Icra revises fertiliser sector outlook to positive on expectations of healthy profitability

Icra on Monday revised its outlook for the fertiliser sector to positive on expectations of healthy profitability in 2021-22, following a normal monsoon for the upcoming kharif season.

Additionally, the agri-economy witnessed a strong performance in 2020-21 with healthy farm incomes, and Icra expects the benefit of the current year to rub off on the next fiscal as well, it said in a report.

Further, the report said the credit profile of the fertiliser sector is expected to witness a significant improvement in this new fiscal year, driven by the removal of the subsidy backlog following the pay-out of additional subsidy of ₹62,602 crore by the government under the Aatmanirbhar 3.0 package.

Going forward, Icra expects the subsidy receipts from the government to be paid in a timely manner, which will lead to lower working capital intensity.

“With the subsidy backlog out of the way now, the industry will be able to save on the interest expense it was incurring earlier. We expect the subsidy receivable days to moderate from 180-200 days witnessed over the last couple of years to around 100-110 days going forward," Icra Group Head and Senior Vice President-Corporate Ratings Sabyasachi Majumdar said.

With lowering of the debt and the associated interest costs, the cash generation and the credit profile of the industry would improve substantially going forward, he opined.

"For FY22, profitability is expected to remain healthy for the industry, given the expectations of a normal monsoon for the upcoming kharif season. Additionally, the agri-economy has witnessed strong performance in FY21 with healthy farm incomes, and we expect the benefit of the current year to rub off on the next fiscal as well,” he added.

Icra further said the subsidy allocation for the fertiliser sector is around ₹79,500 crore for 2021-22, which is expected to be adequate for the urea sector while the phosphatic fertiliser sector is expected to witness marginal shortfall as per the rating agency's estimates, although the subsidy backlog thus created will be very low.

Subsidy estimates are sensitive to the sales volume and natural gas prices, Icra noted.

The announcement of keeping the domestic natural gas price unchanged at $ 1.79 per mmbtu for the period of April to September 2021, is a positive for the fertiliser sector as it will keep the cost of production and the subsidy requirement for the urea players low, the report added.