Fertiliser stocks are shining; and there's more to the rally, say experts

Fertiliser stocks have been on a run since the past few weeks and analysts believe there could be more legs to the rally in the weeks ahead, in the backdrop of positive global and domestic cues.

A K Prabhakar, head of research at IDBI Capital, for instance, sees more headroom in stocks of fertiliser companies, especially those that have backward integration as well — i.e. have captive power plants and raw material source to produce fertilisers.

Unlike crude oil, that is one of the biggest imports for India, a bulk of the gas is indigenously produced, Prabhakar said, which along with timely government subsidy, if any, can help Indian fertiliser plants keep their production cost in check. Among the lot, GNFC, Gujarat Alkali, GSFC, Coromandel International and Chambal Fertiliser are some of the stocks that he is bullish on.

“Rising gas prices has seen a number of fertiliser plants shut down in Europe, which can see Indian fertiliser companies export more. That apart, the supply from Russia and Ukraine, that are major producers of fertilisers is out of the market. China, too, is grappling with problems. All this is fueling optimism,” Prabhakar said.

Russia cutting gas supply to Europe has been the primary driver of the surge in gas prices across Europe in the first half of 2022, analysts said. The price of TTF gas for 2023 delivery closed above 237 €/MWh (70 $/mmbtu) last week, up 120 per cent since the beginning of July. This, experts said, is making operating fertiliser plants unviable.

On Wednesday, CF Industries Holdings Inc, a major fertiliser producer, said that its UK unit intends to temporarily halt ammonia production amid rising gas prices. Other major fertiliser plants across Europe, such as Group Azoty and PKN Orlen's Anwil in Poland, have also limited ammonia and nitrogen production due to the price of gas, reports suggest.

According to analysts at Rabobank International, the European Union (EU) relies on Russia for 21 per cent of its oil imports, 37 per cent of its gas imports and roughly 45 per cent of its solid fossil fuels imports. Switching to an alternate gas supply, they said, may not be possible in the short run.

“Much of Europe’s gas is supplied through pipelines in central and eastern Europe from the east to the west, which are not suitable for sending gas the other way around — at least not on a short notice. Limited availability of fertilisers due to lower imports from the warzone and less production in the EU poses a challenge for agriculture and hence

ultimately the food sector,” wrote analysts at Rabobank International in a recent report, led by Jan Lambregts, their managing director and global head of financial markets research.

The lack of proper spatial distribution of monsoon and its impact on sowing of kharif crops back home, according to G Chokkalingam, founder and chief investment officer at Equinomics Research, could be an issue for fertiliser demand, which can, in turn, impact the fortunes of the companies and their stocks prices.

“Another issue is the recent government order on implementation of One Nation One Fertiliser policy, which will take away the brand equity of companies. Add to this the pressure on the government to cut subsidies. There is a risk of subsidies being converted into bonds. Alternatively, there can also be a delay in payment of the subsidy that can create working capital problems for fertiliser companies. All these, in my view, are some of the risks to the rally,” he said.