Industry Risk Score : Fertilizer - Phosphatic

Executive Summary

Fertilizer sector plays a vital role in sustainable agricultural productivity for the country. Phosphatic fertilizer is consumed in the form of complex fertilizer having varying levels of nitrogen (N) and phosphorus (P) content. Di-Ammonium Phosphate (DAP) and Single Super Phosphate (SSP) are the most widely used phosphatic fertilizers in India. India is the third largest producer of phosphatic fertilizers.

At present, India has around 21 DAP and complex fertilizer units with annual installed capacity of 14.6 Million Tonne (MT). About 50% demand of phosphatic fertilizer is being met indigenously and rest is imported from various countries. For FY18, fertilizer sales registered a nominal growth of around 2% as a result of demand escalation and fall in raw material prices after a 7% decline in FY173. Sale of DAP and other complex fertilizers recorded a 2% increase in volumes over FY 17.

Since the phosphate reserves in India are limited, the industry has high dependence on import of raw materials Therefore, profitability of DAP importers and domestic manufacturers is sensitive to rock phosphate and phosphoric acid prices as both raw materials have supply side constraints and hence, show volatility. Whereas, units with efficient risk and cost management practices, conversion efficiencies and lower logistic costs have competitive advantage over others.

Although phosphatic fertilizer industry has been decontrolled, government exercises indirect control through its comprehensive fertilizer policy on subsidy, quality and distribution. Union Budget 2018-19 has allocated the sector a subsidy of Rs. 25,000 crore out of a total fertilizer subsidy of Rs. 70,000 crore. Pricing policy issues are being faced by manufacturers in the absence of clear government norms for setting MRP. Delay in payment of outstanding subsidy and freight bills and accumulated input tax credit (ITC) is a cause of working capital crunch adversely affecting the industry. However, favorable rate revision in Nutrient Based Subsidy (NBS) policy for FY19 and recent reduction of GST on phosphoric acid from 18% to 12% will yield long-term benefit to the industry.

Limited phosphate reserves have induced research for improving fertilizer products and efficiencies in application. Growing environmental and health concerns over the use of chemical fertilizer necessitates its judicious use along with organic fertilizers.

Phosphatic fertilizer market will register a healthy growth on account of increasing awareness in farmers about benefits of balanced use of fertilizer. Aggressive government focus on agricultural and allied industries, prediction of normal monsoon by Indian Meteorological Department, MSP and farm loan waiver would play a significant role in fuelling fertilizer demand.

Key Risks & Attributes

  • Huge price difference in urea and phosphatic fertilizers
  • Unclear pricing guidelines by government
  • Outstanding subsidy and freight bills
  • Volatile prices of raw material (rock phosphate and phosphoric acid)
  • Changes in duty structure
  • Outlook on agriculture sector
  • Foreign exchange fluctuations

Demand & Supply Scenario


Fertilizer plays a vital role in improving the crop yield and thus, agricultural productivity. Department of Fertilizer (DoF) prepares the supply plan 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 guarantee 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.

At present, India has around 21 DAP and complex fertilizer units having an annual installed capacity of 14.6 Million Tonne (MT). About 50% demand of phosphatic fertilizer is being met indigenously and rest is imported from various countries such as Canada, China, Jordan, Morocco, Russia, Saudi Arabia and USA. Its demand is contingent on agricultural outlook which is largely monsoon dependant in India. Government’s aggressive focus on agriculture sector through infrastructure improvement and various farmer welfare schemes including irrigation facilities, MSP (raised to 150% of cost in budget), farm loan waiver, comprehensive crop insurance cover and interest subvention schemes would increase rural income and boost the industry further.

For FY18, fertilizer sales registered a nominal growth of around 2% after a 7% decline in FY17. Sale of DAP and other complex fertilizers recorded a 2% increase in volumes over the previous year. The fall in raw material prices of phosphoric acid and sulphur for most part of the year and low interest rates helped companies to maintain margins.

In FY17, total nutrient consumption (nitrogen, phosphorus, potassium) of fertilizers had declined from 26.75 MT in FY16 to 25.95 MT. Per hectare use of total nutrients too decreased from 134.9 kg to 130.8 kg during the same period. The P2O5 (phosphatic nutrient) consumption for FY17 was recorded at 6.71 MT, decline of 3.9% over the previous year.

The industry registered significant increase of 14.4% in DAP production in FY 17 at 4.33 MT as against 3.78 MT in FY 16 on the back of normal monsoon and adequate water reserves. Import of DAP was down by 27% from 6 MT to 4.39MT and SSP production recorded a marginal fall by 1.1% at 4.28MT. The stock through opening inventory, production and imports was adequate to meet the demand for the year.

Companies are targeting increase in production of phosphatic fertilizers in future to fulfil its growing demand. Coromandel Intl is adding 1 lakh ton of captive phosphoric acid capacity at an outlay of Rs. 225 crore which will be operational by the year 2019. Kribhco is setting up a USD 230 million joint venture DAP plant for 1.2 MT with Morocco based OCP in Andhra Pradesh.

However, fertilizer consumption is skewed towards urea as it is highly subsidised and is a cheap source of nitrogenous fertilizer. NPK ratio was 7.2:2.9:1 during FY16 and changed to 6.7:2.7:1 during FY17, depicting use of urea over phosphorus. Farmers use urea rampantly deteriorating soil of other essential nutrients provided by phosphatic and other complex fertilizers. Government’s Nutrient based Subsidy (NBS) policy aims at providing these fertilizers at subsidised rates, thus, increasing their consumption. To promote balanced use of fertilizers, soil health cards have also been distributed to farmers, which provide information on nutrient status of their soil and also recommends proper dosage to improve fertility.

SSP is produced by around 105 small and medium scale units. Restriction on SSP units of minimum capacity utilisation of 50% or minimum annual production of 4000 MT was removed inorder to become eligible for subsidy under NBS in March 2016. This will promote SSP production, being a cheap substitute to import based DAP.

To enhance fertilizer distribution network, around 2000 model fertilizer shops under the name ‘Kisan Suvidha Kendras’ have been opened to provide quality fertilizers at genuine rates along with other soil related services. All 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. Implementation of DBT scheme will constrain illegal diversion and smuggling to neighbouring countries.

Acuité believes that demand risk is moderate as growing awareness among farmers of benefits of balanced use of fertilizer on decreasing arable land may fuel the demand for phosphatic fertilizers. Favorable government policies such as DBT to support the fertilizer industry and increased distribution network will boost growth in the industry. Due to fall in raw material prices, DAP demand and production is likely to increase improving profitability of manufacturers in short-medium term.

Nature & Extent of Competition


DAP and complex fertilizer is manufactured by 21 units and around 105 small and medium scale units produce SSP. IFFCO’s Paradeep plant is the world’s largest grassroot DAP plant producing 2MTof DAP/Nitrogen Phosphorus Potassium (NPK) per annum. It has the world’s largest phosphoric acid plant with a capacity of 2650 Tonne/day. Coromandel International Limited is the second largest private sector phosphatic producer (3.5MT) and the largest producer of SSP (1MT) having a pan India presence. The other leading companies in the sector are Gujarat State Fertilizers and Chemicals Limited (GSFC), Deepak fertilizers and Zuari Agro Chemicals Limited.

Since subsidy rates remain same for both importers and domestic manufacturers, the former has cost advantage in terms of easy access to cheap raw material and favorable foreign exchange rates. Better cost control and risk management practices, conversion and logistic efficiencies and diversified geographical presence are critical for units to have competitive advantage. The private sector companies have also started diversifying into crop protection and agro science areas of forward market linkages, post-harvest solutions and drip irrigation addressing end to end need of farmer.

The sector being directly related to food grain production remains under government control and competition is restricted among the major fertilizer units. Strict regulatory framework, high capital intensity and moderate profitability increase entry barriers for any new player. Acuité believes that competitive landscape will remain low among the limited number of players.

Input Related Risk


TRock phosphate and eventually, phosphoric acid is the key raw material used in the production of phosphatic fertilizer. Sulphuric acid, ammonia and nitric acids are the other inputs. Raw materials account for 65-75% of realisations. Rock Phosphate is majorly imported from Morocco and Nauru as Indian reserves are insufficient. Since phosphate reserves are limited worldwide, its conservation and recycling is also underway.

Volatile prices of raw material affect profit margin of DAP importers and manufacturers. During FY17, fall in import prices of phosphoric acid and rock phosphate, the key raw materials, made it viable to produce DAP rather than import the end product. Prices of phosphoric acid declined by about 4% from USD 605/MT in April 2016 to USD 580/MT in April 2017. Rock phosphates prices fell by about 12.4% from USD 137/MT in April2016 to USD 120/MT in April 2017. Significant fall in prices of raw material would result in price drop of DAP increasing its demand in the short term and result in its higher domestic manufacturing, thus improving profitability levels of manufacturers. Stringent quality control checks are in place to ensure satisfactory quality of SSP and only specified source of rock phosphate is allowed for manufacture of SSP.

Government is promoting joint ventures with raw material rich countries for supply of cost-effective inputs and fertilizers. Long term agreements have been entered into for production facilities with buy back arrangements.

Availability and volatile international prices of rock phosphate majorly impact subsidy rates, profitability levels and production vis-à-vis import scenario in the country. Limited reserves of rock phosphate across the world make the industry vulnerable to concentration risk as well. Acuité believes that input risk is high as heavy dependency on import of raw material and intermediaries make the industry highly vulnerable to volatile prices and forex fluctuations risks. In the short term, due to significant price reduction in raw material prices, DAP demand and production is likely to increase improving profitability of manufacturers.

Regulatory Risk


Department of Fertilizer (DoF) under Ministry of Chemical and Fertilizer, Govt. of India is entrusted with the task of planning, promotion and development of fertilizer industry in India. Quality of fertilizer is regulated under Fertilizer Control Order, 1985 to prevent sale of sub-standard fertilizer to the farmers. Penal provisions are imposed and subsidy is denied if fertilizer quality is not found satisfactory. Companies also have to mandatorily print MRP and applicable subsidy on fertilizer bags and any sale above MRP is punishable under Essential Commodities Act.

Phosphatic fertilizers were under government’s retention price scheme (RPS) since 1977 and were decontrolled in 1992. NBS policy was introduced in 2010 making a policy shift from product based to nutrient based subsidy covering 22 grades of decontrolled and 15 grades of complex fertilizers, both indigenous and imported, except urea. Price parity between the various grades of fertilizer through government policy can only rectify the distorted consumption of nutrients.

Companies have to mandatorily submit certified cost (basis of MRP) to DoF and if found unreasonable, subsidy is restricted/ denied. However, companies face pricing issues as there is lack of government clarity on criteria to determine reasonable MRP. During FY 2016-17, units reduced MRP of DAP by Rs. 4000/MT as per government directives due to reduction in international prices of rock phosphate negatively impacting their profit margins.

Levy of GST on fertilizers @ 5% and 18% on raw materials create an inverted duty structure as subsidy is free of GST. It results in accumulation of input tax credit (ITC) and also makes domestic production costlier than imports. Recent reduction of GST on phosphoric acid from 18% to 12% will benefit the industry by reducing blockage of ITC. Units using direct rock phosphate @ 5% GST as input (with captive phosphoric acid facilities) will have less impact.

Whereas, subsidies account for 30-40 % of realisations across companies. Revised Nutrient Based Subsidy (NBS) rates announced for FY 2018-19 have increased subsidy rates for phosphate by 27% (Rs. 15.216/Kg from Rs. 11.997/Kg) while nitrogen rates (Rs.18.901/Kg) have been kept unchanged. This revision would translate into increase in subsidy for DAP by nearly 16% at Rs.10402/MT and for SSP at Rs.2734/MT.The increased subsidy would help in maintaining retail prices of DAP at current level mitigating risk of volatile raw material prices.

Huge NBS and freight claims pending at government’s end have a serious impact on cash flow and working capital requirement of the industry. The direct road freight rates have not been revised since FY14 leading to under-recovery of cost. Also, delayed refund of Input Tax Credit triggers liquidity problems.

Units are subjected to periodical inspections as quality issues surface in SSP. Subsidy payment is only made if quality certificate is issued by state government. The units are also demanding payment of notional freight for SSP and that the subsidy payments procedure to be at par with other phosphatic fertilizers.

Levy of custom duty on phosphoric acid at 2.5% hikes cost of fertilizer and impacts competitiveness to imported fertilizer. Regulations on of excess import of DAP by restricting movement plan and renegotiation of bound rate of duty on DAP in medium term will protect the domestic industry and encourage exports from India.

Although fixation of MRP of decontrolled fertilizers is left open, little discretion remains with manufacturing units. Industry wants market forces to prevail and minimum interference of government in pricing and fertilizer movement. Acuité believes that the sector has high regulatory risk as it is directly related to food grain production and a cause of exorbitant subsidy outgo to the government.

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. Limited phosphate reserves and its wastage during fertilizer production have called for research to increase production and application efficiencies. One such area being explored into is direct application of phosphorous instead of its conversion into fertilizer.

Research in the field of nanotechnology using zinc nanoparticles might replace conventional phosphorus fertilizer in future. The approach will limit the use of tons of fertilizers, conserve natural resources, increase plant nutrient and reduce water contamination through runoffs. However, high costs of these engineered fertilizers have not made them commercially viable in developing countries.

Environment friendly organic fertilizers such as compost enhance the soil with nutrients and microbes. Government’s policy on Promotion of City Compost and use of Phosphatic rich organic manure (PROM) have obvious health advantages over synthesized fertilizers.

Acuité believes that technology risk is low as the industry is less susceptible to technological innovations and advancements. 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, Phosphate Fertilizer industry witnessed a decreasing sales growth in the last three years, and recorded a moderate YoY increase of 6% during FY 2017-18 after a healthy growth of 16% in FY 2016-17. Average sales growth between FY16 and FY18 stacked at around 11.4%, whereas industry average EBITDA margins remained at 13% during the period, reflecting a favourable position.

Interest Coverage


With limited leverage and improving income levels, the overall interest coverage performance was favourable, with an average of 1.9 times during FY16-FY18. Average industry interest coverage also reduced marginally to 2.2 times during FY2017-18.

Return on Capital Employed


Industry ROCE dropped marginally to 2% in FY2017-18 from 3% in the previous year. Also, the industry average during the three-year period from FY16-18 remained at 2%.

Debt / Equity


The industry showed a stable and highly favourable debt-equity ratio with an average of 0.82 times, during the three-year period, indicating limited reliance on borrowed funds.

GCA Days


The industry presented an improving trend in terms of gross current assets (GCA) reducing to 109 days in FY 2017-18 from 113 days in FY 2016-17. For FY18-FY16, the industry had an average GCA of 124 days.

Industry Financials and Industry Average

Fact Sheet (As on Year Ended March 31st)SUM Unit 201803 201703 201603
Net Sales Rs. Cr. 1,03,954 98,161 84,705
OPBDIT (Excl. NOI) Rs. Cr 14,419 12,522 10,397
Depreciation Rs. Cr. 2,741 2,416 2,244
PAT Rs. Cr. 2,126 3,077 960
Net Cash Accruals Rs. Cr. 4,867 5,493 3,204
Networth Rs. Cr. 65,841 61,599 60,561
Total Debt Rs. Cr. 45,633 48,548 60,019

Average Unit 201803 201703 201603
EBITDA Margin % 14% 13% 12%
PAT Margin % 2% 3% 1%
ROCE % 2% 3% 1%
Interest Coverage Times 2.2 2.2 1.4
Debt to Equity Times 0.7 0.8 1.0
Debt to EBITDA Times 3.2 3.9 5.8
GCA Days Days 109 113 154

  • Chambal Fertilisers and Chemicals Ltd.
  • Coromandel International Ltd.
  • Deepak Fertilisers and Petrochemicals Corporation Ltd.
  • Fertilisers & Chemicals Travancore Ltd.
  • Gujarat Narmada Valley Fertilizers & Chemicals Ltd.
  • Hindalco Industries Ltd.
  • Indian Farmers Fertiliser Cooperative Ltd
  • Mangalore Chemicals & Fertilizers Ltd.
  • Rashtriya Chemicals & Fertilizers 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


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