Ind-Ra: Fertiliser Sector Still Awaiting Policy Reforms

India Ratings & Research (Ind-Ra) has a stable to negative outlook on the fertiliser industry for FY15 on concerns regarding timely subsidy disbursals, delays in initiation of key policy reforms and domestic gas pricing and availability. The agency, however, maintains a Stable Outlook on its rated companies as the government of India's (GoI) support to the sector remains largely intact due to its strategic importance.

As GoI's subsidy allocations have been short of the actual obligations, a build-up of subsidy dues and a lag in their payments in the second half of every year is a regular trend. The delay in the subsidy distribution by GoI compels companies to fund the subsidy shortfall through borrowings, thus impacting their credit profiles.

The long-pending urea price hike is a possibility only after the scheduled elections in mid-2014. A marginal increase in urea prices over the past 10 years and a large subsidy budget have made urea price hike inevitable.

The GoI has already announced an increase in the output prices of domestic gas to almost USD8/mmbtu from USD4.2/mmbtu. However, there could be a subsidy on the input prices for the gas used to manufacture urea and other fertilisers. The gas price hike and the government's intervention on gas prices for the fertiliser industry will determine the total subsidy, fertiliser prices and the credit profile of fertiliser companies in FY15.

The GoI's new investment policy for debottlenecking brownfield and greenfield urea projects has not picked up due to concerns on urea off-take, high prices of gas and delayed subsidy. The next urea capex cycle in the industry to bridge the existing 8mmt-10mmt shortfall in domestic supply will be taken up once clarity emerges on these policies.

What Could Change the Outlook

Weakening of government support: The outlook on the fertiliser industry could be revised to negative if the GoI's subsidy support declines due to pressures to reduce fiscal deficit and an increase in subsidy burden. This could, however, be balanced by urea price hike and policy reforms.

Large capex: Huge debt-funded capex programmes affecting the credit profile of fertiliser companies could lead to their Outlook being revised to Negative, especially for entities with moderate-to-low rating headroom.

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