Fertilizers: Headwinds cropping up

29 Sep 2023 , 01:02 PM

The Government of India (GoI) has been revising nutrient-based subsidy (NBS) rates every six months, based on the preceding six months average international prices of key inputs viz. ammonia, phosphoric acid, potassium and sulphur. The revision is due on 1st October, 2023. The Fertiliser industry stares at a precarious situation, wherein spot prices are higher than the average preceding six months prices. Over the last six months, key input prices have declined 63-7%, which is likely to compel GoI to sharply cut NBS rates. However, firming up of input costs by 73-18% during late Sep’24 will impact profitability during H2FY24, if NBS rates are slashed. Further, the companies will have to take a one-time inventory loss again, since the industry-wide inventory across DAP and complex remain high. 

Fall in global prices to compel subsidy reduction: In the last six months, prices of key inputs viz. ammonia, phosphoric acid, potassium and sulphur — have declined ~63-7%. This will compel GoI to cut NBS rate sharply for the ensuing Rabi season. 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. 

But, international prices have surged: Post Aug’23, prices of key input items have spiked. Ammonia is up ~35% since then, while new contracts of phosphoric acid for Q3FY24 are being 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. 

MRPs unlikely to change much: Although the industry will be compelled to take price hikes, analysts of IIFL Capital Services believe the govt will restrict it; given that the elections are looming in some states in the coming months. Therefore, firming up of inputs costs and the steep fall in subsidy will impact profitability during H2FY24. Also, the companies will have to take a one-time inventory loss again as the industry-wide inventory across DAP and complex remains high. However, all is not lost as the rate cut will also improve the WC cycles and consequently, reduce debt and finance costs. Subsidy disbursements have been swift this year.