Fertilisers: Steep cut in NBS rates

26 Oct 2023 , 10:44 AM

The revised NBS rates for the ensuing Rabi season have been announced by the Government of India (GoI). New rates have seen steep cuts, in line with the concerns raised in analysts of IIFL Capital Services recent report (Link). The cut in NBS rates will to lead to a one-time inventory loss and lower profitability in H2FY24. Although the companies will be compelled to take price hikes, analysts of IIFL Capital Services believe the govt will discourage it; given that the elections are looming in some states in the coming months. Therefore, the cut is negative for the complex (NPKs) Fertiliser companies. However, all is not gloom as the rate cut will also improve working capital cycles and consequently, reduce debt and finance costs. Further, govt also approved subsidy allocation of Rs223bn for P&K fertilisers and has been prompt in disbursing subsidy payments this year. Analysts of IIFL Capital Services see 7-10% earnings risk for Coromandel. 

New rates: 

Subsidy per kg of nitrogen, phosphate, potash and sulphur has been cut by 38%, 49%, 84% and 33%, respectively for this Rabi season. Revised rates imply ~37-84% reduction in product-wise subsidies. Subsidy cut from the complex fertilisers is around Rs10,000/MT; while for DAP, the cut is Rs14,500/MT. Analysts of IIFL Capital Services understand that the govt is considering an additional Rs4,500/MT subsidy for DAP to make it remunerative. The subsidy on MOP has been slashed from Rs9,000/MT to Rs1,450/Mt. Rates are w.e.f. from Oct’23 to Mar’24. 

Fall in global prices compelled subsidy cut: 

In the last six months, prices of key inputs viz. ammonia, phosphoric acid, potassium and sulphur — have declined ~63-7%. This seems to have compelled GoI to cut NBS rate sharply. However, prices of key inputs have surged post Aug’23. Ammonia is up ~35%, while new contracts of phosphoric acid for Q3FY24 have been entered at $985/tn (up14% QoQ) and potash is up 4%. Fertiliser prices have also firmed up: urea has risen 6% to US$383, while DAP has gone up 9% to US$530. 

Earnings at risk:

In May’23, the govt had cut NBS rate by 22-54% for the Kharif season, which resulted in companies providing for the inventory loss during Q4FY23 and Q1FY24 results. Analysts of IIFL Capital Services believe companies would have been proactive this time around and taken steps to limit the impact by managing supply chain well. Their channel checks indicate that fertilisers companies offered incentives to push POS sales in Sept’23. Cut in NBS rates will to lead to a one-time inventory loss and lower profitability in H2FY24. However, it will also improve working capital cycles and consequently, reduce debt and finance costs. Analysts of IIFL Capital Services estimate the impact on profit margins of two major products (DAP, NPK 20:20:00:13), based on the revised subsidy and estimated landed costs of various raw materials. 

Earnings sensitivity for Coromandel International: 

As per analysts of IIFL Capital Services calculations, for every 10% contraction is Ebitda/tn, earnings decline by ~7%. The company has seen improvement in Ebitda/tn for manufactured fertilisers from Rs4,500 in FY22 to upwards of Rs6,100 in FY23. Though the company guides for Ebitda/tn of Rs5,000/tn, continued outperformance over the last six quarters had compelled us to assume higher Ebitda/tn of Rs5,750/tn for FY24 and Rs5,175/tn for FY25 and FY26. Hence, analysts of IIFL Capital Services see an earnings risk of 7-10% in the absence of a price hike