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THE INDIAN FERTILIZER INDUSTRY

Industry Analysis

26th October07

INDUSTRY OVERVIEW
Fertilizer sector is a very crucial for Indian economy because it provides a very important input to agriculture. The fertilizer industry in India has played a pivotal role in
achieving self sufficiency in food grains as well as in rapid and sustained agriculture growth. India is the third largest producer and consumer of fertilizers in the
world after China and the United States. The growth of the Indian fertilizer industry
has been largely determined by the policies pursued by the government. The government exercised extensive controls on the pricing, distribution and movement of
fertilizers.
The industry is capital intensive and the production process energy intensive with
the combined cost of feedstock and fuel accounting for anywhere between 55 and 80
per cent of cost of production, depending on the type of fertilizers.
DETERMINANTS OF FERTILIZE DEMAND
Rainfall and irrigation facilities: Adequate and well diversified rainfall gives the farmers
confidence to invest in fertilizers along with well equipped irrigation facilities.
Relative prices of fertilizers: Indian agriculture is characterized by small holdings and demand
for fertilizers tends to be price sensitive. If there is significant price differentiation between
fertilizers, demand will move in the favour of the cheaper fertilizers, even if its not the most
appropriate one.
Cropping pattern: This determines the need and timing of fertilizers purchases.
Government policy: Government policies and framework influences pricing, production and
distribution of fertilizers.
Rising demand for fertilizers
There has been significant growth in the consumption of fertilizers in last three years due to
overall good monsoon. The growth in NPK consumption was 9.50% in 2004-05, 10.60 % in
2005-06 and 8.40% per cent in 2006-07. It is expected to grow by at least by eight per cent during 2007-08 in anticipation of good monsoon. Against the robust growth in consumption, domestic fertilizer production has remained range bound in the last decades. Fertilizers output
grew by a modest 6.50 per cent during 2006-07. The surge in fertilizers demand and stagnant to
modest increase in production has widened the gap between consumption and production causing larger dependence on imports.
Therefore, the rising demand for fertilizers is providing ample scope for the companies in this
sector to increase their production capacity and volumes thereby, driving the growth of fertilizer sector.
Huge capex lined up
The capital expenditure in the fertilizer sector is finding new ways. The total outstanding investment in the fertilizer sector more than doubled to Rs 20,677 crore during the September
2007 quarter as compared to the corresponding quarter a year ago. However, out of 28 projects, only seven are under implementation stage. The reason is most of the de bottlenecking/

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revamp/ modernization projects of the urea companies still awaiting clearance of the Department of
Fertilizers (DoF) to get implemented. Also, change in policy parameters once in every three years is
hampering new investments in the sector.
Once the clearance of projects is done from Department of Fertilizers (DoF) and new policies get struck
than the sector will find new highs in the future. Therefore, the companies in this sector would increase
their production through capital expenditure and would formulate the new growth story of this sector.
Fertilizers: Investment statistics

Jun 2006
Sep 2006
Dec 2006
Mar 2007
Jun 2007
Sep 2007

Projects under
Implementation
(Rs crore)
4,280.60
4,280.60
4,182.60
4,582.60
4,472.60
4,472.60

New projects
(Rs crore)

Total investments
(Rs crore)

0.00
3,850.00
1,212.00
0.00
82.00
9,900.00

5,760.60
9,693.10
10,805.10
10,805.10
10,777.10
20,677.10

Projects
Implemented
(Rs crore)
526.47
0.00
100.00
0.00
40.00
0.00

Source: CMIE

Fertilizer scrips in limelight

The fertilizers stocks showed impressive growth during September 2007, and are continuing the trend at
present on the expectation that the government may announce some fresh support policies. Except the
Gujarat State Fertilizers & Chemicals, all the stocks in the top ten samples notched up double digit
gains during the period. Among the prominent gainers, Nagarjuna Fertilizers & Chemicals, National
Fertilizers and Oswal Chemicals & Fertilizers soared up.
Fertilizers Index: Performance on the bourses

Apr 2007
May 2007
Jun 2007
Jul 2007
Aug 2007
Sep 2007

Market cap.
(Rs crore)

P/E

Volume
(Rs crore)

Returns
(%)

Excess return
over COSPI

17,506
18,843
19,197
20,862
22,489
28,057

29.80
32.10
32.70
30.30
32.70
40.70

366.00
1,705.00
792.00
1,788.00
5,046.00
5,799.00

8.00
7.70
2.20
10.20
8.10
24.60

0.30
1.60
0.0
5.40
9.00
10.20

Source: CMIE COSPI: CMIE Overall Share Price Index

FUTURE OUTLOOK
The fertilizer sector in last few months has shown some upward trend on the ground that
government may come out with policies favoring the sector which would provide boost to the
companies in this sector. The sector looks attractive as their can be unlimited opportunity to
increase the volumes to fulfill the gap between supply and demand. The companies with
huge capex plans are in queue just waiting for the node of DoF, and once the sector get
ground clearance from DoF than we can see new highs for this sector as whole.
Therefore, we are bullish on the sector with the time horizon of 1-2 years and expects that
sector would outperform the broad market in coming years.

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