Complex fertiliser makers to benefit more from lower GST

Deepak Fertilisers, GSFC were among top gainers in the fertiliser space

The government’s last-minute move to reduce the goods and services tax (GST) rate to 5 per cent from the proposed 12 per cent boosted the Street’s sentiment on Monday. The stocks of fertiliser producers such as Zuari Agro, Coromandel International, Chambal Fertilisers, National Fertilizers and Deepak Fertilisers gained between 1.4 and 11.33 per cent on Monday. And for good reason.
 

The earlier 12 per cent rate under the GST regime compared to about 5 per cent that existed in most states prior to the GST era, was a cause of concern. There was no clarity on how companies will pass on the higher taxes under the GST regime and also that it would mean stretched working capital cycles. Thus, bringing the tax rate back to 5 per cent provides respite.
 

Among companies, analysts such as Himanshu Nayyer at Sytematix Shares believe non-urea (phosphatic and complex fertiliser) manufacturers would benefit more. This is because urea is completely subsidised and higher prices would have anyways been reimbursed, while non-urea players would have to absorb a part of the tax increase as the nutrient-based-subsidy scheme is partially subsidised. Thus, Coromandel, GSFC, Deepak Fertilisers, etc. will benefit more. Deepak Fertilisers is also expected to witness volume growth led by capacity expansion and not surprisingly, it was the biggest gainer on Monday among fertiliser stocks.
 

K Ravichandran, senior vice-president and group head, Corporate Ratings, ICRA, says the new rate will result in a marginal reduction in retail prices of fertilisers in a majority of the states, while Haryana, Punjab and Andhra Pradesh, where fertiliser sales were exempt from value-added tax (VAT), will see a 4 per cent rise. He expects the urea price to reduce by Rs 3 per 50 kg bag, but sees the event to be credit neutral for the industry as the working capital requirement would remain unchanged as before.
 

In terms of reduction in working capital requirements, it is the implementation of the direct benefits transfer (DBT) that will drive gains. The pilot project in 16 districts has yielded good results though analysts’ channel checks suggest the completion of implementation may be some time away. Analysts at Sharekhan say the government is confronting certain hindrances for DBT roll-out and expect delay in implementations, while analysts at ICICI Securities see the scheme being rolled out in October. Thus, the benefits may take slightly more time to accrue. Gaurav Dua, head of research at Sharekhan, remains positive on the sector looking at the structural story which is to be driven by government’s efforts on doubling farm income by 2020, implementation of DBT, etc.