1. ICRA RESEARCH SERVICES
ICRA RATING FEATURE
Corporate Ratings
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P h o t o C re d i t : t h e b re a k t h ro u g h . o rg
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The Gas Conundrum: Pricing, Subsidies
& The New Urea Investment Policy
2. I C R A L I M I T E D Page 2
SUMMARY
FY13 was a difficult year for the industry on the demand front; encouraging monsoon signs lead to cautious optimism:
FY13 was one of the more difficult years for the fertiliser industry in recent times, with demand getting affected on account of delayed
and deficient monsoon and significant price increases following high input prices, decline in subsidy rates and currency fluctuations.
Sales of all fertilisers except urea declined in FY13, with the overall sales volumes declining by 11% to 53.4 million metric tonnes
(MMT) from 59.9 MMT in FY12. Further, delays in subsidy on account of significantly low budgeting led to high short-term borrowings
and substantial increase in interest costs. Most players faced profitability constraints and cash flow pressures due to the weak
demand and subsidy delays. The systemic inventory levels of non-urea fertilisers remained high through the year on account of weak
offtake in FY13 and the carryover inventory will be sold at lower prices, impacting the industry profitability. Given the challenging
environment, hopes of normal monsoon in 2013 lead to expectations of some recovery in FY14. On the other hand, adverse weather
conditions and under-budgeting of subsidy for FY14 may lead to further weakening of the financial position of the industry in FY14.
Non-urea fertiliser
sales decline by 24%
in FY13; urea
volumes rise by 2%
Gas price hike to
increase urea
subsidy outflow by
Rs. 131 billion and
affect urea industry
profitability by Rs.
12 billion
Rangarajan Committee recommendations on gas pricing accepted; would negatively impact the industry profitability and
lead to increase in the subsidy requirements: The Cabinet Committee on Economic Affairs (CCEA) approved the Rangarajan
Committee formula, which would lead to an increase in domestic gas prices to US$ 8.4/mmbtu for FY15 and to over US$ 10/mmbtu
from FY16 onwards. The move will have a significant impact on the domestic fertiliser industry. ICRA Research estimates that
incremental subsidy outflow for urea production would be to the extent of ~Rs. 131 billion (at a currency rate of Rs. 57/US$). Further,
the profitability of the players who undertook revamp projects under the Urea Investment Policy of 2008, earning import parity price
(IPP)-based realisations on the incremental urea production beyond the cut-off quantity would be impacted to the extent of ~Rs. 12.14
billion. Additionally the profitability of some of the players manufacturing non-urea fertilisers from gas will be impacted unless the GoI
increases the subsidies on these fertilisers to compensate for higher production costs. Cost structure of companies producing
chemicals in integrated fertiliser complexes will also be impacted due to higher gas costs. Further, the regulatory risks for the industry
will be higher as dependence on subsidy would increase. In case of subsidy delays such as those witnessed in the recent past, the
industry will be affected by way of increase working capital borrowings, high interest costs and pressure on the capital structures,
particularly for players with already stretched balance sheets. Overall, the additional subsidy burden would also have an impact on the
aggressive fiscal deficit reduction targets of GoI. The only positive aspect of the increase in gas price for the industry is that should it
lead to an increase in domestic gas production, the fertiliser sector may get additional allocations as it enjoys the top priority for gas
allocation.
According equal priority to the power sector as fertiliser may constrain gas availability and lead to higher subsidy
requirements for fertiliser sector: However, the GoI is considering a proposal whereby the power sector would be accorded equal
priority as fertiliser. Once parity is accorded between fertilisers and power sector for allocation of domestic gas, the supply to the
fertiliser sector may go down by 8-10 mmscmd, thereby increasing the subsidy burden for the GoI by ~Rs. 11 billion per mmscmd of
gas reallocated as gas cost is a pass-through for urea. As the industry faces higher gas prices going forward, the diversion of gas
and the consequent support by the GoI for the industry either by way of increase in the subsidy or the MRP would remain to be seen.
1 mmscmd gas
reallocation to
power increases
subsidy burden by
Rs. 11 billion
Encouraging early agro-climatic signals provide hope of better demand in FY14; gas price increase to increase
working capital requirements and increase subsidy burden on GoI
3. I C R A L I M I T E D Page 3
Subsidy for NPK nutrients under NBS for FY14 declines; however, currency depreciation may impact pricing: The GoI
reduced the subsidy on NPK nutrients under nutrient-based subsidy (NBS) for FY14 on account of falling global prices of fertilisers
as well as declining prices of raw materials. The new NBS subsidy rates should reduce the P&K subsidy burden of the GoI by 15-
18%, i.e. by Rs. 45-50 billion, depending on consumption in FY14. Retail prices of these fertilisers also witnessed decline as was
mandated by the Department of Fertilisers (DoF); however, currency weakening in the recent past has threatened to increase the
import prices of raw materials and fertilisers. The overall impact on the P&K industry for every one rupee depreciation against the
US dollar is of the order of ~Rs. 9.85 billion. Given the squeeze in non-urea fertilisers profitability in FY13, it remains to be seen if
the players are able to maintain lower prices of non-urea fertilisers in the coming months.
Subsidy backlog of
Rs. 360 billion
carried over to FY14
from FY13
Low subsidy budgeting for FY13 and FY14 to lead to continued subsidy backlog: ICRA expects the fertiliser subsidy to continue
to remain high over the next two years on account of low subsidy budgeting leading to rollover of subsidy to the next fiscal year. With
the total subsidy requirement for FY13 estimated at Rs. 1020 billion and fiscal consolidation by the GoI leading to low budgeted
allotment of Rs. 660 billion, ~Rs. 360 billion of subsidy will be paid from the budgeted subsidy for FY14. ICRA anticipates the total
subsidy requirement for FY14 to cross Rs. 600 billion (not including the subsidy backlog for FY13) despite weak urea international
prices and reduction in subsidies of non-urea fertilisers. Consequently, a part of the subsidy outflow for FY14 will be rolled over to
FY15. While demand scenario is expected to be better, which should result in somewhat better profitability for the companies, delayed
subsidy payments would lead to continuation of stretched cash flows, elevated capital structures as well as impact net profitability due
to high interest charges in FY14.
Stiff competition for greenfield / brownfield projects under the New Urea Investment Policy 2012: The announcement of the New Urea Investment Policy has spurred
various incumbents as well as new players to announce their urea expansion projects. Fifteen companies have filed proposals for urea brownfield / greenfield projects with the
Department of Fertilisers leading to stiff competition for the award of the projects under the scenario of constrained gas availability. ICRA believes that the award of the urea
projects would be based on several considerations such as domestic and international demand-supply scenario, gas availability at reasonable prices, global urea prices,
availability of land / utilities / railway siding / other facilities at existing plants to save on the fixed costs, etc. Besides, the GoI may consider approving certain coal gas-based
projects (including revival projects based on coal) or overseas projects on account of uncertainty of gas availability domestically and increase in domestic gas prices.
Outlook: Better demand outlook in the near term, but gas price hike negative for the industry; increases regulatory risks for the industry: In the near term, the demand
scenario is expected to be better than FY13 given the assumption of normal monsoon and moderation in raw material prices (except gas). This should help P&K players recover
their profitability to some extent in FY14, although complete recovery may likely take a longer time. In the long term, increase in gas prices is negative for the fertiliser industry as
dependence on subsidy will increase, which exposes the industry profitability and cash flows to timeliness of subsidy receipts. How the GoI re-compensates the industry from the
impact of the gas price will determine the returns from the industry in the long term. The urea industry continues to be affected by lack of revision of fixed costs and retail prices.
Currency fluctuations remain a concern on account of significant import dependence. Pooling of gas or according equal priority to the power sector will further increase the
dependence on imported gas and correspondingly, on subsidy. Further, the industry is awaiting approval of projects under the NUIP-2012, which will also be directly dependent
on gas availability. Subsidy is expected to continue to be delayed in FY14 due to under-budgeting, which will affect net profitability of the players due to reliance on short-term
borrowings. While the demand scenario looks positive, gas pricing, subsidy delays and currency fluctuations will remain the key challenges for the industry in the near-to-medium
term.
Decline in nutrient
subsidy to lower P&K
subsidy outflow by Rs.
45-50 billion in FY14
4. I C R A L I M I T E D Page 4
Subscribe to the Full Report for details on the following...
I. Brief update of the Indian Fertiliser Sector
Trends in fertiliser consumption in FY13 vis-a-vis FY12 – Urea, P&K fertilisers
Domestic and international price trends
Impact of high systemic inventory carryover to FY14 from FY13
International prices of key inputs
II. Subsidy budgeting for 2013-14 and likely impact on liquidity and profitability of fertiliser companies
Decline in subsidy under nutrient-based subsidy for FY14 and expected impact on the industry
Impact of decline in international prices of inputs and fertilisers
III. Gas Price Increase: An Impact Analysis
Impact of gas price increase on different segments within the industry
Impact on subsidy outflow and industry profitability
IV. New Urea Investment Policy 2012
Key parameters that the DoF may consider while awarding urea projects under NUIP-2012
V. Industry Outlook
VI. Brief Coverage on the following fertiliser majors
1. Chambal Fertilisers & Chemicals Limited
2. Coromandel International Limited
3. Deepak Fertilisers & Petrochemicals Corporation Limited
4. Gujarat Narmada Valley Fertilizers & Chemicals Co. Ltd.
5. Gujarat State Fertilisers & Chemicals Limited
6. Mangalore Chemicals & Fertilizers Limited
7. National Fertilizers Limited
8. Nagarjuna Fertilizers & Chemicals Limited
9. Rashtriya Chemicals & Fertilizers Limited
10. Tata Chemicals Limited
11. Zuari Agro Chemicals Limited
VII. A Primer on Subsidy Framework for Fertilisers
Subsidy rates for 2013-14 and changes in subsides for various fertilisers
5. I C R A L I M I T E D Page 5
Please contact ICRA to get a copy of the full report
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