The annual Indian budget due next month is likely to have several policy measures to give a stimulus to the agricultural sector such as on irrigation, crop insurance, e-NAM and agricultural credit, which will help the fertiliser players, ICRA said.
The sector is highly regulated with controls on several aspects pertaining to their business. The urea sector works on normative cost plus return framework, with controls on farm gate price, distribution and gas allocation. The difference between retention price and farm gate price net of dealer margin is paid as subsidy to the industry, which is variable in nature depending on the energy price trends.
As regards the NPK (Nitrogen, Phosphorus Potassium) segment, it works on fixed subsidy and variable farm gate pricing principle. Because of the regulated nature, timely payment of subsidy is the key to the eventual returns achieved by the industry, with urea players affected more than the NPK segment as more than 65% of their realization comes by way of subsidy, versus around 30 per cent for the NPK segment.
In recent years, subsidy allocation to the industry has fallen short of requirements resulting in recurring backlog of subsidy. As a result, subsidy gets exhausted within 7-8 months of the fiscal year, forcing the industry to resort to short-term borrowings, the interest costs of which are not borne by the Government of India.
Furthermore, with Direct Benefit Transfer (DBT) scheme ready to be rolled out on a pan India basis, under which the union government of India has committed to pay subsidy within 7 days of confirmation of sales to the farmers, one time clearance of backlog and adequate allocation of regular subsidy will be the key to the financial health of the industry.
“The urea industry also awaits the payment of revised fixed costs, which is long overdue. Many urea players have booked this as an income for the last three years. Any reversal of policy in this regard will lead to write down of their earnings and significant pressure on profitability,” said K Ravichandran, Senior Vice President and Group Head, Corporate ratings, ICRA Limited.