Fertiliser Industry: Budget Expectations

The Indian fertiliser industry has had to face many hurdles over the past year. As the prices of imported complex fertilisers like Di-Ammonium Phosphate (DAP), Muriate of Potash (MOP) and other NPK variants shot over the roof, owing to scarcity in international supplies and sharp rupee depreciation against the US dollar, domestic farmers switched to using the more cheaply available nitrogen-based urea fertiliser as their chief source of nutrient for crop cultivation. This not only affected the demand for complex fertilisers or deteriorated the nutrient value of Indian soil but has also largely fuelled the fertiliser subsidy bill of the government.

As per media reports, the fertiliser industry has already coughed up an amount in excess of Rs 17,000 crore over the budgeted Rs 50,000 crore and threatens to raise a final bill of nearly Rs 90,000 crore by this fiscal’s year end.

While the major brunt of the unfavourable business dynamics were borne by the domestic fertiliser companies in the September quarter as aggregate sales grew by a modest 7 per cent and profits dipped by nearly 9 per cent on a YoY basis, the December 2011 quarter was a positive surprise as the aggregate topline grew by a robust 30 per cent on a YoY basis. However, the bottomline growth continued to disappoint as it de-grew sharply by 23 per cent, chiefly due to a rise in costs of borrowing, soaring input costs and sharp rupee depreciation between October-December 2011.

Going forward, despite the recent appreciation of the Indian rupee and the cooling off in global fertiliser prices, the subdued demand situation for fertilisers, especially the complex variants, is expected to persist and this will continue to hurt the financial health of the fertiliser companies.

Budget 2011-12: A Rewind

As always the budget promises plenty of aspirations and expectations, but seldom do these plans and proposals find the light of the day. Same was the case with last year’s budget when the government proposed to open up a number of positive opportunities for the agricultural sector such as higher credit facility, interest subvention for short-term crop loans and continued emphasis on the Green Revolution, which was indirectly expected to fuel the fertiliser demand.

However, blame it on an unfavourable macro-economic scenario or plain old government bureaucracy, but things did not pan out as per the plan. One of the highlights of last year’s budget was the infamous proposal to de-regulate urea prices and bring it under the purview of the Nutrient Based Subsidy Scheme (NBS). This was seen as a massive trigger for the domestic urea manufactures as it would help empower them with the ability to price their products at a global level and have better control on profitability.

However, owing to the onset of the assembly elections in five crucial states and the fear of angering the vote bank with high prices triggered off by de-regulation, the government refrained from de-controlling urea. Another plan to set up a mechanism to directly transfer subsidies to people living below the poverty line has also failed to see any action on the execution front yet.

Budget 2012-13: Expectations

With time running out and the budget due to be announced on March 16, 2012, the government is expected to be on an ‘all guns blazing’ mode, thriving hard to spur up its revenues and reduce expenses. In order to tackle the rising fertiliser subsidy issue, it has already directed the complex fertiliser manufacturers to refrain from lifting import from the ports owing to a slowdown in demand for the complex variants.

Moreover, in another bid, it decided to cut the subsidy rates being provided under the NBS in lieu of falling global prices and rupee appreciation. Though this move would not spell immediate bad news for the complex manufacturers, given that they have the liberty to raise the prices, nevertheless, keeping in mind the fading demand situation, we expect the dependence on urea to increase further. This in turn would put more pressure on the government’s subsidy bill for fertilisers.

Hence, in order to tackle this situation, it is necessary that the finance minister, while presenting the budget, proposes to either increase the farm gate prices of urea by 10-20 per cent or propose to re-introduce the move to bring urea under the NBS. However, given the defeat that the government has faced in the recently concluded assembly elections in the states of UP, Punjab and Uttarakhand, the chances of such reformist moves is very minute. In fact the government may adopt some more populist moves like lowering the interest rates on crop loans to 3 per cent for farmers who pay in time.

The only likely positive outcome from the Union Budget 2012-13 could be a push towards the direct subsidy transfer for people below the poverty line - a proposal that’s been biting the dust for long. However, without allowing the urea manufacturers to raise prices, this move won’t really prove positive from any company-specific point of view. Finally, according to recommendations from the Federation of Indian Chambers of Commerce and Industry (FICCI), the government must follow suit to other developing nations like China and slash the tariff rates on naphtha, LNG and propylene from 5 per cent to nil in order to ramp up investments in the chemicals and fertiliser sector and spur growth.