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Fertilizer companies set to shine

Expect the performance of Agrochemicals and Fertilizer companies: to continue to diverge in Q3. Fertilizer companies are set to post healthy earnings growth, driven by volume growth in the Urea business and sizeable cost savings in phosphoric acid manufacturing for complex fertilizer manufacturers. Domestic agrochemicals companies may post volume growth in high single-digit but lower than earlier expectations. Lower-than-expected volume growth may be due to pest-free crops (thus, paring demand for sprays), clear climatic conditions in some pockets (pruning demand for fungicides), a 15-day delay in the season and high sales return from Kharif.

Fertilizers – Backward integration to drive cost savings:

Complex fertilizer companies are expected to report healthy EBITDA growth, given higher backward integration benefits – ~USD 110/tonne (to USD 1,060/tonne) rise in contracted Phosphoric acid price in India. Expect mid-to-high single-digit volume growth in complex fertilizer volumes for Coromandel International (CRIN IN, CMP: INR 1,951, TP: INR 2,041, Buy) and Paradeep Phosphates (PARADEEP IN, CMP: INR 114, TP: INR 129, Buy). Urea manufacturers such as Chambal Fertilisers (CHMB IN, CMP: INR 506, TP: INR 516, Reduce) are expected to post healthy growth in urea volumes, while traded fertilizer business may witness a volume dip

Agrochemicals – Multiple factors dragging down demand growth:

Domestic agrochemical companies are on weak footing – Q3 demand growth has been lowerthan-expected. Multiple factors such as relatively pest-free crops, clear weather in some pockets, a 15-day delay in the season and sales return from the Kharif season have contracted demand growth and dampened sentiment. We expect high single-digit volume growth for domestic agrochemical companies

Increase in DAP subsidy to primarily benefit PARADEEP:

The Cabinet has approved one-time special package of INR 38.5bn for DAP for entire CY25. The government has increased DAP subsidy by INR 3,500/tonne, over and above regular nutrient-based subsidy (NBS) subsidy. Additional subsidy should help all the players – Importers (CHMB), standalone manufacturers (Deepak Fertilizer) and backward integrated manufacturers (CRIN and PARADEEP), but the biggest beneficiary will be PARADEEP. This is because: (a) for importers such as CHMB, importing DAP and selling in India continue to be unviable due to high price internationally. (b) For standalone manufacturers, DAP manufacturing is a loss-making proposition due to a surge in raw material price. (c) Within backward integrated manufacturers, CRIN mainly focuses on NPK manufacturing. Hence, the biggest beneficiary within the listed space is likely to be PARADEEP..

Prefer fertilizer companies over agrochemicals:

In both the short- and long-term, we prefer CRIN and PARADEEP given that import replacement of volume and profits are set to play out for both these stocks. Within Agri-inputs, we prefer fertilizers over agrochemicals. We have a Buy on CRIN and PARADEEP.

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