High input costs cloud outlook for fertiliser, chemical companies

Synopsis

Indian fertilizer and chemical sectors have seen gains, but face challenges. Rising raw material costs like rock phosphate and sulphur are squeezing margins, despite government subsidy increases. While low fertilizer inventories may boost demand, chemical exports are declining. Analysts suggest a cautious outlook, highlighting margin pressures and monitoring input costs, crop prices, and export market recovery.

ET Intelligence Group: The ET Fertiliser and ET Chemical indices have each gained nearly 19% over the past three months, buoyed by recovery in the broader market. However, retaining these gains will be challenging given the input cost inflation and slow export demand amid tariff-related measures. Rising prices of raw materials such as rock phosphate and sulphur have affected margins. Low inventory levels of key fertilisers including di-ammonium phosphate (DAP) may offer support given the potential restocking-led demand. For the chemical sector, moderating exports and falling prices remain a concern.

In April 2025, the government increased subsidies on phosphates and sulphur by 45% and 48% to make fertilisers affordable to farmers. This, however, is likely to cover higher input costs only partially. According to Elara Capital, soaring prices of raw materials such as rock phosphate and sulphur-key inputs for phosphoric acid, which finds use in fertilisers and soil management-are expected to narrow margin spreads by up to 30% for fertiliser makers even after taking the government subsidies into account. On the positive side, Elara pointed out that inventory levels of key fertilisers like DAP and urea are at its second lowest level in the past six years, pointing to potential restocking-led demand.

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Price trends remain mixed across the chemicals basket. According to Kotak Securities, refrigerant prices remain firm, but most petrochemical and battery materials are under pressure. Soda ash shows no signs of recovery, and while phenol prices have rebounded modestly, they still remain below historical averages.

India's organic and inorganic chemical exports fell 21% month-on-month and 9% year-on-year in April 2025. Globally, the demand outlook remains weak. Kotak highlights a sharp fall in India's chemical exports in April and soft crop prices across major commodities like corn, soybean, and wheat. International agrochemical companies have guided for flat growth in CY25, pointing to continued headwinds. "There's no broad-based recovery in prices yet," Kotak Securities added, citing continued oversupply from China and weak global pricing across chemical categories.

Motilal Oswal Financial Services considers Atul and Vinati Organics as top picks. "Atul's end-user demand improved in FY25 with key projects like the 50 KTPA liquid epoxy resin plant commissioned," the brokerage mentioned in a report, assigning a target price of ₹8,450.

Vinati Organics has commissioned plants for antioxidants (AO) and other products. Its revenue from AOs grew to ₹220 crore in FY25 from ₹130 crore in FY24, making it the largest double-integrated AO manufacturer in India. Motilal Oswal has assigned a target price of ₹2,195, reflecting a healthy long-term growth outlook despite supply risks from China. The stocks of Atul and Vinati were last traded at ₹7,457.6 and ₹1,875 on Monday on the BSE.

In coming quarters, sector performance will hinge on input cost trends, crop price recovery, and rebound in export markets. Analysts maintain a cautious stance, projecting margin stress despite supportive policy measures.

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