Fertiliser: Demand outlook positive for FY14, says ICRA

ICRA's release on Indian fertiliser sector

Healthy monsoon in the current year has led to a favourable demand outlook for FY14 for Indian fertilizer Sector, with Kharif and Rabi off-take likely to improve significantly compared to FY13. However, since most of the sales is through channel inventory getting cleared, any positive impact on the industry participants’ sales and profitability may not be immediately felt, says rating major ICRA in its latest update note on Fertiliser sector.

Significant rupee depreciation in recent months has led to production costs remaining high despite lower global prices. Further, subsidy delays are likely to put pressure on cash flows of the companies. On the other side, recent developments in the potash market may be beneficial for India in terms of reduction of cost of procurement and significantly reduce retail prices of MOP, which may lead to revival of demand. Any meaningful reform in urea pricing is likely only after the general elections in 2014. Overall, despite significant challenges in the form of currency depreciation, feedstock availability constraints with the gas allocation to the fertiliser sector being capped at existing levels as well as subsidy delays, the industry appears to be on the path of slow but steady recovery due to measures taken to control inventory levels and imports as well as healthy monsoons aiding demand, says ICRA in the report.

While subsidy for P&K fertilisers is likely to remain in the range of Rs. 290-300 billion depending on sales volumes, the subsidy for urea is variable and depends on currency fluctuations. In terms of input costs, energy (gas) cost, which is the major cost of urea production, is denominated in US$/mmbtu. Accordingly, depreciation of the currency leads to increase in gas cost, which in turn increases the subsidy bill. Further, subsidy for revamped urea capacities producing urea volumes beyond cut-off quantity earning IPP-based realisations is affected by global urea prices as well as currency rates. Since global urea prices have declined substantially, ICRA Research anticipates subsidy on this production to decline to Rs. 25-28 billion from an estimated Rs. 32 billion for FY13; the decline in subsidy will directly impact industry profitability to that extent as mentioned above. Overall, the subsidy on urea is estimated to stay at Rs.360-400 billion, similar to previous years as a direct consequence of currency depreciation despite the decline in international urea prices. ICRA Research anticipates overall subsidy to be in the range of Rs. 650-700 billion in FY14 (not including the carryover subsidy of an estimated Rs. 360 billion). Given the subsidy budget of Rs. 660 billion for FY14, the delays in subsidy payments are likely to continue. Though the demand scenario is expected to be better, delayed subsidy payments would lead to stretched cash flows, elevated capital structures as well as adverse impact on net profitability due to high interest costs.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.