Brokerage sees upside of 32% in fertilizer stocks on strengthening demand scenario; know triggers driving this sector

The focus on agrochemical sector has strengthened, on the back of the geopolitical crisis between Russia and Ukraine. Moreover, higher crude oil price and inflation in agri commodities are fuelling demand for agri-inputs globally, brokerage firm Elara Capital said in a note.  

Similarly, the supply shortage and export restrictions from China and Russia benefits the agrochemical (fertilizer) companies, this brokerage said estimating an upside of up to 32 per cent in the agrichemical stocks from current levels amid multiple triggers.  

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In the upcoming NBS (Nutrient Based Subsidy) policy, Elara Capital expect subsidy to rise reasonably, to maintain fertiliser MRP (Minimum Retail price) at current levels, ensuing fair margins for the companies. In this absence, fertiliser companies may hike prices sharply to pass on the cost inflation. 

Key raw material such as phosphoric acid price has been fixed at USD 1,530/tonne, up 93 per cent Year-on-Year (YoY) and 15 per cent Quarter-on-Quarter in Q4 this fiscal. Similarly, Ammonia (up 200% YoY), Sulphur (up 118% YoY), Potash (up 109% YoY) other raw material price may rise in Q4. 

The brokerage opined that the price escalation in fertilisers can be controlled through significant crude oil price dip, meaningful rise in fertiliser supply and material increase in crop production. It added, the government may have to spike FY23 nutrient-based subsidy and budgetary allocation for fertilisers to prevent input cost inflation and maintain regular fertiliser supply. 

The brokerage maintained 'Accumulate' rating for UPL, PI Industries, Bayer CropScience, Rallis India and Dhanuka Agritech with target price of Rs 799, Rs 3096, Rs 5355, Rs 294, Rs 892 per share, which implies an upside of between 9-27 per cent.  

While it maintained Buy rating for Coromandel International and Sumitomo Chemicals and sets a target price of Rs 1068 and 507 per share, potential growth of up to 20 per cent.