Urea retail price set to surge for farmers: Emkay

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Urea retail price set to surge for farmers: Emkay

Emkay Global Financial Services has come out with its report on fertilizer space.

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Emkay Global Financial Services has come out with its report on fertilizer space.

• Recent media reports suggest that the Centre is likely to undertake hike in urea retail prices by 40% to Rs 7430/mt. Formal cabinet note is likely to be circulated next week
• Widening gap between urea & decontrolled fert prices post NBS has accelerated urea consumption (+9% ytd) and adversely affected complex fertiliser consumption (-4%)
• Increase in urea retail prices will lower the subsidy outflow of the govt while benefit to companies will only be restricted to lower working capital requirement
• Complex fertiliser players (Coromandel, Zuari) to benefit from higher complex fertiliser demand while urea players (Chambal fertiliser) will benefit from lower working capital

Government proposes to increase urea retail prices by 40%: Recent media reports suggest that the Centre plans to raise prices of urea by 40% to Rs 7430/mt. Urea prices were last revised in April 2010 by 10% to Rs 5310/mt from Rs 4830/mt earlier. While the introduction of NBS in April 2010 has witnessed rapid increase in prices of decontrolled fertilizers (DAP prices increased from Rs 9350/ mt to Rs 19,000 / mt), prices of urea have remained constant throughout. News reports suggest that the proposal is being formulated and a formal cabinet note is expected to be circulated next week.

The move will help the government to reduce subsidy by Rs 60 bn: Government has witnessed sharp increase in fertiliser subsidy for FY12 which is expected to increase up to Rs 900 bn (source - Ministry of finance) from earlier budgeted Rs 500 bn. Various factors like higher urea demand, sharp increase in global fertiliser prices (Urea and complex) and currency depreciation has contributed to such a sharp increase in fertiliser subsidy. Subsidy increase is despite government bringing complex fertiliser under NBS which has helped the government reducing subsidy by ~80 bn by allowing the companies to increase complex fertiliser prices. Increase in urea retail prices will help the government to reduce its subsidy by approximately Rs 63 bn.

Companies may benefit from reduced working capital: Though the main beneficiary of increase in urea retail price will be government due to lower subsidy outgo, however companies may benefit due to reduction in working capital. Presently approximately 40-45% of total urea price (for gas base domestic urea producer) is collected from the farmers in cash while balance ~55% is collected from the government in term of subsidies received in 45-60 days. With higher retail prices companies will be able to collect ~60% from the farmers hence reducing their working capital requirement.

Long term impact of such price increase may boost complex fertilizer: Widening gap between urea and complex fertiliser has increased urea consumption (+9% ytd) with few farmers substituting low priced urea against high cost complex fertiliser (-4% ytd). We expect that such sharp increase in urea prices will reduce the gap between the these fertilisers and will drive the demand for complex fertiliser in medium term helping complex fertiliser players- Coromandel International , Zuari Industries . Urea players like- Chambal Fertiliser will benefit from lower working capital.

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