India Ratings expects fertiliser subsidy to grow in FY16

Delayed subsidy receivables have become a standard characteristic of the industry with bills remaining pending for as long as six months at times.

Since subsidy forms a substantial portion of the gross sales of fertiliser companies, the delay leads to the funding of subsidy through short-term borrowings which severely impacts their working capital cycle.

Additionally, borrowing cost does not form a part of subsidy reimbursement and is borne by fertiliser companies, which poses an interest burden and significantly impacts their interest coverage.

In view of delay on the part of the government in undertaking comprehensive fertiliser reforms, Ind-Ra has maintained a stable to negative outlook on the fertiliser sector for FY16.

The industry continues to face challenges such as insufficient subsidy allocation in Budget, unfavourable policies for setting up new urea facilities, weak government support for setting up of overseas JVs and delays in providing interim relief to naptha-based urea producers, the report said.

It added that urea retail prices, delays in subsidy payments to fertiliser manufacturers and domestic gas pricing & availability remain a concern.

"We expect the government to push reforms to reduce its subsidy burden by decontrolling urea prices and bringing it under the Nutrient-based Subsidy (NBS) regime.

"A series of reforms are long due in the sector primarily because of lack of government initiative, with subsidy bills and import dependence increasing by the year and no major policy reforms undertaken since the FY11 introduction of NBS," it said.

The recent natural gas price increase will seriously impact the EBITDA of fertiliser manufacturers for post cut-off production.

Also, amendments in the existing urea investment policy are awaited to make further investments in the fertiliser industry lucrative, it added.