Massive Stock Pile-Up Indicates Towards Fading Fertilizer Demand Scenario

In order to reduce its fertiliser subsidy burden this fiscal, the government has directed complex fertiliser manufacturers to abstain from lifting imported nutrients at ports, scheduled to reach in February and March 2012. The reason for this move by the government can be attributed to the poor demand conditions prevailing in the fertiliser market at present.

Owing to the sharp depreciation of the rupee against the dollar in CY2011 and coupled with the high global prices of most complex nutrients, the farmers switched to nitrogen-based urea fertiliser as the main source of nutrients for their crops. This led to a sharp decline in domestic demand for complex nutrients like DAP, MOP, SSP, etc.

While the major brunt of the unfavorable business dynamics were borne by the domestic fertiliser companies in the September quarter as aggregate sales grew by a modest 7 per cent and profits dipped by nearly 9 per cent on a YoY basis, the December 2011 quarter was a positive surprise as aggregate topline grew by a robust 30 per cent on a YoY basis. However, the bottomline growth continued to disappoint as it de-grew sharply by 23 per cent. This was chiefly due to a rise in costs of borrowing, soaring input costs and sharp rupee depreciation between October-December 2011.

Another reason for the squeeze in net margins and profitability can be attributed to the sharp rise in stock-in-trade and work in progress of individual fertiliser companies in the December quarter when compared on a yearly as well as quarterly basis. This clearly indicates that there is a massive stock pile-up at the manufacturers’ end which outpaced the sales growth reported in the three quarters under consideration.

We would like to remind readers that at the time of reporting the December quarter results for the likes of Coromandel International (‘Coromandel International Q3FY12 Earnings’ Review dated January 24, 2012) and others like Chambal Fertilizer and GSFC, we had raised our concerns on the rising inventory pile up and its indication towards a fading demand scenario.

Going forward, we believe the poor demand scenario for fertilisers, especially the complex nutrients will continue to hurt the financial health of the fertiliser companies. Moreover, the government’s proposal to cut back on the subsidies it provides to these fertiliser companies will also hurt them dearly. The only respite for the complex manufacturers has come in the way of the appreciation of rupee in CY2012 and the falling global fertiliser prices in recent times.