Ind-Ra: Government's Cut in Subsidy for Complex Fertilisers to Dent NPK Producers Profitability

The 25%-30% reduction in decontrolled fertilisers subsidy rates will adversely impact the NPK (Nitrogen, Phosphorus & Potash) producer's profitability, says India Ratings and Research (Ind-Ra). Ind-Ra believes that the ability to increase farm gate prices of P&K (Phosphatic & Potassic) fertilisers remains constrained due to the two consecutive weak monsoons which have impacted farmer's affordability. Attempts to increase the farm gate prices to off-set the lower subsidy rates will impact volumes which are already weak for complex fertilisers which are costlier compared to Urea. Further, elevated inventory levels of the NPK also limit the ability of the NPK producers to increase the prices significantly. Producers may resort to giving additional discounts to clear inventory levels which would suppress margins further.

Although lower raw material prices, mainly phosphoric acid, ammonia and rock phosphate, would help protect margins of NPK producers, the benefit would be contingent on a stable rupee, and any weakness will hurt margins. Further, Indian manufacturer's flexibility to produce different grades of complex fertilizers, their backward integration and established brand name are likely to provide some pricing power and help cushion margins.

The positive impact on the working capital cycle of the companies, due to lower subsidy receivables will be partially offset by the extension of a higher credit period to push sales. However, the reduction in working capital to fund subsidy receivables will lead to lower interest expenses.

The drop in profitability will have a bearing on the credit profile of most of Ind-Ra's rated fertiliser companies, however it is expected to stay at levels commensurate with their current ratings. Absence of any large debt led capex in the recent past has resulted in only working capital debt in the balance sheets of most of the NPK producers with near zero long term debt. Coromandel International Limited is a pure NPK producer, while Deepak Fertilisers & Petrochemicals Corporation Ltd, Gujarat State Fertilisers & Chemicals Ltd ('IND AA+'/Stable) and Tata Chemicals Limited are producers of NPK and Urea .

The government of India (GOI) announced last week, the reduction of subsidy rates on Nitrogen and Phosphate by INR5/kg and INR5.45/kg, which is lower by 25% and 30% respectively. The rates have been revised to reflect the fall in international prices of Diammonium phosphate and Ammonia. The Phosphatic & Potassic Fertilisers are covered under the nutrient based subsidy policy of GOI and are partially de-regulated. The downward revision of the rates would slash the NPK subsidy bill of the GOI by upto INR50bn.

Powered by Capital Market - Live News