Use Fertilizer (Stocks) To Grow Portfolio Returns
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Use Fertilizer (Stocks) To Grow Portfolio Returns
Lohit Bharambe and Nikita Singh delve into reasons why fertiliser sector is being re-rated by the investors
Indian fertiliser industry is seeing a healthy re-rating by investors, as is seen in the rising stock prices of several of the fertiliser companies. While realty stocks, banks and finance companies have outperformed markets on YTD and one-year basis, fertiliser stocks have been a pleasant surprise, moving up without much ado.
Fertiliser stocks on an average have delivered returns in excess of 65 per cent on a YTD basis, whereas the returns delivered over one- year period is in excess of 80 per cent. So what is brewing in the fertiliser space and will the fertiliser stocks gain further ground?
As of now, India is the second biggest consumer of fertilisers in the world after with China. Under the current Modi government, the focus on the rural economy with an emphasis on improving agriculture economics is a positive trigger for the fertiliser industry.
The consumption of fertilisers in India is on the rise owing to improving farm economies and increasing thrust on irrigation. As of now, India is highly dependent on imports to fulfil its fertiliser requirement. However, almost 80 per cent urea requirement of the country is met from domestic production.
India majorly imports phosphatic and potassic (P&K) fertilisers. Urea production in India has grown by 8 per cent in recent years, mainly owing to favourable policy changes by the Central government.
The urea requirement in India is also on the rise. Almost 80 per cent urea requirement of the country is met from domestic production.
The revised GST rate at 5 per cent, down from 12 per cent, can be seen as a big boost to the vast agriculture sector in the country. One can expect drop in prices to increase demand for fertilisers
Under the Modi regime over the last three years, there has been an attempt to boost the rural economy. Efforts have been taken to promote energy efficiency in urea production and maximising domestic urea output. One of the focus areas also has been timely imports of urea and other fertilisers meeting the demand at the ground level.
The fertilizers that are covered under the subsidy scheme are urea, di-ammonium phosphate (DAP), muriate of potash (MOP), mono ammonium phosphate (MAP), triple super phosphate (TSP), ammonium sulphate (AS), single super phosphate (SSP) and other complex fertilizers
Dhruv Desai
Director & COO, Tradebulls
" Investors should deploy a buy on declines strategy as most of the leaders within the space continue to display strength ''
Are fertiliser stocks overvalued at current juncture?
The shares of fertilizer companies like Chambal Fertilizer, Deepak Fertilizer and Coromandel International, among others, have risen over 45%, 22% and 35%, respectively, in the last three months. The turnaround of many of these fertilizer companies were on account of reduction in gas prices, better demand and lower subsidy requirement. The GST Council cutting the rate of tax on fertilizer from 12% to 5% boosted the prices of fertilizer stocks to the verge on being overvalued. In the current scenario, we can definitely say that fertilizer stocks are overvalued.
What is your investment outlook on fertiliser stocks?
We remain optimistic on the entire space and would continue to advocate our conviction for an expected outperformance in them. Investors should deploy a 'buy on declines' strategy as most of the leaders within the space continue to display strength. We still believe that the upmove could remain intact and the sector could fetch around 15%-22% returns even from the current juncture. Declines, if any, should be utilized to add long as our top picks within the sector remain Deepak Fertilizer, UPL and Coromandel International.
Bharat Jhunjhunwala (CMT) Founder, Wavemetric
Major indices are still strong the move is expected to continue up in coming days. The fertilizer stocks are looking strong and poised to move up and follow the major markets. The overall sector (fertilizer) is bullish and expected to outperform the main indices in the medium frame
Mustafa Nadeem
CEO, Epic Research
'' There is still long unfolding that is going to happen in fertiliser stocks ''
Are fertiliser stocks overvalued?
Yes, since there has been reduction in GST rates on fertilizer stocks from 12% to 5%, huge unwinding is seen in price in terms of valuations. Most of them are trading near or above their all-time highs, clearly showing the huge buying interest. Mostly stocks have given a bullish rally since then, though trading near previous all-time highs can trigger some kind of major correction. As far as valuations are concerned, we are already seeing a lot of liquidity coming into the market, leaving no sector untouched in terms of undervaluation and that is what a bullish market has. So, at this point, any justified correction of 5-10% in the short term can be seen, while there is still a long unfolding that is going to happen.
What is your outlook on fertiliser stocks?
We believe the trend to continue in the near term, with prices trading near all-time highs. Few of the stocks have already breached all-time highs and have given breakouts like Chambal Fertilizer and Gujarat State Fertilizers, along with Coromandal International as well. Since the breakout has happened after a prolonged period of consolidation, we believe any correction over the short term in the stocks will be an opportunity to add to portfolio for a longer period of time. One can look at Chambal Fertilizer where the previous top of around Rs125-120 will be acting as a fresh base for positional traders with upside possibility of 20-30%, while Coromandal International is an outperformer with much higher possibility to reach Rs520 level.
Sumeet Bagadia
Associate Director, Choice Broking
In recent days, we have seen a huge rally particularly in fertilizer stocks like GSFC, GNFC, RCF & Chambal Fertilizers. Except RCF, all these three stocks GSFC, GNFC and Chambal Fertilizers have been trading in an unchartered territory with decent volume activity. RCF has given a monthly breakout with huge volumes, which also shows a valid move and may move further. Based on the recent movement, volatility and breadth measured by patterns, averages and RSI determine the path of favouring upside progress.
The thrust provided to the agriculture sector in the budget augurs well for the fertiliser industry.
Good monsoon this year, preceded by good monsoon previous year, will be instrumental for the growth of industry. In 2016, good monsoon and favourable agro-climatic conditions helped improve the outlook for the fertiliser sector.
Another important factor this season for the fertiliser industry has been the farm loan waiver. The UP government set the tone for farm loan waiver in the country and it is widely speculated that more such farm loan waivers are on the cards up to 2019. We can expect increase in demand for fertilisers owing to farm loan waivers.
The government’s decision to reduce excise duty on micronutrients from 12.5 per cent to 6 per cent is another positive for the fertiliser industry.
Demonetisation is expected to increase digital payments by farmers. With upsurge in digital payments, the transaction costs are expected to come down and market prices are likely to become uniform and stable.
Direct benefit transfer of subsidy can be expected to be a game-changer for the fertiliser industry. The direct benefit transfers will give fertiliser companies the freedom of pricing as per market demands. With the direct benefit transfer mechanism, the fertiliser subsidy regime will become obsolete and will put the huge amount of money straight into hands of farmers. This augurs well for fertiliser industry.
The recent government directive to the fertiliser companies to deploy point of sale (POS) devices at all the fertiliser retail stores augurs well for the fertiliser companies as it may reduce the pressure of working capital on fertiliser ompanies. This initiative is expected to reduce the time lag in subsidy payments.
Another major factor influencing the fertiliser industry fortunes is the subdued energy price environment. The subdued energy prices can be expected to lower the cost of production of fertilisers. Investors taking exposure to fertiliser stocks are also betting on the rural India growth story.
With 14 per cent of India’s GDP being represented by agriculture sector, almost 20 per cent of the service income depend upon the cash flow from agriculture sector in India. Fertiliser is by far the largest product consumed by the agriculture sector. With rural incomes expected to increase steadily over the years, the consumption of fertilisers can increase manifold in the years to come.
Benefit of cashless regime
A study conducted by PWC suggests that the farmers are able to enjoy cost savings due to fewer trips to the fertilizer shops and higher discounts, thus improving their purchasing ability.
GNFC
BSE Code: 500670
FV: Rs 10 CMP: Rs 297
Market Cap (F.F.): Rs 2,720.19 Crore
Gujarat Narmada Valley Fertilizers & Chemicals Limited is India's industrial chemicals and fertilizer manufacturing major. The company has widespread operations in industrial chemicals, fertilizers and information technology segments. The company is engaged in production and sales of a range of fertilizers, including urea and ammonium nitrophosphate under the ambit of its brand Narmada.
On the financial front, GNFC posted a 4.62 per cent decline in its net sales from Rs 1,377 crore in the fourth quarter of FY16 to Rs 1,313.56 crore in the fourth quarter of the fiscal year 2017. The company’s operating profit stood at Rs 124.89 crore in Q4FY17, down by 49.39 per cent on a year-on-year basis. However, the profit after tax of the company rose immensely and stood at Rs 238.42 crore, up by 227.68 per cent in the fourth quarter of the financial year 2017 on a year-on-year basis.
On an annual basis, the company’s net sales increased by 8 per cent to Rs 4,945 crore in the financial year 2017, as against net sales of Rs 4,548 crore in the previous fiscal (2016). The company’s PBDT stood at Rs 715 crore in FY17, up by 72 per cent from Rs 415.64 crore in the previous fiscal. The company’s net profit increased by over 130 per cent, from net profit of Rs 226.36 crore in FY16 to Rs 521.30 crore in FY17. On the valuation front, the share price of GNFC is trading at a PE multiple of 8.94x, as against its peers such as Zuari Agro Chem's (81.54x), Gujarat State Fertilizers & Chemicals Limited (12.76x). The company’s PE multiple is lower than the industry PE multiple of 19.17x, suggesting good scope of growth.
The normal monsoons and the implementation of direct benefit transfer scheme by the government will boost up farm investments made by farmers, thereby increasing the demand for fertilizers. GNFC is likely to benefit further from the proposed imposition of anti-dumping duty on TDI by the government, as the company is the sole manufacturer of TDI in India and has over 50 per cent of the total market share for TDI. The government is most likely to impose import restrictions on fertilizers. All these factors make GNFC a good stock to invest in.
RCF
BSE Code: 524230
FV: Rs 10 CMP: Rs 97
Market Cap (F.F.): Rs 972.07 Crore
Rashtriya Chemicals and Fertilizers Limited (RCF), a Government of India undertaking, is a premier fertiliser and chemical manufacturing company. RCF's 80 per cent equity is held by the government and the company been accorded the 'Mini Ratna' status. The company produces urea, complex fertilizers, bio-fertilizers, micro-nutrients, water soluble fertilizers, soil conditioners, along with a wide range of industrial chemicals. On the financial front, RCF posted a 10.90 per cent rise in its net sales from Rs 1,992.18 crore in Q4FY16 to Rs 2,209.36 crore in Q4FY17. The company’s profit before interest, depreciation and tax (PBIDT) stood at Rs 109.31 crore in Q4FY17, up by 7.34 per cent on a year-on-year basis. The profit after tax of the company stood at Rs 55.09 crore, an increase of 36.36 per cent in the fourth quarter of FY17 on a yearly basis.
On an annual basis, the company’s net sales decreased 12.40 per cent to Rs 7,200 crore in FY17 from Rs 8,218.99 crore in the previous fiscal. The company’s PBIDT stood at Rs 415.83 crore in FY17, down by 12.11 per cent fromRs 473.10 crore in the previous fiscal, although the loss percentage was reduced in FY17 from 40.83 per cent in FY16. The company’s profit after tax increased 3.83 per cent from Rs 172.64 crore in FY16 to Rs 179.26 crore in FY17. On the valuation front, the share price of Rashtriya Chemicals & Fertilisers is trading at a PE multiple of 25.16x, as against its peers such as National Fertilizers (17.27x), Gujarat State Fertilizers & Chemicals Limited (12.76x). The company’s PE multiple is higher as compared to industry PE multiple of 18.90x.
The company has been massively expanding its operations in the recent years to cater to the huge demand of the agrichemicals and fertilizer markets. The company has added a coal-based fertilizer plant at Talcher, sewage treatment plant and solar power plant at Trombay and a joint venture with FACT at Kochi. With the government’s disinvestment in the company, the company is likely to explore more competitive markets. Considering a good monsoon season this year and on the back of foreseeable improved demand, RCF remains an attractive stock to own in the portfolio.