Wednesday, September 3, 2008

PROFIT FROM THE AGRI BOOM - 4 (FERTILISERS)

Fertiliser stocks have been largely shunned by investors, with some speculators intermittently trying to perk them up. Though these stocks are available at reasonable valuations and most of them offer great dividend yields, sensible longer term investors have been keeping away from them due to continued Government interference in the sector and lack of free pricing power.

Though the sector looks like it will never be completely free from Government meddling, some positives are emerging due to policy action recently.

Faced with an acute shortage of fertilisers, the government has recently announced a new policy whereby a company can import fertilisers and if it can leverage its international tie ups or contacts to import at a price lower than the notified price, it can keep the profits after sharing a portion with the Government.

Another positive is that the fertiliser secretary has assured that henceforth all subsidy payments will be in the form of cash and not bonds as has been the practise till now. Since these bonds were illiquid, most fertiliser companies were forced to sell these bonds at a huge discount to bridge their cash flow gaps. The result was that their bottom lines were negatively impacted. This is set to change with the subsidy being paid out in form of cash.

Since most of the fertiliser companies were dependent on Naphtha or other crude derivatives for meeting their huge energy needs, the crude price shock was adversely affecting profits. With supply of Natural Gas expected to start from KG Basin in October, 2008, these companies will now have access to cheaper fuel. As prices of fertilisers are administered, it will not have a major impact profit wise, since the subsidy will go down, but it will improve cash flow further. Again major fertiliser companies manufacture organic chemicals, which they can sell at market prices. The profitability on this account is likely to improve with the availability of gas.

Rashtriya Chemicals and Fertilisers (RCF) looks a promising bet in this space. Not only does it have a wide product portfolio but also aggressive expansion plans. It also manufactures a wide range of organic chemicals which are used in other industries. RCF has a huge property at Chembur in Mumbai which it wants to develop by constructing and letting out office and commercial space. It could prove to be a major beneficiary of all the above factors coupled with an upsurge in demand from agriculture.

2 comments:

Ninad said...

Numbnuts,

COMING agricultural Boom ???

Wake up Rip Van, the cat is already out of the bag

VALUE STOCKS UNDER TWO DOLLARS said...

I would recommend bunge in the ag business Symbol [BG}