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%.