RCF sees 10% hike in urea prices; subsidies to reduce

RG Rajan, chairman and managing director of Rashtriya Chemicals and Fertilizers (RCF) says the government will divest 12.5% stake in the company by the year-end. CNBC-TV18 had reported earlier that the finance ministry is proposing stake sale via the offer for sale (OFS) route.

Sources said the ministry is looking to raise nearly Rs 368 crore through the RCF stake sale. Last week, North Block had proposed a 9.5% divestment in NTPC to meet nearly half of the Rs 30,000 crore targeted divestment proceeds. The government will retain 80% stake in the company post the stake sale.

Sources say about 68.96 million RCF shares are likely to be put up for sale, spread out in tranches over time.

In a note floated for CCEA approval, the finance ministry has said an EGoM will have final say on the floor price for the RCF issue and also in how many tranches the stake sale will take place. Also, options other than OFS are open if market conditions warrant.

On the business front, RCF has lined up a capex of Rs 6,300 crore to be spent over the next five years to fuel its expansion and is also considering investing in Canadian potash mines. "We see 10% hike in urea prices and that should reduce increase costs, bring down working capital by 100 crore," Rajan told CNBC-TV18 in an interview.

Below is the edited transcript of his interview to CNBC-TV18.

Q: Is there any stake sale talks by the government and by when it can come through?

A: The government plans to disinvest 12.5 percent equity and it can happen in the last quarter of this financial year.

Q: It will entirely be a divestment; you do not want to raise money in that capital offering?

A: Yes, correct.

Q: You expect it to come in January-March quarter?

A: Yes.

Q: By when and how much hike you are expecting in urea prices?

A: We are expecting around 10 percent rise in urea price but ultimately government will take a call on the price rise.

Q: How will 10 percent hike impact your P&L?

A: It will not impact our P&L, but subsidy will become lesser.

Q: How much do you think the subsidies will go down by?

A: If the price of urea is hiked by 10 percent, then 10 percent subsidy will come down for domestic urea.

Q: How much relief in aggregate amount will it be for RCF as it is a working capital relief for your company?

A: It could be around Rs 100 crore.

Q: Will that make any marginal impact on your interest cost this year if it were to come?

A: Definitely, it will have some benefit.

Q: Besides the urea price policy, there are talks that the fertiliser ministry has been asked to expedite the urea investment policy as well aiming and attracting a huge investment of about Rs 45,000 crore to boost urea production, what is your sense of what is expected and what might come through?

A: The policy is expected very soon. It will be an import-parity based pricing policy with some floor and ceiling and gas price is expected to be passed through beyond USD 6.5 per mmbtu. We expect the policy to come in next 1-2 months.

Q: If this policy comes through how much will it add to the existing urea production?

A: We are planning one expansion plant at Thal with capacity of 1.3 million tonne per annum costing around Rs 4,100 crore. So that will be the capacity from RCF side.

Besides, there are number of players planning to put up new plants. So I think around 6-7 million capacities may come up once this policy is announced.

Q: How has offtake been in the current kharif season considering that for a better part we were belaboring under inadequate rains?

A: There has been some drop in the consumption of fertilizers, especially the P&K, there is a 30 percent decline in DAP and NPK and a decline of 5 percent have been seen in urea. Last year, we had holidays so there is not much impact on MOP, but there has been substantial decline in DAP and NPK this year.

Q: Will this impact your revenues? As more money is made on NPK and DAP rather than urea, so it might hit profitability in Q2 for all fertiliser companies?

A: Yes, to the extent the DAP shares are down. It may have some impact but RCF is not a major player in DAP. As far as the sales of NPK is concerned, there is not much drop in in-house production but there is drop in imported fertiliser.

Q: What is your capex plan? How much do you plan to spend this year and next year, is the money in place?

A: Our total capex for the next five years is around Rs 6,300 crore. For the Thal III expansion, we need equity of Rs 1300 crore and we have the  requisite funds. We will be funding our other projects with a mixture of debt and equity. We are looking for some government foreign funding for foreign projects like Ghana Urea Project and Potash project in Canada.