Capacity rise, selloff hopes drive fert scrips

Fitch report sees firms revamping / modernising existing units

Fertiliser stocks have perked up in anticipation of an increase in urea capacities owing to either a revamp or modernisation of existing units.

As a result, urea producers will be able to unlock substantial capacities at a marginal costs in relatively shorter span of time, according to a report by Fitch Ratings India, a wholly owned subsidiary of Fitch Inc, a global accredited rating agency.

According to market sources, select fertiliser stocks have seen a good amount of operator-driven activity as the market expects the disinvestment of state-owned fertiliser companies to gain momentum after the elections.

GNFC has gained nearly 6 per cent in the last one month: from Rs 54.05 on March 5, 2004 to today's close of Rs 57.25. Chambal Fertilisers is up 16.5 per cent to Rs 22.50, Deepak Fertilisers up 10 per cent at Rs 38.85 and Indo Gulf Fertilisers' stock is up 10.12 per cent to Rs 110.45.

Among others, Coromandel Fertilisers and Nagarjuna Fertliser have also gained over 7 per cent each to Rs 128.10 and Rs 8.35, respectively, in the last one month on hopes on improved performance.

Switching from non-gas based fuels to natural gas or liquefied natural gas (LNG) will also reduce the overall working capital requirements of the industry.

Over the longer term, this will lead to a lowering in the overall debt and interest costs. Fitch has pointed out that "the credit quality of some of the naphtha-based producers may be positively affected on account of the improvement in competitiveness by switching to ntural gas/LNG and efficiency gains".

Tarun Bansal, assistant vice president, Fitch Ratings, said in a press release, "Fitch expects the efficiency gains arising out of switching to natural gas/LNG to lead to improved competitiveness of naphtha-based producers which in turn will have a positive impact on their credit quality".

Fitch believes that the government's policy on gas pricing for fertiliser sector will be a strong incentive for producers to invest in the sector. On account of operational efficiency and conversion to low cost fuels, the inefficient units will shut down.

Over the long-term, units with flexibility in production for using different feedstock, a wide product range and focus on operational efficiencies will be better placed.

With the government committed to full decontrol of urea distribution, the local industry is geared to take on competition from imports.

However, Fitch expects the current regulatory framework is equipped to make the industry globally competitive. Meanwhile, the global rating agency expects the divestment of fertiliser state-owned units to gain momentum after the General Elections 2004 for the Lok Sabha.

This will reduce the share of public sector in production of fertilisers and will lead to the emergence of a few large players in the private sector with multi-product businesses and an all-India presence.

Fitch pointed out that the immediate demand outlook for the domestic market continues to be positive on the back of expectation of good performance for Rabi 2003 and another normal monsoon for 2004.