February 22, 2010
Mumbai
Efficient fertiliser players well placed under NBS policy: CRISIL
CRISIL Ratings believes that the implementation of Nutrient-Based Subsidy Policy (NBS), announced
last week by the Government of India (GoI) will increase the volatility in the profitability of players in
the fertiliser industry. Under the new regime, more efficient players will be better placed to mitigate
the impact of higher volatility, as they will be better able to control their production costs.
In the complex fertilisers segment, the linkage of subsidy with import parity prices since April 2008
had already exposed the producers to volatility in international prices of both fertilisers and raw
materials. Says Mr. Pawan Agrawal, Director, CRISIL Ratings, “The NBS policy will mean that as
the subsidy component becomes fixed in nature, changes in raw material prices will impact the
profitability of players in the complex fertilisers segment more than before. Therefore, only players
with strong operating efficiencies, characterised by backward linkages, healthy supplier relationships,
and the flexibility to alter their product mix, will be able to mitigate the impact of volatility in raw
material prices on profit margins”. The retail prices of complex fertilizers will be decided by the
players. Therefore over the medium term, players with strong brands and those close to key markets
will be better placed under the NBS regime.
CRISIL Ratings also feels that the NBS regime is likely to bring the Government of India (GoI)’s
subsidy bill for complex fertilisers under control, as the subsidy component will now be fixed for the
entire year as opposed to the current regime where it varies with movements in the international
prices of fertilisers and raw materials. However, the quantum of impact on the subsidy bill of GoI can
be assessed once the final details of per nutrient subsidy are announced. CRISIL also believes that
NBS will address the issue of imbalance in soil nutrients, and encourage players to introduce
innovative products, thereby promoting balanced fertilization and application of secondary and micronutrients.
CRISIL will await further announcements regarding the extent of per nutrient subsidy, mechanism for
calculation, and any plans of mid-year interventions by the government. However, given the strategic
importance of this sector in ensuring food security, CRISIL believes that the government will balance
the interests of both farmers and producers, and it is unlikely that the cash flows of producers will
reduce materially from the current levels. “Therefore CRISIL does not foresee any immediate impact
on the credit quality of its rated entities”, adds Mr. Agrawal.
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The increase in the MRP of urea by 10 per cent, also announced by the Cabinet would result in a small
reduction in GoI’s subsidy bill for 2010-11. Further, CRISIL Ratings believes that urea manufacturers
will benefit slightly from this price increase as the dependence on subsidy receivables from the GoI
will reduce, thereby enhancing their working capital position. Says Mr. Sudip Sural, Head, CRISIL
Ratings, “The current subsidy regime for urea ends on March 31, 2010; the contours of the new
regulatory framework will therefore be a key determinant of their credit quality over the medium
term”. The GoI has stated its intent to implement NBS for urea as well. If that happens, CRISIL
Ratings believes that the manufacturers that have a low cost profile and are close to their end markets
will be better placed. CRISIL will watch for further announcements on GoI’s policy towards urea
subsidy.
Media Contacts
Analytical Contacts
CRISIL Rating Desk
Mitu Samar
Head, Market Development &
Communications
CRISIL Limited
Tel: +91-22- 3342 1838
E-mail: [email protected]
Pawan Agrawal
Director – CRISIL Ratings
Tel: +91-22-3342 3301
Email: [email protected]
Tel: +91-22-3342 3047/3342 3064
Email:[email protected]
Tanuja Abhinandan
Market Development &
Communications
CRISIL Limited
Tel: +91-22-3342 1818
Email: [email protected]
Sudip Sural
Head - CRISIL Ratings
Tel: +91-11-4250 5100
Email: [email protected]
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