Monsoon turnaround to boost fertiliser stocks

With the improved rainfall across the country, it is only logical that fertiliser stocks will do well from here since the sector is looking at bumper sales in the September quarter as well

From worries of deficit rainfall just a few weeks ago, the monsoon has done a complete turnaround to register 16% above normal rainfall as on 4 August 2010. Things were even better in the last week of July with rainfall 38% above normal.

Since a lot of sowing happens in July, the higher rainfall bodes well for cultivation and logically for the use of fertilisers. According to government data, over 64.7 million hectares had been cultivated as on 22nd July, about 5.4 million hectares more than last year till that date.

The best part is that even parts of Rajasthan, Gujarat, and Maharashtra that normally do not receive good rainfall have got sufficient rain this year. This has a direct impact on rain-dependent but expensive crops such as cotton, pulses, and coarse cereals (hopefully dal prices will come down now). The surge in rains has also given a good push to kharif (the monsoon crop) planting with estimates that 8% more area has been brought under cultivation this year.

In the June quarter, most fertiliser companies did very well largely because of better margins in their nutrient-based products. In April, the government implemented the nutrient-based subsidy that freed the prices of phosphate and potassium fertilisers (obviously, farmers get a subsidised price; the government pays the difference to companies). The Centre still controls urea prices (although it did raise urea prices by 10%, the first change since 2002; it remains a very politically sensitive issue).

With the improved rainfall, it is only logical that fertiliser stocks will do well from here since the sector will be looking at bumper sales in the September quarter as well.

Tata Chemicals jumped quite a lot after declaring excellent results on 30th July. Its fertiliser EBIT trebled to Rs1.7 billion (almost twice as much as expected). The stock price was hovering at Rs330 almost all of July but started moving up in August to touch Rs362 while writing this article.

Gujarat State Fertilizers & Chemicals' fertiliser division also showed strong growth, which is likely to be echoed in the September quarter. The stock moved up from Rs240 in June to around Rs300 currently.

Coromandel International also reported a strong quarter, with 165% y-o-y growth in net profit and a huge jump in profitability of its nutrient-based fertilisers. The stock has almost doubled from April because of its high leverage to nutrient-based fertilisers. While writing this article, it traded at Rs532.

The government says that it will come out with a new investment policy for the sector, which will encourage investments (particularly for urea). Hopefully, only good things lie ahead for this sector.

A brief background of fertiliser use in India: Utilisation is heavily skewed towards urea. Nitrogen-based urea accounts for 50% plus of India's fertiliser consumption because of heavy government subsidies on the nutrient. Phosphate fertilisers account for 1/5th of Indian demand, while potash accounts for 8%.

India imports 6-7 million tonnes of fertilisers annually, so the scope for domestic production to bridge this gap is immense, provided government policy supports manufacturing.

In the 'Green Revolution' movement in the 1970s, India improved its food production by leaps and bounds. From this time also started the practice of the government heavily subsidising use of fertilisers, particularly urea. Over the past three decades, the overuse of urea has degraded soil so much that yields on some crops are falling sharply.

India produces less rice per hectare than even Pakistan, Sri Lanka and Bangladesh.

The problem has worsened since 2000 (since consumption in general has skyrocketed in India). According to the ministry of agriculture, India spends twice as much on food imports today as it did in 2002.

The same fertiliser industry that had lobbied to retain subsidies in 1991, now does not want them. This is because initially the understanding was that the subsidies will allow companies to make a margin of 12%. However, over the years, with the government trying to cut its spending, this margin became slimmer and slimmer and by some estimates, it is now at barely 2%-3%.


India seeks Germany's nod to share black money info with ED

New Delhi: India has asked Germany to allow it to share information on black money, allegedly stashed by 18 Indians in LGT Bank, with the Enforcement Directorate (ED) that investigates violations of foreign exchange norms, reports PTI.

Germany had helped India last year in unearthing Rs44 crore in untaxed money, stashed by these 18 Indians, in LGT Bank in the European tax haven of Liechtenstein.

Penalty proceedings were initiated against these people and a total tax demand of Rs24 crore has been raised against them. However, India needs Germany's clearance to further share the information provided by that country, with the ED.

"Indian competent authority under the DTAA has requested the German competent authority to allow it to share the information with Indian Directorate of Enforcement ... The matter is under consideration of German competent authority," finance minister Pranab Mukherjee said in the Rajya Sabha today.

He said the article concerning 'exchange of information' of Double Taxation Avoidance Agreement (DTAA) with Germany does not provide for sharing of information with ED.

India is already in talks with many countries to revise the DTAAs to prevent tax evasion and strengthen 'exchange of information' norms.

"India has taken steps to re-negotiate all existing DTAAs to revise article concerning Exchange of Information to specifically provide for exchange of banking information," minister of state for finance S S Palanimanickam said in a written reply to the Rajya Sabha.

Responding to a query on flow of illegitimate funds in the country, he said the government has proposed to review the India-Mauritius DTAA to prevent treaty shopping and strengthen information exchange.

Treaty shopping refers to a deal where a third country resident takes advantage of the provisions of the DTAA between two countries to reduce his tax liability.

Mr Palanimanickam said a joint working group comprising members from the governments of India and Mauritius has had six rounds of meetings since it was constituted in 2006 to put in place adequate safeguards to prevent misuse of the DTAA.

"Consistent efforts are being made by the Indian government to find mutually acceptable solutions for addressing India's concerns," he said.


Mines ministry favours continuing with iron ore exports

New Delhi: Amid inter-ministerial differences on export of iron ore, the ministry of mines today feared that banning overseas sale of the ore would lead to job loss, but said it would abide by the decision of a Group of Ministers (GoM), reports PTI.

"In 2009-10, only 90 million tonnes of iron ore were consumed out of 218 million tonnes produced. Whereas, 128 million tonnes of iron ore were exported. Thus, there is a surplus production of iron ore," B K Handique, minister of mines, said in the Lok Sabha during Question Hour.

Most of the exported iron ore is in the form of iron ore fines for which Indian does not have any technology to process it, the minister said.

"So, in that case what we can do. If we do not export the produced fines, which are generated as part of the mining process, it would result in pollution and impede the mining process.

"Therefore, the immediate need is to develop a technology that can process the iron ore fines. Sudden stoppage of production of iron ore, as a result of ban on exports, would also give a rise to loss of employment," Mr Handique said.

A Group of Ministers has been constituted to consider Draft Mines and Minerals (Development and Regulation) Bill, 2010 and is likely to submit its recommendations soon.

As far as conflicting views of different ministries are concerned, the minister said there are different views expressed by various ministries based on their perception.

"My ministry has, however, kept an open mind and whatever decision is taken, we shall abide by it. But our only concern is that there must be a technology to process iron ore fines in the country so that we could create an environment for employment," he said.

A member had pointed out that the steel and law ministries were in favour of banning the exports iron ore, while the commerce ministry was for continuing with exports and the finance ministry was neutral on the matter.


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