BackBittersweet subsidy cuts for fertilizer companies
Icra says subsidy cuts will take away the benefits of low international prices of intermediaries
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The reduction in nutrient-based subsidy for decontrolled fertilizers can undermine the profitability of companies that manufacture them. According to ratings agency Icra Ltd, the subsidy cuts will take away the benefits of low international prices of intermediaries.
Also, inventories of phosphatic and potassic (P&K) fertilizers rose to a five-year high in January this year, adds Icra. Analysts fear excess inventories, along with competition from traders, will trigger price cuts, impacting profitability.
“Attempts to increase the farm gate prices to offset the lower subsidy rates will impact volumes which are already weak for complex fertilizers," India Ratings and Research Pvt. Ltd said in a note.
“Further, elevated inventory levels of the NPK (nitrogen, phosphorus and potassium fertilizers) also limit the ability of the NPK producers to increase prices significantly. Producers may resort to giving additional discounts to clear inventory levels which would suppress margins further," the note added.
Coromandel International Ltd, Deepak Fertilisers and Petrochemicals Corp. Ltd, Gujarat State Fertilisers and Chemicals Ltd, and Tata Chemicals Ltd all produce complex or NPK fertilizers. The drop in profitability may affect the credit profile of some fertilizer companies.
However, the inventory concern could abate if there is a good monsoon. Normal usage of complex fertilizers will help clear excess inventories.
In addition, the subsidy cuts will reduce complex fertilizer makers’ dependence on government support, which is a good sign. For example, the share of subsidy in diammonium phosphate realization is estimated to fall from 35% to 28%, helping companies improve their working capital situation, points out HDFC Securities Ltd.
The reduction in subsidy rates for complex fertilizers is likely to prune the government’s subsidy bill by ₹ 4,500-5,000 crore this fiscal year. The government is likely to route these savings to clear the subsidy backlog, estimated at around ₹ 30,000 crore.
HDFC Securities estimates the current fiscal year-end receivables to fall around 40%. While that should please the industry, the subsidy cuts could undermine the firms’ profitability.
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