Six things to know before you invest in the fertiliser industry

Deciphering the fertiliser industry sure can be a daunting task. The segment is highly regulated and always under the government's watchful eye. And the subsidies varying depending upon fertiliser composition don't help either.

While it might be near-impossible to detail every nitty-gritty of the industry, in this story, we look at the distinguishing features of the fertiliser sector.

No pricing power
Fertilisers are crucial to the food security of a country. Unsurprisingly, this means fertiliser companies are subject to heavy regulations. From prices to input materials, the government has a say in everything.

Hence, most fertiliser companies, such as Coromandel International, have agrochemical divisions as they are not under stringent regulations like fertilisers and thereby can offer better margins.

Subsidies
To ensure affordability, the government fixes the selling price of fertiliser and provides subsidies to companies.

This may have you believe that fertiliser companies have a steady revenue stream. However, that is not the case.

The subsidies are rarely provided on time. For example, the trade receivables (including subsidies receivable) of Chambal Fertilisers as of September 2022 is Rs 8,152 crore, 44 per cent of its total assets. To put things in perspective, the company's median receivable days of the last five years is 132 days!

Moreover, the amount of subsidies received varies depending upon the composition of the fertilisers.

Urea fertilisers are the most used fertiliser and account for 55 per cent of all fertilisers produced as of December 2021. As a result, they are the most regulated fertilisers.

The government fixes the selling price of urea fertilisers to provide a discount to the farmers. However, the subsidies producers receive to accommodate that discount are not tied to the cost of production. Rather the government categorises companies based on their energy efficiency levels and allocates subsidies based on that.

On the other hand, for P&K (phosphorus and potassium) fertiliser producers, the subsidy game is a bit different. The government fixes the subsidies rather than the prices, meaning P&K fertiliser companies receive the same amount as subsidies regardless of the cost of production. As a result, these companies have to be at the top of their capital efficiency game to stay afloat.

Capital intensive
As the subsidies are tied to energy efficiency for urea producers, these companies have to frequently upgrade their plants. Thus, they require high fixed capital to finance routine energy efficiency upgrades.

Moreover, since subsidies are often delayed, fertiliser producers need to have enough working capital to absorb the discounts they have to provide on the selling price, at least till the subsidies finally arrive. Safe to say, they require high working capital.

Efficiency
Considering that the subsidies are often delayed and there is a high capital requirement, a fertiliser company's efficiency numbers are pivotal (especially if it's a P&K fertiliser company). This means how efficiently the management utilises the resources available is a game-changer.

Seasonality
With fertilisers being directly tied to agriculture, a good monsoon means more revenue for fertiliser producers. Consequently, the fertiliser industry has a seasonal nature.

For example, the graph shows Chambal Fertilisers' and Coromandel International's revenue for the last 18 quarters. As you can see, the revenue spikes during the monsoon period.

Fertilisers never go to waste
India is a fertiliser deficit country, meaning excess fertilisers produced by a company would never go to waste. Hence, scaling up automatically means higher revenue and more bargaining power for fertiliser companies.

In short, if you are planning on investing in the fertiliser segment, efficiency and capital management of the companies should be your core focus.

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This article was originally published on December 26, 2022.