Cut in phosphatic, potassic fertilisers subsidy to hit producer’s profit: India Ratings

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The reduction in subsidy rates of phosphatic and potassic (P&K) fertilisers would adversely hit the profitability of manufacturing companies as they would be constrained to hike retail prices, says India Ratings.
The government last week reduced the subsidy on P&K fertilisers to an estimated Rs 21,274 crore for the next fiscal due to decline in global prices, a move that may save the exchequer around Rs 5,000 crore.

“The 25-30% reduction in decontrolled fertilisers subsidy rates will adversely impact the NPK (Nitrogen, Phosphorus and Potash) producer’s profitability,” India Ratings and Research (Ind-Ra) said in a statement.
The agency said that the ability to increase farm gate prices of P&K fertilisers would remain constrained due to the two consecutive weak monsoons which have impacted farmer’s affordability.
“Attempts to increase the farm gate prices to offset the lower subsidy rates will impact volumes that are already weak for complex fertilisers which are costlier compared to urea,” it added. The agency further said that the elevated inventory levels of the NPK also limit the ability of the NPK producers to increase the prices significantly.
“Producers may resort to giving additional discounts to clear inventory levels which would suppress margins further,” it added.
Although lower raw material prices, mainly phosphoric acid, ammonia and rock phosphate, would help protect margins of NPK producers, the benefit would be contingent on a stable rupee, and any weakness will hurt margins.
The positive impact on the working capital cycle of the companies due to lower subsidy receivables will be partially offset by the extension of a higher credit period to push sales, India Ratings said.
However, the reduction in working capital to fund subsidy receivables will lead to lower interest expenses, it added. The government reduced subsidy rates on nitrogen and phosphate by Rs 5/kg and Rs 5.45/kg, which is lower by 25% and 30%, respectively. The rates have been revised to reflect the fall in global prices of diammonium phosphate and ammonia. P&K fertilisers are covered under the nutrient-based subsidy policy.