Regulatory changes bode well for fertilizer industry ICRA

ICRA says the policy measures may not lead to an immediate improvement in financial performance but they are broadly positive for the overall fertiliser industry
Regulatory changes bode well for fertilizer industry ICRA

ICRA Research, in its July update of Fertiliser Industry Report series entitled “Major Policy Initiatives for Urea: Gas Pooling & Comprehensive New Urea Policy 2015”, says that, although actual rainfall and monsoon precipitation so far has been significantly better than earlier estimates of IMD, growth outlook for the industry appears more cautious for FY16 and would depend largely on the regional distribution of rainfall in addition to the overall magnitude.

The operating environment for the fertilizer industry improved to some extent in FY15 with overall volumes rising by 6 percent – in line with ICRA’s estimates of a 5-7 percent growth – driven by the healthy sales of P&K fertilizers. While urea volumes grew by modest 1 percent, P&K fertiliser sales grew by robust 13 percent, despite drought during Kharif 2014 and unseasonal rains in Rabi 2014-15, primarily on account of normalisation of system level inventories, relatively stable currency rates and low base effect, as per a recent report release by ICRA Research on the fertiliser sector.

In ICRA Research’s view, while urea sales will not be significantly impacted and may post a minor 1-2 percent growth to 31-31.5 MMT during FY 16, the P&K segment is more vulnerable to monsoon and economic forces (rupee fluctuation, prices of key raw materials, etc.).

Regarding the recent host of policy initiatives for the fertiliser industry, K Ravichandran, Senior Vice President & Co-Head, Corporate Ratings, observed that, “The policy measures announced by the government may not lead to an immediate improvement in financial performance of the fertiliser industry, though they are broadly positive for the overall fertiliser industry.”

According to ICRA, the implementation of gas pooling for the urea industry from June 2015 would incentivise competition among the industry players based on their energy efficiency. It would positively impact individual players, who did not have access to low cost domestic gas and were operating using largely R-LNG, while it will negatively impact players who were primarily using domestic gas for urea production.

“Besides, the new policy does away with the major impediment for setting up new urea plants under the New Urea Investment Policy 2012 – gas supply at reasonable cost, providing visibility on gas availability and prices,” Ravichandran said.

The implementation of the New Urea Policy (NUP-2015) from Q2 FY16 is positive for the government since it would reduce the subsidy outgo as the normative energy efficiency for the urea units on the basis of which subsidy is calculated, has been reduced. Also, the urea units may be able to generate healthy energy savings under the NUP-2015 as well despite tightening of the norms, as most of the companies have been able to improve their energy consumption levels in the past few years through energy savings and / or replacement of machinery under debottlenecking projects. Besides, the revised policy for urea production beyond re-assessed quantity incentivises domestic production and enables the industry players to earn reasonable profits, while at the same time it would not allow the government’s subsidy outgo (on this quantity) to exceed the outgo that it will have to incur if it imports urea.

The government has allowed the naphtha-based units to continue production until the issue of gas availability for these plants is resolved. It has also kept the nutrient-based subsidy for P&K fertilisers at the same level for FY16 as in FY15. However, freight subsidy will now be provided on a lump sum basis, which lays the onus of distribution of these fertilisers on the companies instead of the Department of Fertilisers directing supplies, although the government will have legal tools to direct fertiliser suppliers to supply in underserved areas. Further, the government has also made it mandatory for all indigenous producers of urea to produce 100 percent of the total production of urea as neem-coated urea to prevent diversion of urea for industrial uses and to help improve yields.

Regarding the outlook for the fertiliser sector, Ravichandran, said that, “The performance of the fertiliser industry in the near term would largely depend on the magnitude and spatial distribution of the monsoon during the Kharif season. However, subdued energy price environment augurs well for the industry although volatile currency and volatile prices of imported raw material for P&K fertilisers remains a concern.”

“The subsidy delays for the industry are expected to continue in 2015-16 as well which would continue to affect the financial risk profile of the players,” he added.

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