Fertiliser firms to benefit as global prices ease, says ICRA

Indian fertiliser companies are likely to see an improvement in profitabilty helped by moderation in global prices and Government subsidies, according to rating agency ICRA. The rating agency expects profitability for phosphatic fertiliser manufacturers to improve at the current nutrient-based subsidy (NBS) rates, given the decline in input prices. In addition, ICRA said that for urea manufacturers , the energy efficient plants are likely to benefit from higher energy savings given the elevated pooled gas prices.

A few months back fertiliser prices and other key raw material prices increased globally due to strong crop prices, healthy demand, and geo-political issues amid limited supplies of some of the fertilisers. However, the prices started to ease due to weak international demand at such elevated prices. Further, the Government also revised the NBS rates downwards with effect from October 2022 as the prices started to soften.

Sabyasachi Majumdar, Group Head & Senior Vice President – Corporate Ratings, ICRA Limited, said, “The availability of fertilisers in international markets have improved, and the prices have also started to correct, which is a good sign for the domestic fertiliser industry as India imports a sizeable portion of key raw materials as well as finished fertilisers (almost 25-28% of finished fertilisers are imported).”

However, Majumdar said that owing to high international prices of raw materials and finished fertilisers, currency depreciation, and firming up of pooled gas prices, the subsidy requirement of the industry is expected to reach its highest ever level at around Rs. 2.5 lakh crore for FY2023. During the current fiscal, budgetary subsidy allocation was Rs 1.05 lakh crore, which was subsequently increased to Rs 2.14 lakh crore as against the requirement of about Rs 2.5 lakh crore.

Moreover, ICRA expects the government to allocate additional subsidies to ensure adequate fertiliser availability for the farmers and a healthy credit profile of the incumbents. At current prices of gas and other raw materials and assuming some growth in fertiliser consumption, ICRA expects the subsidy budget to remain elevated at around Rs 2 lakh crore for FY2024.

Urea Market

Indian fertiliser industry remains dependent on urea imports to meet domestic demand as there are supply constraints in India. However, the situation is expected to improve and the import of urea is estimated to decline as new plants are commissioned to increase domestic production. Moreover, nano urea has the potential to replace some portion of conventional urea but remains contingent on farmer acceptance, according to rating agency ICRA. In the case of DAP (Di-ammonium Phosphate) and MOP ( Muriate of Potash), the industry will depend on imports as there are no additional capacities in India in the segment.

According to Prashant Vasisht, Co-Group Head & Vice President of Corporate Ratings at ICRA Limited, the cost of subsidies for the urea segment has increased as gas prices have risen to around $25-26/MMBtu. To address this issue, the Indian Government has allowed fertiliser companies to obtain 20% of their gas from the domestic spot market. Additionally, if the recommendations of the Kirit Parikh Committee are implemented, it could lower domestic gas prices and reduce the pooled gas prices for fertiliser companies, which would result in a reduction of around Rs. 4,500 crores in subsidy requirements for every $1/MMBtu decrease in pooled gas prices.

Stocks To Watch

Some of the stocks to watch in the fertiliser industry are as follows: UPL, PI Industries, Sumitomo Chemical, Bayer Cropscience, Anupanm Rasayan, Sharda Cropchem, Rallis India, Bharat Rasayan, Dhanuka Agritech, Astec Lifesciences, Meghmani Organics, NACL Industries, Valiant Organics, Dharmaj Crop Guard, Zuari Agro Chemicals, Jubilant Industries