Working capital borrowings of fertiliser sector set to rise, says Icra

With the subsidy budget getting exhausted for the fertiliser industry by the end of December 2019, the working capital borrowings of the industry will rise, according to a report.

The government had allocated Rs 800 billion in the Union Budget for FY19-20 for payment of the fertiliser subsidy, it remains inadequate to meet the total requirement of the fertiliser subsidy, which stands at around Rs 1,250 billion, according to the report by rating agency Icra.

The subsidy requirement of Rs 1,250 billion includes a subsidy backlog which is expected to increase to Rs 450 billion by the end of FY2019-20, it added.

Of the total budgetary allocation, the government had released nearly 84 per cent by the end of October 2019, it said.

With the subsidy budget expected to be over by the end of December 2019, the subsidy receivables will rise till the end of FY2019-20, as a result, the working capital borrowings of the industry will rise leading to moderation in the credit metrics, Icra noted.

"We do not expect any additional budgetary allocation for the fertiliser industry in the current fiscal from the government as the possibility of the Centre missing its fiscal deficit target looms large. However, the government is expected to sanction a Special banking Arrangement (SBA) in Q4 FY20, which will help in reducing interest outgo to a small extent," Icra Senior Vice-President and Group Head, Corporate Ratings, K Ravichandran said.

Overall, he said, the government needs to increase the budgetary allocation in the upcoming Union Budget for 2020-21 to around Rs 100 billion in order to reduce the subsidy backlog.

"The increased budgetary allocation if continued for a couple of years will wipe out the subsidy backlog and pave the way for implementation of the true form of Direct Benefit Transfer (DBT) in the fertiliser sector," he added.

With a late surge in the monsoon, the soil moisture and healthy reservoir levels, the sowing levels in the rabi season have witnessed healthy growth, the report said.

Icra expects healthy outlook for fertiliser sales in the current rabi season with DAP/NPK offtake expected to grow at a robust pace as there has been significant moderation in the retail prices year-on-year driven by a fall in the raw material prices.

Urea demand is expected to remain stable as the offtake by farmers remain more or less uniform, given fixed and low retail price, it added.

"The overall fertiliser offtake is expected to be healthy in the current rabi season. The profitability of the urea players is expected to be stable given the stable pooled gas prices over the past 12-14 months and steady volume offtake. Profitability of the P&K players is expected to improve in H2 FY20 as key raw material prices, that is phosphoric acid and ammonia prices have softened," Icra Senior Analyst, Corporate Ratings, Varun Gogia opined.

While retail price of P&K players has been reduced, Icra expects slight expansion in the contribution margin for DAP/NPK players which should support profitability, he said.

"Nonetheless, the credit metrics of the industry are expected to remain subdued given the continued delay in the subsidy disbursement by the government," Gogia added.