The Group of Ministers (GoM) on fertilisers has proposed to bring urea under the nutrientbased subsidy scheme, wherein the manufacturers will be allowed to increase the urea price by up to 10%. While the move will benefit urea manufacturers, it will also bring down the government’s subsidy burden and encourage a balanced usage of fertilisers.
Last year, non-urea fertilisers such as potassic and phosphatic fertilisers were brought under the NBS after which, consumption of cheaper urea has increased. It stands at 27 mt per annum, which is more than half of the total fertilisers consumed in the country. Domestic urea output stands at 21 mt, necessitating imports of 6-7 mt every year.
Further, on the back of higher input cost, controlled price for urea companies is facing margin pressure. Urea production includes different forms of feedstock such as gas and naphtha and, hence, the cost varies from manufacturer to manufacturer. Under the draft policy, the government’s subsidy portion will be restricted at . 4,000 per tonne to gas-based urea plants but a higher subsidy will be given to naphtha-based players. These units will get three years to convert into gas-based producers. Further, the weighted average pooled gas price will be considered to arrive at a uniform subsidy amount.
Decontrol will help the companies offset their manufacturing cost and improve bottomline. National Fert, RCF, Nagarjuna Fert and Chambal Fert derive over half of annual revenues from urea. Among listed companies, PSU National Fert is the biggest urea producer with a capacity of 3.2 mt per annum. It derives over 95% of its revenues from urea. Its Q1 profits fell 66% due to a rise in raw material costs and interest burden. It has replaced naphtha with natural gas over the past few years, but still consumes substantial quantities of fuel oil that are not linked by natural gas pipelines. In FY10, almost 68.6% of RCF’s revenues came from urea and subsidy. The ratio stood at 73% for Nagarjuna and 51.3% for Chambal in FY11.
The partial price decontrol will ease liquidity positions for urea makers and help them realise their sale proceeds faster. Higher urea prices would also rationalise its consumption and bring down imports while encouraging more domestic production. Chambal has gained over 30% in the past six months already, which limits a further upside in the near term. However, analysts expect National Fert and Nagarjuna Fert to give positive returns.
Last year, non-urea fertilisers such as potassic and phosphatic fertilisers were brought under the NBS after which, consumption of cheaper urea has increased. It stands at 27 mt per annum, which is more than half of the total fertilisers consumed in the country. Domestic urea output stands at 21 mt, necessitating imports of 6-7 mt every year.
Further, on the back of higher input cost, controlled price for urea companies is facing margin pressure. Urea production includes different forms of feedstock such as gas and naphtha and, hence, the cost varies from manufacturer to manufacturer. Under the draft policy, the government’s subsidy portion will be restricted at . 4,000 per tonne to gas-based urea plants but a higher subsidy will be given to naphtha-based players. These units will get three years to convert into gas-based producers. Further, the weighted average pooled gas price will be considered to arrive at a uniform subsidy amount.
Decontrol will help the companies offset their manufacturing cost and improve bottomline. National Fert, RCF, Nagarjuna Fert and Chambal Fert derive over half of annual revenues from urea. Among listed companies, PSU National Fert is the biggest urea producer with a capacity of 3.2 mt per annum. It derives over 95% of its revenues from urea. Its Q1 profits fell 66% due to a rise in raw material costs and interest burden. It has replaced naphtha with natural gas over the past few years, but still consumes substantial quantities of fuel oil that are not linked by natural gas pipelines. In FY10, almost 68.6% of RCF’s revenues came from urea and subsidy. The ratio stood at 73% for Nagarjuna and 51.3% for Chambal in FY11.
The partial price decontrol will ease liquidity positions for urea makers and help them realise their sale proceeds faster. Higher urea prices would also rationalise its consumption and bring down imports while encouraging more domestic production. Chambal has gained over 30% in the past six months already, which limits a further upside in the near term. However, analysts expect National Fert and Nagarjuna Fert to give positive returns.
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