Fitch Ratings has today said, in a just published Special Report, that the outlook for the Indian power fertiliser sector for 2010 to remain Stable to Negative. On the positive side, fertilisercompanies shall continue to enjoy low off-take risks on account of theinadequate domestic capacity facing strong and growing demand forfertilisers in the country. The credit profiles of Indian fertilisercompanies shall also benefit from the support available from thegovernment of India (GoI), due to the strategic role of the sector inensuring national food security. On the other hand, downside factorsinclude the possibility of major structural changes in the subsidyregime, which could have a significant impact on the business risk offertiliser manufacturers; challenges in sourcing key inputs and thecapex plans of urea manufacturers.
Fitch expects that the negative overhang in credit profiles, passed on from the previous two years, lowers the headroom available to fertiliser companies, as increases in financial leverage from fresh capex plans and a build-up of subsidy dues, could lead to further deterioration in credit profiles.
In the financial year ended March 2009 (FY09), 21% of urea, 67% of diammonium phosphate (DAP), and 100% of muriate of potash (MOP) sold in India was imported. This means that domesticmanufacturers face low off-take risks, as demand for fertilisers growsin tandem with food grains demand. However, major phosphate-basedfertiliser manufacturers have not planned any significant capex in2010, given the evident challenges in sourcing inputs for theirexisting capacity. Furthermore, the urea industry is moving towardsbrownfield capex, which remains subject to the availability of naturalgas. Earlier in 2009, fertiliser companies started receiving naturalgas supplies from the newly-found gas sources in the Krishna Godavaribasin,which eased the pressure on urea manufacturers to source expensive spot gas or naphtha.
Fertiliser manufacturers and importers in India are dependent upon government subsidies, due to the government-imposed price caps on fertiliser prices. The subsidy requirements of the fertilisersector have multiplied during the past ten years, since both inputprices and quantity of fertilisers exhibited an upward trend. As themounting subsidy burden affects the national fiscal deficit targets,the government is now considering a revision of the subsidy regime.This involves moving the current subsidy scheme from a cost-plus orimport price parity model to a nutrient-based subsidy model. Althoughthe exact details of the new subsidy have yet to be finalised, thebroad contours of the proposals under consideration include fixing thesubsidy amount based on the quantity of nutrient (nitrogen, phosphorousor potash) contained in a fertiliser, and decontrolling the retailprices at the "farm gate" level.
In case these proposals are accepted, the Indian fertiliser retail process will be subject to market forces, including international commodity prices. Should the GoI adopt the nutrient-based subsidy model, its subsidy burden could become less prone to the huge spike seen in FY09. At the same time, it could expose demand for fertilisers to changes in the prices of the respectivenutrients, and may change the demand between various nutrients which ispresently skewed towards nitrogen-based fertilisers. Implementation ofa subsidy policy on the above lines can significantly alter the earnings potential and credit profiles of fertiliser manufacturers.