The government of India introduced the DBT mechanism for fertilizer subsidy on a pilot basis, effective October 2016, to reduce the diversion of fertilizers and bring transparency and swiftness to transactions and movement of subsidy funds. The DBT was rolled out on a pan-India basis in February 2018.
At present, manufacturers record sale of urea when it is sold to wholesalers/distributors and normally receive subsidy from the government in two-three months of the raising of the bill. However, under the new DBT mechanism, urea sales would be recorded on sale to farmers through point-of-sale machines. Generally, the majority of fertilizer sales occur over June-August and November-January. Thus, sales booking to that effect could be more lumpy in the medium to long term.
Considering urea sales would be booked at the time of sale to a farmer rather than to a distributor/wholesaler, the inventory carrying period of manufacturers is likely to increase, leading to additional borrowings for industry players, which are already marred by huge subsidy backlogs. The situation could further be worsened by the impact of significant cash outflows towards debt-led capex to comply with the revised stricter energy efficiency norms as per the New Urea Policy 2015. A recent government directive extended the implementation of the energy efficiency norms for some players to 1 April 2020 from 1 April 2018.
If the government were to pay fertilizer companies within 10 days of sale to farmers, the impact on the overall working capital cycle would not be significant, as higher inventory days would be compensated by lower receivable days. However, if there were to be two-three-month delays in the receipt of subsidy after sales to farmers, the overall working capital cycle would be further stretched. If the working capital cycle were to stretch, the industry would be hopeful of government support in the form of special banking arrangements like those in the past or revision of fixed-cost reimbursements, among others. Subsidy arrears stood at INR230 billion at 9MFYE18, and the budget provision is for INR700 billion for FY19. Meanwhile, the actual subsidy burden in FY19 could rise, given the increase in pooled gas prices driven by higher domestic gas and imported LNG prices. In Ind-Ra's opinion, such a development could delay subsidy payments.
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