Industry Risk Score : Fertilizers - Phosphatic

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.

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. Phosphatic fertilizers are primarily utilised for healthy growth coupled with flower & seed production. The most popular phosphatic fertilizer used in India is Diammonium Phosphate (DAP) because of its better physical properties.

It is a concentrated fertilizer with high phosphorus and nitrogen content. Despite domestic DAP production witnessing a rise over the past few years, India continues to import a large portion of its requirement. The primary reason for the same is low/unavailability of the raw materials locally used in the production of the fertilizer. Raw material supply and prices of phosphoric acid and rock phosphates which are needed to manufacture DAP are heavily influenced by global dynamics primarily by the demand in China. Any large variation in prices leads to industry preference becoming skewed towards importing DAP as against the raw materials required to manufacture the same. The country mainly imports DAP from China, Saudi Arabia, USA and Jordan.

In FY19, production of DAP fell by ~15% y-o-y to about 39 LMT from 46 LMT in the previous year on account of higher raw material prices. During the period, prices of phosphoric acid rose leading the players resorting to imports rather than manufacture DAP domestically. Imports in fact, jumped by 57% on-year to 66 LMT in FY19.

Although phosphatic fertilizer industry has been decontrolled, the government continues to be the central authority in terms of fixing prices. The government has implemented the Nutrient Based Subsidy (NBS) policy with 22 grades of decontrolled fertilizers (DAP, MAP, TSP, DAP Lite, MOP, SSP, Ammonium Sulphate) and 15 grades of complex fertilizers. The farmers are provided with these fertilizers at subsidized rates contingent to the nutrients such as N, P, K & S present in the same. The subsidy is given to the companies which is fixed annually. The scheme entails, MRP of fertilizers to be fixed by manufacturers based on the prevalent international and domestic prices, exchange rate and the stock present in the country.

For FY20, the government has continued with the previous year’s subsidy rates for nitrogen, phosphorus and potassium, while revising it upwards for sulphur y-o-y. The expected expenditure for release of subsidy on P&K fertilizers during FY20 is at around Rs. 22,875 crore.

Key Risks & Attributes

• Delay in subsidy disbursal
• Raw material availability
• Rising imports

Despite domestic DAP production witnessing a rise over the past few years, India continues to import a large portion of its requirement accentuating high demand scenario for the fertilizer. The primary reason for the same is low/unavailability of the raw materials locally, used in the production of the fertilizer.

In FY19, production of DAP fell by ~15% y-o-y to about 39 LMT from 46 LMT in the previous year on account of higher raw material prices. During the period, prices of phosphoric acid rose leading the players resorting to imports rather than manufacture DAP domestically. Imports in fact, jumped by 57% on-year to 66 LMT in FY19 which the country mainly imports from China, Saudi Arabia, USA and Jordan. Large variation in raw material prices leads to industry preference becoming skewed towards importing DAP as against the raw materials required to manufacture the same.

Overall consumption is also on an increasing trend which augurs well for the sector. Going ahead, with subdued fertilizer prices on back of prices softening in the international market and good monsoons is further likely to support demand. Notwithstanding, supply at competitive rates to remain a key monitorable.

Acuité believes that the demand risk is marginally favourable as growing awareness among the farmers coupled with subdued prices will lead towards rising trend. However, availability and prices of raw materials which can impact profitability of players remains a prevalent risk for the industry.

Although DAP is a decontrolled fertilizer, the government continues to be the central authority in terms of fixing prices.

The government has implemented the Nutrient Based Subsidy (NBS) policy wherein the farmers are provided fertilizers at subsidized rates contingent to the nutrients such as N, P, K & S present in the same. The subsidy is given to the companies which is fixed annually. Despite the scheme allowing MRP of fertilizers to be fixed by manufacturers based on the prevalent international and domestic prices, exchange rate and the stock present in the country, pricing competitiveness remain low as subsidy is fixed by the government annually. Any large variation from the prevalent prices is likely to impact players’ sales owing to the sector being highly sensitive to predatory prices.

Consequently, competitiveness pertaining to the sector remains low and is likely to continue on similar path going ahead as well.

Acuité believes that the competitive landscape will continue to remain low owing to the prevalent regulated price model followed in the industry.

The raw materials required to manufacture the fertilizers are majorly imported. Despite domestic DAP production witnessing a rise over the past few years, India continues to import a large portion of its requirement. The primary reason for the same is low/unavailability of the raw materials locally, used in the production of the fertilizer.

In fact, raw material supply and prices, primarily of phosphoric acid and rock phosphates which are needed to manufacture DAP are heavily influenced by global dynamics mainly by the demand in China. Any large variation in prices leads to industry preference becoming skewed towards importing DAP as against the raw materials required to manufacture the same. The country mainly imports DAP from China, Saudi Arabia, USA and Jordan.

In FY19, with higher raw material prices, production of DAP fell by ~15% y-o-y to about 39 LMT. During the period however, imports jumped by 57% on-year to 66 LMT accentuating the risk the sector is exposed to.

Acuité believes that since the sector is highly exposed to importing the raw materials, any adverse volatility in its availability is likely to cripple the players manufacturing the final product and will remain a key monitorable going ahead.

Although phosphatic fertilizer industry has been decontrolled, the government continues to be the central authority in terms of fixing prices. The government has implemented the Nutrient Based Subsidy (NBS) policy with 22 grades of decontrolled fertilizers (DAP, MAP, TSP, DAP Lite, MOP, SSP, Ammonium Sulphate) and 15 grades of complex fertilizers. The farmers are provided with these fertilizers at subsidized rates contingent to the nutrients such as N, P, K & S present in the same. The subsidy is given to the companies which is fixed annually. The scheme entails, MRP of fertilizers to be fixed by manufacturers based on the prevalent international and domestic prices, exchange rate and the stock present in the country.

For FY20, the government has continued with the previous year’s subsidy rates for nitrogen, phosphorus and potassium, while revising it upwards for sulphur y-o-y. The expected expenditure for release of subsidy on P&K Fertilizers during FY20 is at around Rs. 22,875 crore.

Further, the fertiliser DBT was rolled out in phases from October 2017 and is currently being implemented across India. Despite the initial challenges, the new system has increased the overall accountability of stakeholders and will be key monitorable going ahead.

Acuité believes that the sector has high regulatory risk as players are highly exposed to the subsidy released by the government which affects their profitability.

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, DAP units to be driven to select better technology and different measures to reduce energy consumption.

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.

Industry financial performance risk score

Operating Margin
(Marginally favorable)

Interest Coverage Ratio
(Marginally favorable)

Return on capital employed
(Unfavorable)

Debt/ Equity
(Marginally favorable)

GCA days
(Marginally favorable)

Note: The industry financial performance risk score is provided on a 6-point scale