With the long-awaited new urea investment policy finally coming into place, fertiliser companies have more than one reason to smile, and which is clearly reflected in their share prices. The policy is expected to encourage fresh investments into the sector, leading to capacity expansion. It would also boost the flagging urea production, reducing the country’s dependence on imports.
"The Cabinet Committee on Economic Affairs has approved a new fertilizer policy which is long term, realistic and farmer friendly," said Shruti Bhargava, analyst at Networth Stock Broking.
The new policy aims at attracting investments in the urea sector by resumption and expansion of existing units to meet the set target of 40 mn of urea by 2012. This includes reviving eight units of Fertilizer Corporation of India and Hindustan Fertilizer Corporation.
At present, India produces 21 mn tonne of urea as against the rising demand of 27-28 mn tonne, which it has been filling through imports.
Under the new norms, the international price-parity formula for domestic urea manufacturers would be adopted for calculation of subsidy and cost of production. Existing units producing additional urea will get an import parity price of 85 per cent in the price band of $250-425 a tonne while that for expanding units it would be 90 per cent.
Analysts expect Tata Chemicals and Chambal Fertilisers to gain the most from the policy as the two have already initiated debottlenecking plans.
"Tata Chemicals’ new additional 0.2 mtpa capacity is coming onstream by October 2008 and Chambal Fertilizers’ new additional 0.14 mtpa capacity will come onstream by April 2009. Post expansion, Tata Chemicals’ capacity would be 1.06 mtpa, up from the current 0.86 mtpa and Chambal Fertilizers’ capacity would be 1.87 mtpa, up from 1.73 mtpa," said Bhargava of Networth.
Shares of fertilizer companies have been in the limelight since Friday after the new policy was announced. On Monday, RCF soared 3.78 per cent to Rs 71.40, Coromandel Fertilizers climbed 2 per cent to Rs 175, Chambal Fertilizers gained 1.47 per cent to Rs 82.75, Tata Chemicals was trading flat at Rs 348 after touching a high of Rs 361.
According to the policy, fertilizer producers will be given subsidy at Rs 8,000 crore per month from September 2008 onwards till February 2009. Till July 2008, the government has paid about Rs 28,000 crore towards fertilizer subsidy. The fertilizer ministry expects the amount to be mostly paid in cash and not more than 10 per cent will be issued as fertilizer bonds. Also, they also expect the subsidy to be borne fully by the government as it is an open-ended one.
The new policy states that the Department of Fertilizers will maintain a buffer stock of 3.5 lakh tonne of diammonium phosphate and 1 lakh tonne of mono ammonium phosphates as contingency. An outlay of Rs 429.85 crore was approved for launching a scheme for promoting the balanced use of fertilizers.
The government has also included two fertilizers-Triple Super Phosphate and Ammonium Sulphate-which will get 25 per cent subsidy on delivered cost under the concession scheme and fixed their maximum retail prices at Rs 7,450 a tonne and Rs 10,350 a tonne, respectively.
Triple Super Phosphate, being a cheaper substitute for diammonium phosphate, will provide access to alternative supply of phosphatic fertilizers, expanding the basket of phosphatic fertilizers.
"With this move, the government expects to save Rs 1,163 crore on its subsidy bill of Rs 95,000 crore, which is positive for all complex fertilizer manufacturing companies like Tata Chemicals, Coromandel Fertilizers, RCF and Zuari Industries," Bhargava added.
The incentive on import savings will be in ratio of 65:35 for the importer, which means if the importer is contracting at a price lower than the industry average, he will be eligible for 65 per cent of the difference between the higher industry average and the lower contracting price. The remaining 35 per cent would go to the government. This will encourage the industry to seek long-term import of fertilizers at lower prices.
Analysts expect the new policy to add 60-70 per cent to margins for large and efficient gas-based urea makers, even as low investments are needed to revamp or expand existing units. Realisations may also go up for cash-starved fertilizer firms.
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