The move to implement a nutrient-based subsidy system and free prices is positive for the sector.
Stocks of fertiliser producers came in the limelight after the government made favourable policy announcements for the sector on Thursday. The government approved implementation of a nutrient-based subsidy system and freed pricing for DAP and MOP products from April 1. The move is considered a good start towards required reforms in the sector.
For complex fertilisers like DAP and MOP, the maximum retail price (MRP) was fixed by the government. The decontrol in pricing will help companies in terms of margins and reward the efficient producers. In this space, analysts expect companies like Tata Chemicals, which generates about 25 per cent of its revenues from sale of complex fertilisers, to benefit.
Also, in the nutrient-based space, earlier the subsidy was given on an ad-hoc basis and was based on inputs. Now, companies producing complex or nutrient-based fertilisers will be incentivised to invent products and increase their revenues in the long run, apart from the gains on margins.
For the farmer, the application of nutrient-based fertiliser would help to increase overall productivity and, hence, lead to higher incomes. Companies such as Zuari Industries, Coromandel Fertiliser and Rashtriya Chemicals & Fertilisers, which produce complex fertilisers, will be among key beneficiaries of these initiatives.
The government also announced a rise of 10 per cent in urea prices from Rs 4,830 per tonne to Rs 5,310 per tonne. It will continue to govern the MRP for urea. As a result of this move, the government’s subsidy burden will decline by about Rs 1,300 crore, while companies will benefit on account of improvement in their working capital cycle in the long run. This is primarily on two counts -- the overall amount of subsidy will come down and the time lag for payment of subsidy is also expected to drop. Overall, analysts believe the move is in the right direction, as it will help the sector in the long run and incentivise companies on new investments.