February 19, 2014
Stagnant subsidy may hurt India's fertiliser companies
This April, the price of natural gas, key raw material used in urea production, will almost double. However, the subsidy provision on indigenous urea has been increased by a meagre 17%. With the selling price of urea fixed at INR5,310 (US$85) per tonne, producers have to depend on the government for recovery from the escalation in production costs.
Inadequate provision may lead to delays in subsidy payments due to tight government finances. Urea producers may hence have to borrow more to meet their working capital requirement, which will lower their profits due to higher interest outgo.
The subsidy allocation for phosphatic and potassic fertilisers has been reduced by over 16%. Although a moderation in the global prices of key inputs, such as phosphoric acid, rock phosphate and potash, provides some respite to these players, any further fall in the rupee against the dollar will negate the benefit from lower international prices.
The total subsidy bill for the current fiscal is expected to exceed the budgetary estimate by 54%. The current year's deficit of over INR37,000 crore (US$6 billion) will have to be paid out of the provision made for the next fiscal. This will leave the Government with less than INR31,000 crore (US$5 billion) to be paid out as subsidy in 2014-15. This will further aggravate the working capital stress for fertiliser companies and reduce their profits in 2014-15.
However, fertiliser stocks seemed unperturbed as urea majors, Chambal Fertilisers and Tata Chemicals, closed marginally lower. The stock of country's leading P&K producer Coromandel International gained over 1%.