There have been lot of positive doses injected into the Agri space both directly and indirectly. One of them which really interested me is the move to provide subsidies based on nutrients and not based on products. Also, the other major shift is that the subsidies will be given to farmers instead of giving it to the Fertilizer companies.
Though currently there is not much idea as to how this kind of subsidy allocation would take place, these measures could make a major impact on the fertilizer industry that is currently dominated by the chemical fertilizers. However, since the proposals are not that clear currently, one must make due diligence before making any decision out of this budget announcement.
Though there are various fertilizer products that are currently available - both chemical and bio, there are only few products that are heavily sold and accepted. The reason - these are the ones that are highly subsidized and are priced at lower levels. The fertilizer companies are not to be blamed since even if they are willing to sell the less subsidized products, there are hardly any takers due to the higher price levels.
However, since the new budget proposes to change toe way of subsidy giving from product based to nutrient based, the scene is set to change with the change in prices as well.
The sale price of urea, which contains 46% of "N" is now priced at around 4830 rs per tonne. Hence this would translate to about 10,500 rs per tonne for nutrient. On the other hand, Ammonium sulphate contains 20.6% of "N" and retails at around 10,350 rupees per tonne. Hence the cost of one tonne of nutrient here would be more than 50,000 rupees. Due to the high price variation in the cost for a tonne of nutrient, Ammonium sulphate is unable to compete with the highly subsidized urea, even though Ammonium Sulphate contains other nutrients like 24% of Sulphur.
The current system due to the above mentioned price difference forces the farmers to consume "N" entirely based on Urea, ignoring other fertilizers that are available in the markets, even though they contain additional nutrients. It is highly expected that the implementation of the proposal would be able to provide more nutrients for a healthy plant growth and the fertilizer companies will be able to design products that suit various crop requirements.
To contact the equity analyst on this story: Arun Gopalan in Chennai at Arun@hbjcapital.com