Fertiliser subsidy unlikely to reduce: CRISIL

CRISIL believes that the Government of India's (GoI's) fertiliser subsidy is unlikely to reduce even after new plants are set up under the New Urea Investment Policy (NIP) 2013.

The key reason for this is the prevailing high price-in the international market-of gas, a key input in the production of urea. For the subsidy to reduce, the new urea plants need to procure gas at less than USD12 per million metric British thermal unit (mmBtu), which appears unlikely. However, the new policy holds potential to invite fresh investments after a gap of more than a decade and could facilitate reduction in India's import dependence. Moreover, the debt servicing ability of new urea projects will be constrained in the initial years. The new projects will, therefore, require debt-servicing support from existing cash flows in the initial years.

Against the backdrop of a sizeable demand-supply gap in natural gas projected over the medium term in India, new urea projects will, of necessity, be dependent on imported re-gassified liquefied natural gas (RLNG) as feedstock. Says Pawan Agarwal, Senior Director, Ratings, "At gas costs above USD12 per mmBtu, the reimbursement for brown-field projects under the policy will exceed the average import parity price of urea for the last six years, resulting in higher subsidy bill." This scenario is highly likely as RLNG prices per mmBtu currently range between USD18 to USD20. Further, the global demand-supply dynamics in urea are expected to change considerably as India, the largest importer of urea, gears up to add substantial capacity, as do other major markets such as China and USA. Therefore, GoI's subsidy bill will increase as domestic production will be reimbursed at high gas cost.

NIP 2013 proposes to make reimbursements on urea a function of the import parity price (IPP) and the gas cost. Reimbursements will occur within a price band, based on the actual IPP, for gas prices per mmBtu of between USD6.5 and USD14, and at the floor price for gas of more than USD14 per mmBtu.

Adds Sudip Sural, Senior Director, Ratings, "For all gas prices, reimbursement at the floor price will be inadequate to fully cover operating and financial costs in the initial years, thereby constraining debt servicing ability." The project cost, funding mix and terms of debt tied-up will be important determinants of project economics. CRISIL believes that players will need strong balance sheets, a proven track record at managing attendant project risks, and free cash flows from existing operations to support debt repayment on expansion projects in the initial years in order to maintain their respective credit risk profiles.

Disclaimer: CRISIL has taken due care and caution in preparing this Press Release. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of information on which this Press Release is based and is not responsible for any errors or omissions or for the results obtained from the use of this Press Release. CRISIL, especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Press Release.

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