Fertiliser Stocks Rally Likely To Continue Amid Potential Inventory Sellout

The valuations of fertiliser stocks that have been on a high tide are catching up, but the earnings growth has not been factored in, given the potential inventory sellout. This could trigger a further surge to their shares, according to market analysts.

The hike in the minimum support prices, decent cash flow with farmers and good monsoon season are contributing to a very strong fertiliser demand. The buzz with the dealers is that there might be an inventory sellout by July, according to Pratik Tholiya, senior vice president of institutional equity research at Systematix Group.

Since the beginning of the month, National Fertilizers Ltd., Rashtriya Chemicals & Fertilizers Ltd. and Madras Fertilizers Ltd. have given returns of up to 43%. The fertiliser companies' stocks rose significantly after the Union Cabinet announced a hike in the minimum support prices of 14 crops on Wednesday.

Fertiliser stocks also rose after reports that the GST Council might consider exempting fertilisers from the tax regime. The fitment committee has proposed to exempt fertilisers from the goods and services tax, which will be taken into consideration once the council meets on Saturday, according to Informist.

With the recent rally, the valuations are catching up with prehistoric levels, but earnings growth has not been factored in by most analysts, Tholiya said. "When we are talking about a sellout of inventory, we are talking about steep earnings growth coming in."

The average volume growth is 3–4% yearly, but with a sellout in inventory looming, there might be a 7–9% growth this year. The subsidies for fertilisers will improve in the upcoming budget, which should further improve the earnings, Tholiya said.

The profitability should improve and that is one of the reasons stocks will move up, he said.