India Ratings: Reforms key lessen govt‘s fert subsidy woes

India Ratings has maintained a Stable Outlook on its rated fertiliser companies despite persistent issues like delays in reimbursement of subsidies, delays in initiation of key policy reforms and volatility in key input prices. The Stable Outlook is based on the agency’s expectations of the sector’s continued strategic importance to the government for maintaining the national food security value chain.

India Ratings expects the government of India’s (GoI) subsidy burden to touch INR1trn in FY13 in the absence of bold policy decisions regarding urea prices and moving of urea under the nutrient-based subsidy (NBS) scheme. After the introduction of NBS, the industry expected GoI to move urea under NBS like rest of the fertilisers. However, this did not materialise in 2011 and 2012. Now, NBS for urea seems unlikely even in 2013. After a minor increase (around 1%) in subsidised urea’s retail prices in 2012, the agency expects a urea price hike in 2013.

“A longer-than-usual time lag in the actual transfer of subsidy to fertiliser manufacturers is likely in 2013 as the budgetary provision of INR610bn for the payment of fertiliser subsidy may fall short by INR400bn-INR450bn in FY13. The government is likely to resort to a combination of a special banking arrangement, supplementary grant and carry forward to the next financial year to meet the shortfall”, says Salil Garg, Director India Ratings’ Corporates team.

GoI has not signalled any major reform in the fertiliser subsidy payment mechanism as fertilisers have been kept out of the plans for the direct benefit transfer (DBT) of subsidy to a select population of beneficiaries. However, the possibility of fertiliser subsidy to move under DBT mode over the medium to long term remains alive in case the current roll-out of DBT in 20 districts yields positive results.

GoI has announced a revised urea investment policy for de-bottlenecking brownfield and greenfield urea projects. This will help kick start the next urea capex cycle in the industry, which once complete will help cover the existing 8mMT shortfall in domestic supply.

The Rating Outlook could move to Negative if subsidy support from the government is either inadequate or not timely or both. Also, large debt-funded capex programmes could move the Outlook to Negative for entities with moderate-to-low rating headroom.

India Ratings-rated fertilizer companies include Indian Farmers Fertiliser Cooperative Limited (‘IND AA’/Stable), Coromandel International Limited (‘IND AA+’/Stable), Gujarat State Fertilisers & Chemicals Ltd (‘IND AA+’/Stable), Tata Chemicals Limited (‘IND AA’/Stable).

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