CRISIL Ratings believes that the implementation of Nutrient-Based Subsidy Policy (NBS), announcedlast week by the Government of India (GoI) will increase the volatility in the profitability of players inthe fertiliser industry. Under the new regime, more efficient players will be better placed to mitigatethe impact of higher volatility, as they will be better able to control their production costs.
In the complex fertilisers segment, the linkage of subsidy with import parity prices since April 2008had already exposed the producers to volatility in international prices of both fertilisers and raw materials. Says Pawan Agrawal, Director, CRISIL Ratings, “The NBS policy will mean that asthe subsidy component becomes fixed in nature, changes in raw material prices will impact theprofitability of players in the complex fertilisers segment more than before. Therefore, only playerswith strong operating efficiencies, characterised by backward linkages, healthy supplier relationships,and the flexibility to alter their product mix, will be able to mitigate the impact of volatility in rawmaterial prices on profit margins”. The retail prices of complex fertilizers will be decided by theplayers. Therefore over the medium term, players with strong brands and those close to key marketswill be better placed under the NBS regime.
CRISIL Ratings also feels that the NBS regime is likely to bring the Government of India (GoI)’ssubsidy bill for complex fertilisers under control, as the subsidy component will now be fixed for theentire year as opposed to the current regime where it varies with movements in the internationalprices of fertilisers and raw materials. However, the quantum of impact on the subsidy bill of GoI canbe assessed once the final details of per nutrient subsidy are announced.
CRISIL also believes thatNBS will address the issue of imbalance in soil nutrients, and encourage players to introduceinnovative products, thereby promoting balanced fertilization and application of secondary and micronutrients.CRISIL will await further announcements regarding the extent of per nutrient subsidy, mechanism forcalculation, and any plans of mid-year interventions by the government. However, given the strategicimportance of this sector in ensuring food security, CRISIL believes that the government will balancethe interests of both farmers and producers, and it is unlikely that the cash flows of producers willreduce materially from the current levels. “Therefore CRISIL does not foresee any immediate impacton the credit quality of its rated entities”, adds Agrawal.
The increase in the MRP of urea by 10%, also announced by the Cabinet would result in a smallreduction in GoI’s subsidy bill for 2010-11. Further, CRISIL Ratings believes that urea manufacturerswill benefit slightly from this price increase as the dependence on subsidy receivables from the GoI will reduce, thereby enhancing their working capital position. Says Sudip Sural, Head, CRISILRatings, “The current subsidy regime for urea ends on March 31, 2010; the contours of the newregulatory framework will therefore be a key determinant of their credit quality over the mediumterm”.
The GoI has stated its intent to implement NBS for urea as well. If that happens, CRISILRatings believes that the manufacturers that have a low cost profile and are close to their end marketswill be better placed. CRISIL will watch for further announcements on GoI’s policy towards ureasubsidy.
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