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| CapitalSertars Investment Advis |
Depreciation of rupee and rising gas costs is likely to increase the urea subsidy shortfall to Rs 9,000 crore this financial year, a report said as per the PTI report. Urea players have been witnessing rising gas costs, which coupled with the depreciation of rupees against the US dollar will result in higher cost of production, rating agency Icra said in its report. The increased cost of production for urea is a pass-through to the government in the form of subsidy and will lead to a rise in the urea subsidy in FY19, it added. "With the recent currency depreciation, domestic fertiliser industry is expected to face headwinds as it is highly import dependent," said K Ravichandran, senior vice-president and group head, corporate ratings, Icra.
He said the goverment's urea subsidy bill for FY19 is expected to reach around Rs 54,000 crore, against budgetary allocation of Rs 45,000 crore, driven by rising gas costs and currency depreciation. However, Ravichandran said, energy efficient urea manufacturers are not expected to witness any significant challenges from currency depreciation as the increased cost of production will be a pass-through to the government in the form of subsidy, while increased interest costs would be offset by the higher energy savings.
"Nonetheless, for production beyond reassessed capacity (RAC), which is eligible for import parity pricing, the government's intervention may be imperative to safeguard the profitability given the rising gas costs and relatively subdued global urea prices," he added. Phosphatic and potassic (P&K) players have also witnessed rising raw material prices in recent quarters, particularly for phosphoric acid, according to Icra.
As a result, P&K players had undertaken a retail price increase in February 2018, while the NBS subsidy rates for phosphates was also increased for FY19 which, according to the agency will enable the industry to conserve their contribution margins for the upcoming kharif season despite rising raw material prices. "The demand for P&K fertilisers is expected to remain healthy in the upcoming kharif season unless the expectations related to a normal monsoon do not fructify leading to weaker demand and thus, inability of the companies to pass on the rising raw material costs to the farmers leading to decline in profitability of the companies," Ravichandran added.
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