Agriculture, remains the key sector of Indian economy and acts as a major source of employment to people across the country. The fertilizer industry is this aspect is an important player assuring food security. At an overall level, India is the 2nd largest consumer of fertilizers with urea comprising more than half of the total consumption.
During FY19, the country produced 415 LMT (Lakh Metric Tonnes) of fertilizers which are classified as primary, secondary and micro nutrients based on the quantum of nutrients. In fact, the country is the 3rd largest producer of nitrogenous fertilizers after China and the US. The most widely used primary nitrogenous fertilizer is urea which dominates the total fertilizer production in India in line with the higher consumption.
With respect to domestic urea production, the country has witnessed stable growth over the past few years despite recording flat growth on-year at 240 LMT during FY19. Apart from domestic production the country also resorts to imports of urea albeit at a lower proportion of 20- 25% of the total production- import mix. With India being the world’s second largest consumer of urea, the government is working towards achieving self-sufficiency by increasing domestic production thereby ending imports by 2022. In fact, to increase the share of domestic production the government is providing incentives to producers to go beyond the re-accessed capacity under the New Urea Policy. Going ahead, production and imports are likely to be impacted on account of neem coating of urea which is likely to constrain consumption.
The industry is highly regulated with control over fertilizer production, distribution and prices. The difference in the government fixed MRP and manufacturing costs is reimbursed as subsidy to the manufacturer, and its timely disbursal remains a key monitorable. Any delay or deviation from the budgeted estimates has as adverse impact on the players’ profitability.
Further, India imports the raw materials which are required for manufacturing the fertilizers. With respect to the same, natural gas is primarily used as a feedstock for the manufacturing of urea. It comprises for 50- 70% of the entire raw material costs. Consequently, availability of the same is also regulated with respect to supply and prices. With higher preference towards the gas based plants, out of 31 urea plants, 28 are gas based with the rest based on naphtha.
Initiatives such as New Urea Policy 2015, Direct Benefit Transfer in the fertilizer Industry, gas pooling for the urea sector augurs well to the sector.
Key Risks & Attributes
During FY19, domestic urea production was flat on-year at 240 LMT (Lakh Metric Tonnes). The country has however witnessed stable growth over the past few years recording a CAGR of 1.5% over FY15- FY19. Apart from domestic production the country also resorts to imports of urea albeit at a lower proportion of 75 LMT (during FY19) comprising ~24% of the total production- import mix.
With India being the world’s second largest consumer of urea, the government is working towards achieving self-sufficiency by increasing domestic production thereby ending imports by 2022. In fact, to increase the share of domestic production the government is providing incentives to producers to go beyond the re-accessed capacity under the New Urea Policy. However, on account of neem coating of urea which is likely to constrain consumption, going ahead, production and imports are likely to be impacted.
Owing to the policy support provided by the government to underpin growth in the fertilizer industry, it has led to the rapid build-up of manufacturing units in the country with investments in the public, co-operative and private sectors. Further, initiatives such as New Urea Policy 2015, Direct Benefit Transfer (DBT) in the industry, gas pooling for the urea sector augur well for the sector.
Acuité believes initiatives such as New Urea Policy and Direct Benefit Transfer (DBT) in the fertilizer Industry are likely to bring in higher transparency and accountability supporting growth.
Urea being a highly regulated sector wherein the government determines/controls its retail price is a controlled fertilizer. With higher delivered cost of fertilizers compared to the market realization accrued on retailing, the difference is given as subsidy by the government to the urea manufacturer/importer. In fact, the government has approved for the continuation of the urea subsidy which assures that the retail price will be the same till 2020.
Consequently, competitiveness pertaining to the sector remains lower and is likely to continue on similar lines going ahead as well.
Further, under the New Urea Policy, the government has allowed the manufacturers to produce additional quantity in order to support domestic demand in the country. With additional supply infused by the players in the market it is likely to confine imports going ahead.
Acuité believes that since urea is a controlled fertilizer, the competitive landscape in the industry will continue to remain low among the operational players.
The raw materials required to manufacture the fertilizers are majorly imported. With respect to the same, natural gas is primarily used as a feedstock for the manufacturing of urea. It comprises for 50- 70% of the entire raw material costs.
Availability of the same is highly regulated with regard to its supply to the fertilizer industry. Further, the government has approved a scheme for gas pooling in the sector which seeks to establish a mechanism for pooling the price of domestic gas and Regasified Liquefied Natural Gas (RLNG) for offering a uniform gas price to all the customers in the sector. Domestic gas is being allocated to all sectors as per Gas Utilization Policy of the Government. It is first allocated to the priority sectors such CGD, Fertilizer, Power and LPG. With higher preference of the industry towards the gas based plants, out of the 31 urea plants, 28 are gas based with the rest based on naphtha.
However, the inverted duty structure to which the industry is exposed wherein raw materials such as naphtha and ammonia are being charged at 18% is likely to hamper domestic players’ profitability.
Acuité believes that since the gas pricing and availability are being highly regulated any sharp volatility with the same is likely to be confined. However, higher global demand specifically from China can impact the raw material availability and will remain a key monitorable.
The industry is highly regulated with government control over fertilizer production, distribution and prices. The difference in the government fixed MRP and manufacturing costs is reimbursed as subsidy to the manufacturer, and its timely disbursal remains a key monitorable. Any delay or deviation from the budgeted estimates has as adverse impact on the players’ profitability.
Further, India imports the raw materials which are required for manufacturing the fertilizers. With respect to the same, natural gas is primarily used as a feedstock for the manufacturing of urea. It comprises for 50- 70% of the entire raw material costs. Consequently, availability of the same is also regulated with respect to supply and prices.
Initiatives such as New Urea Policy 2015, Direct Benefit Transfer in the fertilizer Industry, gas pooling for the urea sector augurs well for the sector. The government had also revised dealer margins to be paid to urea distributors. The revision is likely to benefit the dealers across the country by enhancing their financial viability post DBT implementation.
Acuité believes that since urea industry is government regulated any adverse policy changes can lead to high risk in the sector.
Although India has made a significant improvement in terms of crop yield, it lags behind in terms of global productivity levels. This underpins the requirement for R&D in fertilizer sector for superior quality fertilizer products. However, the sector remains less exposed to rapid technological transition in short term owing to its price sensitiveness.
Going ahead, urea units to be driven to select better technology and different measures to reduce energy consumption. The government has also issued revised energy norms under New Urea Policy 2015 for existing gas based urea plants in the country.
Acuité believes the industry’s exposure to rapid technological innovations at a lower level. However, in long term to achieve operational efficiencies the players will have to abide with optimal energy norms requiring investments.
Operating Margin
(Marginally
favorable)
Interest Coverage Ratio
(Marginally favorable)
Return on capital employed
Debt/ Equity
(Marginally unfavorable)
GCA days
(Marginally unfavorable)
Note: The industry financial performance risk score is provided on a 6-point scale
Disclaimer:
Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry.
Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true,
Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon.
Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.