Urea stocks look good in long term

Over the last two decades, the fertiliser industry has hardly seen any major greenfield projects in the country. However, this industry experienced some brownfield projects and few major consolidations by the large standalone fertiliser companies through acquisitions. Zuari Group and Coromandel International were in the forefront in acquiring other fertiliser companies like Paradeep Phosphates, Mangalore Chemicals & Fertilizers, Godavari Fertilizers, Liberty Phosphates, etc in the last two decades. Recently, Tata Chemicals announced a sale of its urea plant (with a capacity of 12 lakh tonnes) to Yara Fertilizers India for a consideration of Rs 2,682 crore.

It is true that the farmers are applying urea in excess of what the Indian crops require. However, there exists a huge gap between the domestic demand and production. The domestic production of urea in FY2017 was around 242 lakh tonnes while the annual demand for urea stays around 300 lakh tonnes depending upon the monsoon performance. The governments are advising the farmers over the last two decades to cut down the urea consumption substantially as it is applied in overdoses. Still, urea consumption remains robust due to a cheaper price, which has been possible due to government’s support in the form of subsidy. The urea subsidy is expected to be near Rs 43,000 crore in FY2018 and estimated to be around Rs 45,000 crore in FY2019. It is likely that the support to the farmers in terms of very high urea subsidy would stay for long due to political compulsions. Any major cut in the urea application by the farmers might happen by reducing the imports rather than keeping the domestic firms idle.

India’s food grain production rose five times over nearly seven decades from 50.82 million tonnes in 1951 to 252.22 million tonnes in 2015-16. This is mainly on account of nearly four-fold jump in the productivity. Yield increased from 522 kg per hectare (ha) in 1951 to 2,056 kg/ha in 2016. This, in turn, was made possible by ever-growing application of fertilizers and crop protection products. Since cultivable land is continuously shrinking and population keep growing, the prospects for the fertiliser business as a whole remain robust in the long-term in the country.

It is most unlikely that the farmers would cut down the urea consumption substantially as the other fertilisers like DAP (Di-ammonium phosphate) and complex fertilisers costs remain higher. Expected steep increase in the gas output by Reliance Industries is also set to facilitate higher production of urea by the Indian companies in the long run. Thus, expected increase in gas output, depreciating rupee over the years and hence, steep hike in cost of imports, constraints in setting up new urea plants, relatively higher cost of other fertilizers, compulsion to keep rising the productivity levels by keep increasing the application of fertilisers, etc augur well for further consolidation of urea producers in the country. Therefore, in the medium to long terms, there could be an opportunity for the investors in select urea stocks (based on relatively lower enterprise value, proximity to the ports, decent market share, etc) to make equity wealth.

The writer is founder and managing director of Equinomics Research & Advisory