Cut in MRP may hurt non-urea fert producers' profit: Report

The reduction in maximum retail price (MRP) of non-urea fertilisers by public sector producers is expected to hit their profitability sharply, a rating agency report said.
"The reduction in the MRP of non-urea fertilisers by the public sector fertiliser producers is significantly higher than the decline in raw material prices since March 2016 and may squeeze non-urea producers' operating profitability by around Rs 3,000 crore," the India Ratings and Research (Ind-Ra) report said here.
It said the pure play urea producers are unlikely to be affected, but those in the non-urea business will be hit hard.
The decision to reduce the MRP of non-urea fertilisers comes against the backdrop of a sharp decline in the nutrient based subsidy rates announced for FY17 by the government of India in March 2016, it said.

The reduction in MRP translates into lowering of the end user prices by 5 per cent to 31 per cent across various non-urea fertilisers, namely diammonium phosphate (DAP - 10 per cent), muriate of potash (MOP - 31 per cent) and other nitrogen, phosphorus and potassium-based complex fertilisers (NPK -5 per cent), which is not commensurate with the 5-7 per cent decline in raw material prices since March, 2016.
While the lower MRP is initiated by public sector fertiliser producers; the market dynamics will compel private players to fall in line.

Raw materials constitute 60-70 per cent of the total input costs, and thus the reduction in MRP will directly impact the operating profitability, thereby resulting in the weakening of credit metrics of non-urea producers.

Nevertheless, Ind-Ra notes that a further reduction in raw material prices and a healthy demand due to the expectation of a normal monsoon, may partly offset the negative impact on operating profit and support the financials of non-urea producers.
"Government's cut in subsidy for complex fertilisers to dent NPK producers' profitability" report highlighted that the reduction in the subsidy rates announced for FY17 was offset by a commensurate decline in raw material prices during FY16.
Thus, the further decline in raw material prices since March 2016 supported the profitability until recently when the MRP reduction kicked in.
The MRP reduction, however, will be positive for the soil nutrient balance, which has suffered due to the excessive use of cheaper urea compared to other nutrients. The price reduction in non-urea fertilisers will also lower the price gap between urea and non-urea fertilisers, which will support the use of non-urea fertilisers, Ind-Ra said.