Rising costs and delayed reimbursements will hurt Indian fertiliser manufacturers: CRISIL

25 June 2008

The credit risk profiles of India's fertiliser companies may come under increasing pressure over the medium term, on account of rising input costs coupled with the likelihood of delays in subsidy settlements by the the centre.

The delays are likely because of the increasing strains that fertiliser subsidies impose: 'farm gate' prices of fertilisers - the prices that end-users pay - remain largely constant, while imported fertilisers and raw materials for fertiliser manufacture grow ever more expensive, leaving a gap that the government has to fund. CRISIL believes that players with healthy operating efficiencies and conservative capital structures are better equipped than others to withstand these mounting pressures.

Capacity utilisation levels of domestic urea manufacturers were more than 95 per cent in 2007-08 (refers to financial year, 1 April  to 31 March). However, unfavourable government policies continue to thwart fresh investments in urea capacity. India's import dependence on urea is, therefore, set to increase over the medium term, unless the centre releases a long-term policy attracting fresh investments in the sector. The country's dependence on imports for di-ammonium phosphate (DAP) has also increased over the last couple of years on account of limited domestic availability.

Increasing imports, international prices, and input costs India's overall dependence on imported DAP and urea has increased steadily in recent years. In 2007-08, India imported around 6.9 million tonnes of urea, an increase of 47 per cent over import levels in the previous year. The country's increasing dependence on imported urea has been on account of stagnant domestic production - consumption has continued to grow steadily, but no new urea plants have been commissioned since 1999.

Likewise, DAP imports meet a significant 37 per cent of India's total demand, despite a marginal reduction in import levels to 2.7 million tonnes in 2007-08 from 2.9 million tonnes in 2006-07.

The problems relating to increasing imports have been aggravated by substantial increases in international prices. International urea prices increased to $500 per tonne in April 2008 from $330 per tonne in March 20071. Similarly, global DAP prices increased to $1220 per tonne in April 2008 from $435 per tonne in March 2007.