Fertiliser stocks in focus; Chambal, RCF, Paradeep, UPL rally up to 7%

Fertiliser companies are set to post healthy earnings growth, driven by volume growth in the Urea biz and sizeable cost savings in producing phosphoric acid for complex fertiliser makers

Shares of fertiliser companies are in focus; they have rallied by up to 7 per cent on the BSE in Tuesday’s intra-day trade on expectations of healthy earnings growth in the quarter ended December 2024.

 

Rashtriya Chemicals & Fertilizers (Rs 179.85), Chambal Fertilisers & Chemicals (Rs 505.40), Paradeep Phosphates (Rs 128.20), UPL (Rs 547.35), National Fertilzers (Rs 118.95) and Deepak Fertilisers & Petrochemicals Corporation (Rs 1,204.70) were trading higher in the range of 4 per cent to 7 per cent in intra-day trade today. In comparison, the BSE Sensex was up 0.41 per cent at 78,286.67 at 11:43 AM.

 

 

According to analysts at Elara Capital, in Q3 (October to December), fertiliser companies are set to post healthy earnings growth, driven by volume growth in the Urea business and sizable cost savings in producing phosphoric acid for complex fertiliser manufacturers. 

 

Domestic agrochemicals companies may post volume growth in high single-digit but lower than earlier expectations. Lower-than-expected volume growth may be due to pest-free crops (thus, paring demand for sprays), clear climatic conditions in some pockets (pruning demand for fungicides), a 15-day delay in the season and high sales return from the Kharif crop.

 

The Indian government's cabinet has approved a one-time special package of Rs 3,850 crore for DAP for the entire CY25. The government has increased Diammonium phosphate (DAP) subsidy by Rs 3,500 per tonne, over and above the regular nutrient-based subsidy (NBS). Additional subsidies should help all the players – importers (Chambal), standalone manufacturers (Deepak Fertilizer) and backward integrated manufacturers (Paradeep), but the biggest beneficiary will be Paradeep, according to the brokerage firm.

 

Meanwhile, the stock price of Paradeep hit a record high of Rs 128.20, and rallied 7 per cent on the BSE on the back of heavy volumes. The average trading volumes jumped over 1.5 times, with a combined 10.2 million equity shares changing hands on the NSE and BSE. In one week, the stock has gained 16 per cent, and zoomed 63 per cent in the past three months.

 

The company’s newly launched biogenic nano DAP (with 6 per cent Nitrogen and 16 per cent P2O5) and nano Urea (containing 8 per cent Nitrogen) have gained significant traction, with sales surpassing 600,000 bottles in H1 (April to September). Additionally, sales of the newly introduced Triple Super Phosphate (TSP) reached 63,330 MT in H1, with Q2 sales totaling 36,320 MT.

 

The company has announced an expansion of its captive phosphoric acid capacity from 0.5 MMTPA (million metric tons per annum) to 0.7 MMTPA.

 

In Q2FY25, the company benefited from favorable conditions, including a good monsoon season, healthy reservoir levels, and robust crop prices, the management said. Looking ahead, the management is optimistic about the upcoming Rabi season, which they anticipate will mirror the strong demand seen during the Kharif season.

 

Meanwhile, shares of UPL were up 5 per cent at Rs 547.35 in intra-day trade. The company is a leading global player in agricultural solutions and the fourth largest seed manufacturer. Transitioning from a generic post-patent agrochemical company, UPL now offers high-margin, differentiated crop protection and bio-solutions.

 

On November 19, 2024, the board had approved monetisation plans for Advanta Enterprises Limited (AEL), which includes selling an 8.93 per cent stake to Alpha Wave Ventures for $250 million and raising $100 million through fresh equity. Further, on November 20, 2024, the company's board had approved a Rs 3,377.74 crore rights issue (part of the Rs 4,200 crore FY25 plan). 

 

These equity infusions, coupled with the expected improvement in operating profitability in H2FY25, should strengthen the debt coverage metrics and gearing by end-FY25. Going forward, timely equity raising and improvement in operating cash flows from H2FY25 is expected to help the company to deleverage further, according to CARE Ratings.

 

UPL's strategy of backward integration, which includes producing key raw materials in house, and its low operational break-even point will likely enhance its profitability as the industry rebounds, according to Moody’s Ratings.

 

Meanwhile, the company has continued to focus on streamlining its working capital through efficiencies as well as reducing its reliance on relatively expensive short-term debt for financing.  The rating agency said they therefore forecast UPL's credit metrics will improve steadily, with its debt/Ebitda (earnings before interest, tax, depreciation, and amortisation) leverage declining towards 4.5x-5.0x by March 2026, compared to 10.4x as of March 2024 and an estimated 9.0x at September 2024.  Lower debt levels and a slight reduction in interest rates will help the company's Ebitda/interest coverage recover to around 2.0x-2.5x by FY25-26 from 1.1x during FY23-24, Moody’s Ratings said in its rationale dated November 22, 2024.