The rising natural gas prices in recent times are expected to adversely impact domestic urea production in FY19, Icra said in a report.
Domestic gas price for the second half of FY19 is also expected to increase owing to increase in international gas prices, which will result in further upward movement in pooled prices, the rating agency added.
"The rise in gas prices has been adversely impacting urea players," it said.
With the rising share of high cost R-LNG in the gas consumption mix for the fertiliser sector, firm international spot gas prices and higher term LNG prices given the high crude oil prices; pooled price for the fertiliser sector is expected to remain elevated in the near term, it added.
Icra said rising gas prices will lead to higher subsidy receivables for the urea players, leading to higher working capital borrowings and associated interest costs leading to negative impact on profitability.
"The impact, however, will be largely offset by the energy savings for units which are energy efficient vis--vis their pre-set norms as energy savings will be reimbursed at higher energy costs," said Varun Gogia, senior analyst, Icra.
With rising gas prices and subdued international urea prices, the production beyond re-assessed capacity (RAC) for high energy consumption domestic urea units is expected to remain unviable, the report said, adding, while the contribution margin for the energy efficient players is expected to decline, leading to lower profitability from production beyond RAC.
"As a result, urea production may decline in FY19 unless the department of fertiliser undertakes measures to keep production beyond RAC viable," said Gogia.
Icra noted that the delay in fixed cost reimbursement by the government is expected to weaken the profitability of urea units.
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