Subsidy cut for complex fertilisers will dent NPK producers' profitability: India Ratings

COIMBATORE: The 25%-30% reduction in subsidy rates of decontrolled fertilisers will adversely affect the NPK (Nitrogen, Phosphorus & Potash) producer’s profitability, India Ratings and Research has said.
“The ability to increase farm gate prices of P&K (phosphatic & potassic) fertilisers remains constrained due to the two consecutive weak monsoons which have impacted farmer’s affordability,” it said.
“Attempts to increase the farm gate prices to off-set the lower subsidy rates will impact volumes which are already weak for complex fertilisers that are costlier compared to urea,” the agency stated.
“Further, elevated inventory levels of the NPK also limit the ability of the NPK producers to increase the prices significantly. Producers may resort to giving additional discounts to clear inventory levels which would suppress margins further,” it said.
Although lower raw material prices, mainly phosphoric acid, ammonia and rock phosphate, would help protect margins of NPK producers, the benefit would be dependent on a stable rupee, and any weakness will hurt margins, India Ratings said.
“Further, Indian manufacturers’ flexibility to produce different grades of complex fertilisers, their backward integration and established brand name are likely to provide some pricing power and help cushion margins,” it said.
The drop in profitability will have a bearing on the credit profile of most of India Ratings-rated fertiliser companies. However, it is expected to stay at levels commensurate with their current ratings, the agency said.
“Absence of any large debt-led capex (capital expenditure) in the recent past has resulted in only working capital debt in the balance sheets of most of the NPK producers with near zero long-term debt,” it said.
The central government announced last week the reduction of subsidy rates on ‘Nitrogen and Phosphate’ by Rs 5 per kg and Rs 5.45 per kg, which is lower by 25% and 30% respectively. The rates have been revised to reflect the fall in international prices of di-ammonium phosphate and ammonia.
Phosphatic and potassic fertilisers are covered under the nutrient-based subsidy policy of the government and are partially deregulated. The downward revision of the rates would slash the NPK subsidy bill of the government by up to Rs 5,000 crore.