India Ratings pegs fertiliser subsidy for FY16 at Rs 71k cr

Fertiliser subsidy for FY16 is expected to increase to about Rs 71,000 crore from around Rs 65,000 crore in FY15, says a report by India Ratings & Research (Ind-Ra). Ind-Ra expects subsidy bills to increase to around Rs 71,000 crore (at a gas price of about USD 6.0/mmbtu) for FY16 from around Rs 65,000 crore in FY15. Increasing subsidies by the government have remained insufficient, resulting in a carry forward to next year.

FY15 has not been any different and saw a spill over of the FY14 subsidy of around Rs 30,000 crore.

The build-up of subsidy dues and a lag in their payments in the second half of every year will continue unless allocations are increased or subsidy obligations are reduced through bold reforms such as decontrolling urea prices and moving the commodity under NBS regime, it said.

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.