Urea makers stare at delayed subsidies, gas trouble: CRISIL

CRISIL Ratings: Special banking arrangements provide temporary relief, but gas re-pricing will raise subsidy burden in the next fiscal

Fertiliser makers are looking at another year of delayed subsidy payments from the government, which will step up pressure on their credit profiles. While the introduction of nutrient-based subsidy in complex fertilisers and a decline in the import parity price (IPP) of urea have helped the government contain the overall subsidy bill, fiscal constraints have meant repeated under-budgeting of subsidy leading to delayed payments.

This has particularly impacted urea manufacturers and compelled them to seek more working capital loans, which has increased their interest cost burden. Says Sudip Sural, Senior Director, CRISIL Ratings: "Even though payments by the government are a certainty and it supports manufacturers through special banking arrangements (SBA), where it bears most of the interest cost, the stress due to delay is expected to continue into the next fiscal."

Urea makers will continue to face working capital pain in the next fiscal amid uncertainty over the next subsidy budget as a new government takes oath at the Centre following the general elections in May. This fiscal, the IPP of urea has declined as have prices of raw materials to make complex fertilisers. This could translate into a reduction in subsidy in the next fiscal. "However, what will complicate matters is the re-pricing of domestic gas to international benchmarks effective April 1, 2014. This will raise the subsidy burden from urea manufactured using domestic gas as feedstock," Mr. Sural said. For every USD1 per mmBtu (million metric British thermal unit) increase in the price of gas, the government’s additional subsidy outgo is estimated at Rs 30 billion. On the other hand, for urea manufactured using re-gasified liquefied natural gas (RLNG), the subsidy bill will remain vulnerable to high prices of the feedstock.

The government had under-budgeted for fertiliser subsidy in the last and current fiscals, which led to a piling up of subsidy receivables - from an equivalent of 94 days as on March 31, 2012, to 115 days as on March 31, 2013, and about 206 days as on September 30, 2013, for CRISIL-rated urea manufacturers. In the first half of this fiscal, their working capital borrowings have increased more than 25 per cent. The trend has meant a decline in the interest coverage ratio of CRISIL-rated urea manufacturers over the last three years. The number is estimated to fall to 2.6 times this fiscal from 3.0 times in 2012-13 and 3.8 times in 2011-12.

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While the SBA does provide temporary respite to fertiliser manufacturers in the form of cash-flow relief and lower interest burden, CRISIL believes the problem of under-budgeting, especially when the urea subsidy bill is likely to bloat in the next fiscal, will need to be addressed. Under-budgeting and delayed payments could lead to rating pressure on CRISIL-rated fertiliser manufacturers.

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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