Industry Risk Score :Fertilizer- Nitrogenous

Executive Summary

Fertilizer industry plays a vital role in supporting self-sufficiency needs in food grain production by increasing agricultural productivity. At present, India is the third largest producer and second largest consumer of fertilizers in the world. The sector has grown at a CAGR of 4% between FY13 – FY17 . Fertilizers are classified as primary, secondary and micro-nutrients based on their nutrient quantum. The most widely used primary nitrogenous fertilizer is Urea. India consumes approx. 30 Million Tonne (MT) of urea annually of which about 80% is indigenously produced and the rest is imported. In FY 2016-17, the total production of fertilizer was 41.32 MT of which urea production was 24.2 MT and imports were down by 35% to the tune of 5.48MT . The stock was adequate to fulfill the demand for the year.

The industry is highly regulated under Fertilizer Control Order, 1985 with control over fertilizer production, distribution and prices. The difference in government fixed MRP and manufacturing cost is reimbursed as subsidy to the manufacturer. Urea being highly subsidized at 70% of its cost, results in huge subsidy outgo to the government. Union Budget 2018 has allocated Rs. 70,000 crore to fertilizer sector out of which urea gets a share of Rs.45,000 crore. Large amount of outstanding subsidy and freight bill to the tune of Rs 30,000 crore have been pending before government and is a source of much financial discontent to the industry .

Fertilizer sector consumes around 34% of available natural gas for production of urea. Shortage in indigenous supply and dependence on import of natural gas is a limiting factor for the growth of industry. The government is committed to raise the share of gas in India’s energy mix from 6% to 15% by 2022 through intensified domestic exploration, and adoption of hydrocarbon exploration and licensing policy (HELP) .The fall in global prices of LNG will stabilize the imports in future. Adequate pipeline infrastructure and gas pooling policy will ensure gas availability at uniform prices to all units.

The sector is struggling with poor returns due to normative reimbursement of cost of production (as against actual cost) and delayed subsidy payments translating into liquidity problems. Stifling government control and cumbersome payment procedure has made the industry unattractive for fresh investments. Overall return on net worth for the industry was negative 0.73% during FY2016-173.

However, the New Urea Policy (NUP), 2015 aims to rationalise the subsidy burden by maximising indigenous production of urea, end its import and promote energy efficiency of units. Also, the recently launched Direct Benefit Transfer (DBT) scheme and 100% neem coating of urea will keep in check subsidy pilferage and illegal diversion of urea.

The industry has a promising outlook in future given the rising agricultural growth, increased government spending and proactive steps being taken to revamp the ailing units.

Overall, Acuité believes that the Indian cotton fabric industry risk will remain favourable in the short to medium term. Increased exports, boost in domestic consumption and favourable government policies would be the key determinants.

Key Risks & Attributes

  • Huge Subsidy backlog
  • Shortage and pricing of natural gas
  • Tight energy efficiency norms
  • Low profitability, under recovery of cost
  • Sick units and machine obsolescence
  • Changes in duty structure
  • Outlook on agriculture sector
  • Changing customer preference towards sustainable organic farming

Demand & Supply Scenario


During FY2016-17, food grain production touched a record level of around 275 MT as a result of good monsoon and ample water reserves. During this period, the total production of fertilizer was 41.32 MT of which urea production was 24.2 MT and imports were down by 35% at 5.48MT. It is expected that demand for urea might increase by about 7.5 MT till 2025 as a result of huge growth in agricultural sector. Increase in rural income by means of various farmer welfare schemes such as MSP, farm loan waiver will boost the industry further.

Supply plan is prepared by Department of Fertilizer after assessing seasonal fertilizer requirement given by state governments. Production, import, distribution and movement of fertilizer is monitored through government’s integrated Fertilizer Management System (iFMS) to ensure adequate and timely supply of fertilizer to all parts of the country. Freight by rail/road is being reimbursed to ensure wider availability of fertilizer even to remote areas.

Presently, there are 30 Urea producing units with an installed capacity of 20.75 MT in public, private and co-operative sector. Under, NUP 2015, the ceiling imposed on urea production beyond re-assessed capacity during FY 2016-17 has been raised to enable them to produce additionally which was not possible earlier due to low Import Parity Price.

The performance in PSU sector has been adversely affected due to technological obsolescence and shortage/ frequent interruption of gas. Numerous projects have been announced by the government to restructure sick units and build new plants. Revival of five dormant plants at Gorakhpur, Barauni, Talcher, Sindri and Ramagundam is expected to increase urea production by 7.21MT3.

Government aims to ensure timely and adequate quantity of fertilizer at affordable prices to farmers. Around 2000 model fertilizer shops ‘Kisan Suvidha Kendras’ have been opened to provide quality fertilizers at genuine rates along with other soil related services. Al subsidised fertilizers are mandatorily being sold through point of sale (POS) devices linked with Aadhar details of farmers to plug loopholes and pilferage in distribution system.

The sector may witness growth on account of the increasing FDI inflow and demand in agriculture sector coupled with government’s aggressive focus on food and allied industries. Government is strongly committed to revamp the ailing industry under New Urea Policy, 2015. However, to encourage investment in the sector, a fair return on capital investment is necessary.

Nature & Extent of Competition


India is home to numerous top class private and public-sector companies. National Fertilizers Limited, Fertilizers and Chemicals Travancore Limited (FACT), Rashtriya Chemicals & Fertilizers Limited (RCF) are the leading PSUs. Chambal Fertilizers, Deepak Fertilizers, Gujarat State Fertilizers & Chemicals (GSFC), Zuari Industries Limited are the top private sector companies. IFFCO and KRIBHCO are the two units in co-operative sector.

The sector being directly related to food grain production is under strict government control. Competition is restricted among the major fertilizer units. Strict regulatory framework, high capital intensity and low profitability increase entry barriers for new players.

Huge difference in price of Urea and other decontrolled phosphatic and complex fertilizers has led to imbalanced use of fertilizer nutrients by farmers which are detrimental to soil health and risk crop nutrients. Soil health care policy would enhance usage of complex fertilizers skewing Urea’s demand in future. Also, growing awareness for organic farming and government support to city compost policy will pose a challenge to chemical fertilizer industry.

Urea being the only "Controlled” fertilizer, the competitive landscape in the industry will continue to remain low among the limited number of players.

Input Related Risk


Raw material costs account for 70-80% of the cost of production and are subsidised. Natural gas is the most preferred source of hydrogen to produce ammonia and consequently, urea. Out of the 30 large scale urea units in India, 27 are gas based and 3 are Naptha based. The gas supply to urea units is allocated by government at controlle prices. Though the industry gets priority for domestically produced gas, however due to limited gas reserves, it has to depend on robust imports of LNG making India the fourth largest importer. Imports are likely to grow as more LNG terminals are built.

For FY 2016-17, share of domestic gas in total supply of gas to fertilizer sector declined from 56.6% to 49%. The average domestic supply declined to 21.1 MMSCMD in FY2016-17 from an average of 25.8 MMSCMD in FY2015-162. Constrained gas supplies at high rates have forced the units to temporarily suspend their operations.

Under NUP 2015, target energy norms with token penalties have been announced by government to achieve energy efficiency by plants. The industry is showing its incapability to implement it since these energy saving projects have high capital cost with long payback period.

However, fall in global LNG prices and slashing of custom duty by half to 2.5% in Budget 2017 will enable the industry to majorly reduce cost of production. The Pradhan Mantri Urja Ganga project and Dhamra LNG terminal aims at augmenting pipeline infrastructure in the country. Also, the ‘Gas Pooling Policy’ will align variations in gas prices and ensure supply of gas at uniform prices to units on national gas grid. Joint ventures with Middle East companies have been entered into to provide the key inputs at reasonable prices.

Fall in global LNG prices and reduction of custom duty has benefitted the industry, however, procurement and adequate supply of gas at reasonable rates and lack of capital investment to achieve energy efficiency remains a major concern for the Urea industry.

Regulatory Risk


The Department of Fertilizer plans and monitors entire production, sale and pricing of Urea. The retail price of Urea has been fixed under Essential Commodities Act at Rs. 5360/Tonne. The fixed cost component of cost of production is facing a continuous inflationary push and has not been revised since long, leading to its under-recovery of about Rs.940 crore p.a. since FY2014-152. Strict energy consumption norms, complicated government policy and payment procedures have discouraged further investments in the sector. No new Urea plants were installed during the period 2000-2017. Large amount of unpaid subsidy and freight bills are pending for several years resulting in working capital crunch and heavy interest loss.

Quality of fertilizer is regulated under Fertilizer Control Order, 1985 to prevent sale of sub-standard fertilizer to the farmers. Various quality control measures are in place and penal provisions are imposed on units if fertilizer quality is not found satisfactory.

The 5% GST on urea vis-à-vis 18% on input ammonia has led to an inverted duty structure. It has resulted in liquidity problem in the industry due to blocked input tax credit carrying high interest costs. Natural gas has been kept out of GST ambit and is still attracting VAT in various states declining any input tax credit to the sector.

Recently, the government has rolled out DBT scheme across 19 districts to directly transfer the subsidy amount to manufacturers’ account as soon as a sale is made at POS via devices at retail level to solve the problem of subsidy leakages and delay in subsidy credit. The industry is skeptical on DBT due to absence of adequate budget allocation, trained manpower and technological support.

National Identity cards and biometric scans of farmers would record their fertilizer purchase and identify final beneficiary of subsidy. 100% Neem coating of Urea will keep in check illegal diversion of fertilizer for non-agricultural use. These measures will also curb smuggling of fertilizer to neighboring countries.

Urea industry in India, being the most government regulated industry in the world, is prone to high regulatory risk. Stifling government control and uncertain policy environment has made the sector unattractive for fresh investments. Favourable government policies would trigger "Make in India” initiative in the sector leading to sustained food grain productivity.

Technology Risk


Although India has made significant improvement in crop yield, it still falls behind in global productivity levels. This calls for huge R&D investment in fertilizer sector for improved fertilizer products, both efficient and affordable. Urea Deep Placement (UDP) technology, practiced in Bangladesh and some African natios, aims in reducing loss of urea (around 66%) through nitrification, leaching and runoff, thereby increasing crop yields (thus income) and majorly curbing environmental pollution.

Environmental concerns on indiscriminate use of chemical fertilizers will increase demand for its substitutes. Slow/ controlled-release fertilizer technology is one such breakthrough which could replace water soluble fertilizers in future. It uses nugget/pellet form of fertilizer coated with nitrogen and zeolite which requires less application and minimizes wastage through leaching. Research on use of nanotechnology in fertilizer and N-fix solutions is in its early stage which could substitute synthetic fertilizers in future.

Presently, the industry is less susceptible to technological innovations and advancements in the field. Going forward, judicious use of chemical and organic fertilizers will be ecologically useful and economically viable to the industry.

Operating Margin


In terms of net sales, Nitrogenous Fertilizer industry witnessed a moderate Y-o-Y increase of 5.7% during FY16-FY18. Industry average of EBITDA margins remained at 12% during the period, reflecting a favourable position.

Interest Coverage


With limited leverage and improving income levels, the overall interest coverage ratio was favourable with an average of 1.9 times during FY16-FY18. Average industry interest improved to 1.9 times in FY2017-18 compared to 2.1 times during FY2016-17.

Return on Capital Employed


Industry ROCE reduced significantly to 1% FY2017-18 from 3% in FY 2016-17. However, during the three-year period, average ROCE was 2%.

Debt / Equity


The industry showed a stable and favourable debt-equity ratio with an average of 1.3 times, during the three-year period.

GCA (Days)


The industry presented an improving trend in terms of gross current assets (GCA) reducing from 201 days in FY2015-16 to 119 days in FY2016-18. The industry had an average GCA of 150 days, during the three-year period.

Industry Financials and Industry Average

Fact Sheet (As on Year Ended March 31st)SUM Unit 201803 201703 201603
Net Sales Rs. Cr. 69,521 66,132 62,414
OPBDIT (Excl. NOI) Rs. Cr 9,203 7,524 7,240
Depreciation Rs. Cr. 1,573 1,374 1,328
PAT Rs. Cr. 574 1,787 1,095
Net Cash Accruals Rs. Cr. 2,147 3,160 2,423
Networth Rs. Cr. 28,125 25,483 23,729
Total Debt Rs. Cr. 28,805 30,193 37,896

Average Unit 201803 201703 201603
EBITDA Margin % 13.2% 11.4% 11.6%
PAT Margin % 1% 3% 2%
ROCE % 1% 3% 2%
Interest Coverage Times 1.9 2.1 1.8
Debt to Equity Times 1.0 1.2 1.6
Debt to EBITDA Times 3.1 4.0 5.2
GCA Days Days 119 135 201

The entities considered in the static pool are as under:
List of Companies

Chambal Fertilisers and Chemicals Ltd.
Gujarat Narmada Valley Fertilizers & Chemicals Ltd.
Gujarat State Fertilizers & Chemicals Ltd.
Indian Farmers Fertiliser Cooperative Ltd
Madras Fertilizers Ltd.
Mangalore Chemicals & Fertilizers Ltd.
Nagarjuna Frtilizers & Chemicals Ltd
National Fertilizers Ltd.
Rashtriya Chemicals & Fertilizers Ltd.
Southern Petrochemicals Ind. Ltd
Zuari Agro Chemicals Ltd.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating 'High Risk' and 6 indicating 'Highest Safety'. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable

Data Sources & Credits

  1. Annual Report 2016-17, Department of Fertilizer
  2. Annual Report 2016-17, Fertilizer Association of India(FAI)
  3. Indian Journal of Fertilizer
  4. Press Release of Ministry of Chemicals and Fertilizers
  5. Press Release of FAI


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