Fertiliser policy change to affect firms differently

Fertiliser companies are likely to pass on subsidy benefit to consumers

Analysts are cautiously optimistic on the profit margins of fertiliser companies, following a change in the government's policy on urea subsidy earlier this month.

Companies with high exposure in nitrogen (N) and sulphur (S), the two main nutrient-based crop fertility boosters, would tend to gain in the wake of the increase in subsidy. Those focusing on phosphate (P) and potash (K) based products might lose, on a cut in the subsidy.

Early this month, the Cabinet Committee on Economic Affairs (CCEA) approved a 20 per cent increase in the rate for nitrogen from Rs 15.854 a kg to Rs 18.989 a kg and for sulphur by 10 per cent from Rs 2.044 a kg to Rs 2.240 a kg. The subsidy for phosphate has been lowered from Rs 13.241 a kg to Rs 11.997 a kg (down 9.4 per cent) and that for potash was revised downwards 20 per cent, from Rs 15.470 a kg to Rs 12.395 a kg.

According to government estimates, overall payment under the nutrient-based subsidy (NBS) scheme would reduce to Rs 19,800 crore in 2017-18, from Rs 20,700 crore in 2016-17.

"The benefit for fertiliser companies would be area-specific. Production in short supply in a region would see some price support and, hence, high benefit for producers. In case of oversupply, the price of any fertiliser would remain subdued, resulting in a proportionate decline in their earnings," said Prakash Gaurav Goel, analyst with ICICI Securities.

The new subsidy rate for P&K fertiliser is in line with changes in input prices in the global market. Hence, the industry is unlikely to face any major inventory loss due to the reduction in subsidy on P&K nutrients. Currently, inventory in the system for diammonium phosphate (DAP) is around 1.5 million tonnes and for NPK is slightly higher at 1.8 mt. Industry sources said this would be sold at current prices and should get consumed by mid- May, after which new supply will come into the market.

"Prices of new inventory may not reduce significantly as prices of ammonia and phosphoric acid have firmed up. However, the companies may also not be able to increase prices in case where subsidy has gone down due to the looming threat of El-Nino which may impact consumption of fertilisers. Companies with higher contribution from NPK fertiliser are likely to be least affected as they enjoy brand equity and less competition which offers them better pricing power over commoditised fertilisers such as DAP / MOP (Muriate of Potash)," said Pratik Tholiya, an analyst with Emkay Global Financial Services.

Subsidy on DAP, which is second most widely used fertiliser after urea, has remained broadly unchanged. Among other fertilisers, ammonium sulphate phosphate which is 40 per cent of the total NPK fertilisers consumed in the country has witnessed a 6.6 per cent increase in subsidy. Key players in this category are Coromandel, GSFC, Tata, FACT, and Paradeep.

By contrast, however, subsidy has been reduced on NPK-10 and NPK-12 which are the other two extensively consumed NPK fertilisers (forming 31 per cent of total NPK consumed in the country). Subsidy on NPK-10 has been cut by around 9 per cent y-o-y while on NPK-12 it has been cut by 6 per cent. GSFC, Tata, Zuari are key producers of these two fertilisers.

"In light of the revision of maximum retail price (MRP) undertaken in FY17 by the industry, and given the recent revision in NBS rates, the MRP for MOP could increase by Rs 800-1,000 per tonne while that of complex fertilisers and DAP are expected to remain unchanged. Furthermore, the revision in NBS rates is expected to have a neutral impact on the demand for DAP and complex fertilisers while the MOP demand could be modestly hit if the MRP is increased by the industry," said K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA.