The favourable agro-climatic conditions and fall in raw material prices indicate stable outlook for fertiliser sector in the second half of this financial year, while demonetisation is expected to have marginal impact on the sales volume, ICRA said in a report.
"Overall, the outlook for the fertiliser sector continues to remain stable with favourable agro-climatic conditions and liquidation of high systemic inventory," ICRA Senior Vice-President and Head, Corporate Ratings, K Ravichandran said.
He said, for FY17, the upside in the overall volumes is likely to be limited at 2-4 per cent due to high systemic inventory levels at the beginning of the year.
"However, volume growth is likely to be at the lower end of the expected band as the recent government move of demonetisation could negatively impact demand in the short term," Ravichandran said.
The urea industry would continue to benefit from subdued energy price environment, which is likely to drive the cost of production lower, he added.
On the phosphate and potash (P&K) front, though the profits in H2 FY17 should be relatively better due to a further softening of raw material prices, the overall profits for FY17 should remain weak due to impact of weak H1 performance.
He said, the recent denomination move is expected to have a marginal negative impact on the agri-input sector in the near term.
"This is because, the rabi season sowing sets in November and the demand for agri-inputs like fertilisers, seeds and agrochemicals is high during this period. Most of the sales to the farmers are usually done on a cash basis and, hence, the temporary liquidity pressure is likely to affect the demand for the fertilisers during the peak rabi season," he added.
Also some impact on the sales was expected on account of the disruptions in the transportation and the supply chain, he said.
However, he said, a slew of measures such as allowing farmers to use old high denomination notes for purchasing seeds, increasing the withdrawal limits for them and extension of credit period by the fertiliser companies mitigate the impact.
The fertiliser volumes at companies end fell by 3 per cent year-on-year during H1 FY17 to 27.77 million tonne, despite normal monsoons during Kharif 2016, with the South-West monsoon ending at 97 per cent from the Long Period Average (LPA), the ICRA report stated.
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