Fertilizer Stocks are Rising

From vibrant flowers to towering trees, all plant life owes a significant debt to a seemingly mundane industry: fertilizers.

These chemical compounds, meticulously formulated to replenish essential nutrients in the soil, fuel the growth of crops that nourish billions.

As the global population continues to climb, so too does the demand for food, placing fertilizer companies at the heart of a complex and ever-evolving agricultural ecosystem.

Without fertilizers, farmers may need to clear more land for farming. Which could contribute to deforestation and other negative environmental impacts.

That's the role of fertilizers in our lives. Although we don't use them directly, their absence would drastically affect our daily lives.

The stocks of fertilizer-related companies witnessed a sharp uptick in Thursday's intraday trade, rallying up to 20% upper circuit.

Bullish Rally in the Fertilizer Sector?

#1 Fertilisers & Chemicals Travancore

The company is engaged in the manufacturing and selling of fertilizers, its by-products and Caprolactam. It is under the administrative control of the Department of Fertilizers, Ministry of Chemicals & Fertilizers.

During Thursday's (20 June 2024) trading session, the company's shares hit a 20% upper circuit to achieve an intraday peak of Rs 1,090.

#2 Rashtriya Chemicals & Fertilizers

Rashtriya Chemicals & Fertilizers (RCF), a government-owned enterprise under the Ministry of Chemicals and Fertilizers, specializes in chemical and fertilizer production.

Approximately 75% of its equity is owned by the government of India. Notably, RCF attained Navratna status in August 2023, becoming the first PSU in the fertilizer sector to achieve this recognition.

During Thursday's trading session, the company's shares surged 20%, reaching an intraday peak of Rs 222.3.

#3 National Fertilizer

National Fertilizers Limited is engaged in the production and marketing of Neem Coated Urea, Bio-Fertilizers (solid & liquid) and other allied Industrial products. It is also engaged in trading of imported and domestic Fertilizers, compost, seeds and other agro products.

In Thursday's trading session, the company's shares surged by 19.9% to achieve an intraday peak of Rs 151.1 per share.

#4 Madras Fertilizers

Madras Fertilizers Limited (MFL) operates as a Public Sector Undertaking under the governance of the Department of Fertilisers, Ministry of Chemicals and Fertilisers.

It holds the distinction of being the first PSU in the fertilizer sector to achieve ISO 9002 accreditation. MFL originated as a joint venture between AMOCO India and the Government of India.

In Thursday's trading session, the company's shares rallied 19.6% to Rs 129 per share.

#5 Chambal Fertilizers & Chemicals

Chambal Fertilizers & Chemicals Ltd is engaged in the production of Urea from its manufacturing plants. It also markets/ deals in other fertilizers and agri-inputs. It also has a joint venture for the manufacture of phosphoric acid in Morocco.

In Thursday's trading session, the company's shares surged by 19.3% to Rs 558 per share.

Apart from this, the following stocks too saw a rally, surging between 9 to 16%.

Company	% Increase	Closing share Price (as of 20 June 2024)
Paradeep Phosphates	16	91.5
Deepak Fertilizers & Chemicals Corporations	12.8	721.5
Zuari Agro Chemicals	11.8	226.5
Southern Petrochemicals industries Corporation	9.9	92.4
Gujarat Narmada Valley Fertilizers & Chemicals	9.9	763.1

Source: Equitymaster

What is Fuelling the Rally?

# Minimum Support Price for Kharif Crops

The Union Cabinet in its meeting held on 19 June 2024 approved the Minimum Support Price (MSP) for 14 Kharif-season crops, including paddy, ragi, bajra, jowar, maize, and cotton.

The MSP hike, projected to have a financial implication of Rs 2 trillion (tn) for the government and expected to result in an estimated gain of Rs 350 billion (bn) for farmers compared to the previous season, is aimed at significantly boosting farmers' incomes and improving their economic conditions.

The increase in MSP ranges between 1.4% and 12.5%, with paddy, the most widely cultivated crop, seeing a notable 5.35% rise in its MSP. The highest absolute increases have been recommended for oilseeds and pulses.

The MSP hike announcement has also boosted stocks in other sectors such as FMCG, consumer durables, and auto, with the Nifty FMCG, Nifty Auto, and Nifty Consumer Durables indices currently trading with gains of up to 0.50%.

GST Council to Consider Fertilizer Exemption

Further, the reports suggest that the GST Council, in its meeting scheduled for 22 June 2024 on granting relief to industries facing retroactive GST demands due to earlier tax uncertainties. They may also discuss exempting fertilizers after considering a request from the fertilizer sector.

According to media reports, the GST Council may request the Group of Ministers (GoM) on rate rationalization to consider exempting the fertilizer sector from GST.

The fitment committee appointed by the council has suggested that the Group of Ministers (GoM) on rate rationalization should decide whether fertilizers should be exempted from the current 5% GST rate, as reported by the media.

Initially, in 2017, when the Goods and Services Tax (GST) was introduced, fertilizers were categorised under the 12% GST tax slab. However, following requests from several states, the GST Council subsequently lowered the tax rate on fertilizers from 12% to 5%.

What Next?

The outlook of fertilizer stocks looks promising due to a moderation in raw material prices for urea and nutrient-based fertilizers starting in Q4 FY23. There are also expectations of sustained healthy demand due to the government's focus on increasing farmer's income.

Better urea volume growth is anticipated in FY25, supported by the expected onset of the La Niña phenomenon and a favourable monsoon season, which should result in good rainfall.

The India Meteorological Department (IMD) has forecasted an above-normal monsoon for FY25, the first such prediction in eight years, signalling a promising kharif season.

The stabilisation of urea operations across plants is expected to enhance profitability in the urea segment. While the import dependence for urea remains between 20-25% due to insufficient domestic capacity, this proportion is likely to decrease with the commencement of new urea units.

The significant price differential between urea and non-urea fertilizers ensures steady demand for urea, with expected growth at a stable rate of 1-3% in the near to medium term, though this rate may fluctuate in the coming years.

Conclusion

The Indian government's robust policy support, including initiatives like the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) and a substantial Rs 1.64 tn subsidy budget, is fuelling the growth of the fertilizer industry.

Innovations in precision farming and bio-fertilizers are enhancing efficiency and expanding market reach.

Additionally, collaborations and agreements between companies are further driving market growth and increasing the availability of specialised fertilizers.

In 2023, the Indian fertilizer market reached a value of US$ 41.2 bn and is projected to soar to US$ 70.2 bn by 2032, reflecting a healthy annual growth rate of 6.1%.

Rising awareness of sustainable farming practices is boosting the demand for organic and eco-friendly fertilizers.

Despite these positive trends, the fertilizer industry faces challenges due to fluctuations in commodity prices, weather patterns, and government policies. Therefore, it is essential to conduct thorough research before investing in fertilizer stocks.

Consider factors such as your risk tolerance, the stock's historical performance, company financials, market capitalisation, and future business prospects.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...