Urea players have been witnessing rising gas costs, which coupled with the depreciation of rupee against the US dollar will result in higher cost of production, ratings firm ICRA said in a report.
As per ICRA estimates, for one US dollar rise in gas costs, the cost of production for urea rises by Rs. 1,800-2,000/MT while for every one-rupee depreciation against US dollar, the same rises by Rs. 240/MT at a constant gas price.
The increased cost of production for urea is a pass-through to the Indian government in the form of subsidy and hence, will lead to a rise in the urea subsidy outflow for it in FY2019, ICRA said.
The Indian rupee has depreciated nearly 7.2% against the dollar since the start of CY2018 and 4.9% since the start of FY2019. The domestic fertiliser industry is largely dependent on imports to meet its raw material requirement for both urea as well as the phosphorus and potassium (P&K) segment and finished fertilisers.
“With the recent currency depreciation, the GoI’s urea subsidy bill for FY2019 is expected to reach around Rs. 54,000 crores against budgetary allocation of Rs. 45,000 crores,” said K. Ravichandran, Senior Vice-President & Group Head, Corporate Ratings.
However, energy efficient urea manufacturers are not expected to witness any significant challenges from currency depreciation as the increased cost of production will be a pass-through to the GoI in the form of subsidy, while increased interest costs would be offset by the higher energy savings, he added.
P&K players have also witnessed rising raw material prices in recent quarters, particularly for phosphoric acid. As a result, P&K players had undertaken a retail price increase in February 2018 while the NBS subsidy rates for phosphates was also increased for FY2019 which will enable the industry to conserve their contribution margins despite rising raw material prices.
ICRA expects the P&K fertiliser companies to undertake price increase to conserve their profitability for the upcoming kharif season. The demand for P&K fertilisers is expected to remain healthy in the upcoming kharif season.