Even as the market remained insipid on Wednesday, with the benchmark indices losing over a per cent, the stock of fertiliser maker Deepak Fertilisers and Chemicals bucked the weakness. The stock zoomed over 9 per cent in trade, after the company announced that it has re-started production of ammonium nitrate phosphate (ANP) complex fertiliser, after a one year hiatus, using expensive imported re-gasified liquid natural gas.
On the BSE, the stock ended 7.63 per cent higher at Rs 142.55.
Supply of domestic gas produced from RIL’s KG D6 basin to Deepak Fertilisers’ Taloja (Mumbai) facility was stopped in May 2014 following the Department of Fertilisers’ decision to channelize the low cost domestic gas, used for producing complex fertilisers, towards urea.
This move was largely to reduce the Government’s fertiliser subsidy burden by giving priority to the highly subsidised urea. The Government provides almost three fourth of urea’s production cost as subsidy to the producer; the balance is paid by the farmer.
In the case of complex fertilisers, the Government subsidy accounts for just a fourth of the total production cost. Complex fertiliser producers have more leg room to pass on price increases to farmers, thanks to the implementation of the nutrient based pricing policy since April 2010.
Even as investors cheered the move, the benefit to Deepak’s profit on account of this move may be limited. This is because the cost of RLNG is more than twice that of domestic gas. Hence, while the commencement of ANP production will aid the company’s revenue growth in 2015-16, the accretion to profit may not be significant.