Analysts Anticipate Rs 20 Trillion Agri Credit Outlay To Benefit Tractor Manufacturers And PSBs

Analysts expect Rs 20 trillion in agricultural credit support to the farm sector proposed in the Union Budget 2023-24 to generate long-term benefits for farm-linked credit financiers and tractor manufacturers. However, players in the fertilizer industry may see limited upside, they added.

"Because fertilizer stocks have more than doubled in the last six months, we don't see the foundation for another surge," said AK Prabhakar, head of research at IDBI Capital.

On February 1, the government proposed increasing agriculture credit targets by 11% year on year to Rs 20 trillion in FY23-24. However, the total fertilizer subsidy was reduced by 22% to Rs 175,100 crore for FY24 Budget Estimates from Rs 225,200 crore in FY22 Revised Estimates, while it was increased by 66% from Rs 105,200 crore in FY23BE. While urea fertilizer allocation was down 14.9%, Nutrient-Based Subsidy was down 38% from revised estimates.

"Subsidies were reduced in anticipation of falling commodity prices, which would result in lower fertilizer manufacturing costs. However, if commodity prices rise, it may have an impact on rural or semi-urban consumption demand "said Deepak Jasani, HDFC Securities' head of retail research.

According to tradingeconomics.com, global urea prices fell more than 60% to $412 per tonne from $1,050 per tonne on April 19, 2022, while di-ammonium phosphate (DAP) prices fell 36.61 percent to $637 per tonne from $1,005 per tonne on April 1, 2022.

Meanwhile, analysts at IIFL Securities remain 'neutral' on the sector, expecting no significant impact on fertilizer manufacturers as subsidy reductions remained in line with expectations.

"Although the cut in allocation appears steep and would be viewed negatively by complex players, the government has historically been supportive of the fertilizer industry, revising allocation throughout the year. As a result, we do not view this negatively for the sector "In a budget analysis report, they wrote.

Shares of fertilizer companies such as Coromandel International, Deepak Fertilisers, Madras Fertilisers, National Fertilisers, and Zuari Agro Chemicals have advanced up to 22.4 percent this fiscal year on the bourses.

Aside from that, since the credit outlay for agriculture has been increased to Rs 20 trillion and the central food grain scheme has been extended for another year, analysts expect this extension to help rural disposable income and boost agricultural demand.

"We anticipate that this measure will benefit public-sector lenders by increasing agricultural demand and the demand for agricultural credit. PSU banks such as State Bank of India (SBI), Bank of Baroda, and Indian Bank are likely to benefit greatly "ICICI Direct Research analysts wrote.

Meanwhile, Prabhakar of IDBI Capital believes that micro or gold finance companies such as Muthoot Finance, Mahindra Finance, Chola Investment, and Manappuram Finance will benefit from this move in the long run.

"Increased farm credit activity may also boost demand for farm equipment, improving long-term prospects for tractor players like Mahindra and Mahindra (M&M) and Escorts Kubota," he added.

In January 2023, Escorts Kubota's tractor sales increased by 16.5% year over year to 6,649 units, while M&M's farm equipment sector saw total tractor sales rise by 28% year over year to 28,926 units.

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