Amendments to NIP-2012 negative for new urea investments: ICRA

The government's amendments to the New Investment Policy 2012 (NIP-2012) for urea is moderately negative for new urea investments and would increase uncertainty for investors, rating agency ICRA said today.
Overall, policy amendments are moderately negative compared to original policy from the point of view of new investments as the uncertainty associated with cash generation is higher due to removal of the 'guaranteed buyback' clause, ICRA said.
The government had notified certain amendments to the New Investment Policy 2012 (NIP-2012) for urea last week. The original policy, notified in January 2013 to facilitate fresh investments in the urea sector, benchmarked the realisation of urea for new projects to import parity prices (IPP), subject to floating floor and ceiling prices, which are in turn linked to gas prices.

Amendments are aimed at encouraging only serious players to participate in the application for greenfield or brownfield urea projects, while moving the government away from the legal obligation to provide subsidy on entire urea production under the guaranteed buyback clause as was implied in the original policy.
Commenting on the amendments, K Ravichandran, Senior Vice President and Co-Head, Corporate Ratings, said, "The quantum of domestic gas availability and pricing have become paramount now and will likely determine the returns and debt servicing ability of the new projects.
"Since the realisations for the players are dependent on the delivered gas prices, availability of higher quantum lower cost domestic gas will ensure that the cost of production of these new units remains at reasonable levels vis-a-vis international prices".

On the other hand, units based on high cost R-LNG/spot gas may face the threat of the government curtailing procurement of urea from these units if international prices are substantially lower and subsidy outgo can be lowered through import of urea, Ravichandran said.
The amended policy requires the project proponents to furnish a bank guarantee of Rs 300 crore for each project, which should ensure that non-serious players do not apply for the project. PSUs are, however, exempted from furnishing the bank gurantee.
The time period for commencement of operations has also been shifted and it is now proposed that those units, whose production commences within five years from the date of the amendment notification, that is, the units which commence production by October 7, 2019, would be subsidised for a period of eight years from the date of commencement of production.