Beginners Guide to TikTok for Search - Rachel Pearson - We are Tilt __ Bright...
SH-2014-Q4-2-ICRA-Fertilisers
1. ICRA RESEARCH SERVICES
ICRA RATING FEATURE
Corporate Ratings
Contacts:
K. Ravichandran
+91 44 4596 4301
ravichandran@icraindia.com
Pranav Awasthi
+91 124 4545 373
pranav.awasthi@icraindia.com
Ankit Deora
+91 22 6179 6337
ankit.deora@icraindia.com
P h o t o C re d i t s : w w w . s i m o n i n d i a . c om
IIINNNDDDIIIAAANNN FFFEEERRRTTTIIILLLIIISSSEEERRR SSSEEECCCTTTOOORRR::: DDDeeeccceeemmmbbbeeerrr 222000111444 UUUpppdddaaattteee
Movement forward on policy front:
Domestic Gas Price Hike and
Amended Investment Policy for Urea
2. I C R A L I M I T E D Page 2
SUMMARY
Improvement in P&K volumes as monsoons pick up during Q2 FY15, while urea sales decline; low expected crop output leads to some
concern on consumption growth
P&K sales drive volume growth despite drought in certain regions; urea volumes shrink: The overall sales volume of fertilisers improved by 3% y-o-y to 29.54 MMT during
7m FY15 driven by the healthy 17% growth in the sale of P&K fertilisers (in line with ICRA Research’s estimates of a 15-20% growth in P&K volumes) to 13.3 MMT. The P&K
sales growth has been driven by relatively low opening inventory levels vis-a-vis previous years and low base effect. Imports picked up during Q2 FY15 resulting in a 21% jump
in imported volumes of P&K fertilisers. With low opening inventory and healthy sales volumes, system inventory levels were at a 3-year low as of end-Oct’14. The sales growth
was despite drought in northern and north-western crop belts of Haryana, Punjab, UP and east-MP and regions of Andhra Pradesh and Maharashtra. Monsoon remained largely
normal, albeit delayed in most other parts of the country. On the other hand, urea sales declined by 7% during 7m FY15 to 16.24 MMT. However, ICRA Research notes that the
urea sales volume was almost equivalent to volumes seen in the corresponding period during FY12-FY13, implying that FY14 was somewhat of an aberration and sales remain
at normal levels. The shrinkage in urea sales volumes has also been on account of lower imports and limited utilisation of Nagarjuna Fertilisers & Chemicals Ltd. plants during
Q2 FY15. Further, urea sales also witnessed some pressure as companies are creating awareness amongst farmers to limit distortion of NPK nutrient usage ratio. Urea
shortages have been reported in some parts of the country due to operational issues at some plants and lower imports. ICRA Research estimates that overall fertiliser sales
volumes should witness a y-o-y growth of 3-7% during FY15, with urea sales volumes expected to decline by 3-5% and P&K volumes expected to grow by 15-20%.
Low international food prices to weigh on global fertiliser prices in CY15: Global urea prices have remained relatively stable in recent months. Trading activity has
remained muted and prices continue to remain subdued at ~US$ 325/MT (against average of ~US$ 385/MT during FY11-FY13). Due to the low coal prices, China is estimated to
continue to dominate global urea markets on account of its substantial surplus production, although Chinese exports of urea have been significantly low during YTD CY14. On
the other hand, low energy prices is expected to lead to commissioning of new plants in regions with availability of low cost gas (such as the US, Middle East and Russia). Given
these factors, urea prices are expected to continue to stay low in the medium term (with a floor at the ~USD 300/MT level), barring occasional spikes. Similarly, DAP and MOP
international prices continued to remain muted, primarily on account of low food prices as well as muted demand from key markets such as India. However, phosphoric acid
prices for supplies to India (during Q2 FY15 and Q3 FY15) and DAP prices were increased substantially from the previous levels. While low global fertiliser prices have led to the
economics of nutrient usage remaining favourable globally, surplus production and prospects of low global food prices may weigh on the global fertiliser prices, at least in H1
CY15. ICRA Research believes that there will be continuing pressure on global fertiliser prices and raw materials in the near term. Pick up in regional demand in the near term
and improvement in food prices in the medium term would be the key determinants to an increase in global fertiliser and raw material prices.
Lower impact on Indian fertiliser industry of the gas price hike than that anticipated based on Rangarajan Committee formula: The Government of India (GoI) revised
the domestic gas price to US $5.6/mmbtu (NCV basis) from US $4.2/mmbtu (NCV basis) w.e.f November 1, 2014. Though the increase in the gas prices is a negative for the
fertiliser industry, the lower increase in gas prices than that as per the Rangarajan Committee recommendations will have significantly lower impact on the industry than was
anticipated. Subsidy outgo for the urea industry would increase by ~Rs. 43 billion (at a currency rate of Rs. 60/US$) as per ICRA Research estimates (as against ~Rs. 131 billion
estimated earlier). The gas price increase would impact the profitability of revamped urea capacities earning IPP-based pricing and those of non-urea fertilisers under nutrient-
based subsidy (NBS) such as ammonium nitro-phosphate, which are produced using domestic gas, albeit the impact would be lower. Chemicals manufactured by integrated
fertiliser-chemicals complexes may also face a decline in profitability as cost of production will increase while their prices are generally driven by international prices of these
chemicals. Additionally, as gas purchase contracts are denominated in US dollars, weakening of the rupee increases the INR purchase price. However, the gas price increase
will improve the viability of exploration for oil and gas producers, which may lead to an increase in domestic gas production over the medium-to-long term.
3. I C R A L I M I T E D Page 3
Subsidy flow has normalised during YTD FY15: For FY15, the GoI had already increased the subsidy allocation for urea by Rs. 100 billion (out of the total subsidy allocation
of Rs. 730 billion) in view of the anticipated gas price hike, of which only ~Rs. 18 billion is estimated to be required for the increase in gas cost applicable from Nov’14 onwards.
The remaining amount will be used to clear the outstanding dues of the fertiliser industry. Besides, the GoI has also approved a special banking arrangement of Rs. 145 billion
for the industry. These measures reflect that the new government is looking to lower the delays in subsidy payments for the fertiliser industry, which is a positive for the industry.
Amendment in the NIP Policy to increase marketing risks for new projects; eleven entities have applied for new projects: The GoI, in October 2014, notified
amendments to the New Investment Policy 2012 (NIP-2012) for urea. The amendments are aimed at encouraging only serious players to participate in the application for a
greenfield / brownfield urea project, while moving the GoI away from the legal obligation to provide subsidy on the entire urea production under the guaranteed buyback clause
as was implied in the original policy. ICRA Research believes that the risks for the investors will increase as the GoI will have a flexibility to curtail procurement of urea from the
new plants and meet the requirements through imports in case international prices are substantially lower than realisations for these new plants, thereby saving subsidy. The
amended policy also requires the project proponents to furnish a bank guarantee (BG) of Rs. 300 crore for each project, though PSUs are exempted from furnishing the BG.
ICRA Research believes that the quantum of domestic gas availability and pricing have become paramount post the notification of the amended policy and will likely determine
the returns and debt servicing ability of the new projects, given the flexibility to the DoF to import urea post the removal of the “guaranteed buyback” clause. The returns may
also likely decline to some extent compared to previous estimates as urea IPP is expected to continue to remain at relatively lower levels in the medium-to-long term.
Nevertheless, the industry is of the view that the interests of the project proponents will be taken care of by the GoI, given that only a limited number of projects is expected to
be approved. Eleven players have applied for new projects as compared to fifteen proposals that were received at the time of notification of the original policy. While the number
of proposals has declined, the number is still substantial. The DoF will now have to devise a way to approve new projects, either by way of bidding or through elimination based
on technical and financial parameters of the proposed projects. It is expected that players who have access to gas transportation network, utilities and other related
infrastructure and / or better preparedness to go ahead with the proposed projects or access to reasonably priced gas (although most of the players are unlikely to have an
advantage on this latter front and will have to depend on imported R-LNG to a large extent) will have an advantage over the other players. The exact mechanism to approve the
projects will remain to be seen and may delay investments further. ICRA Research expects the GoI to approve a small number of plants (3-4 in number) due to gas availability
constraints, outlook of subdued urea prices and prospects of demand destruction in case urea prices were to rise.
Improvement in outlook for the industry due to normalisation of system inventories and stable operating environment; reforms in the next 1-2 years to determine
the direction of the industry going forward: The fertiliser industry performance is expected to improve during FY15, primarily on account of normalisation of system
inventories, reasonable monsoon in a major part of the country despite drought in certain regions and a stable operating environment, with expectations of reforms from the new
government, stable currency rates and modest global prices of fertilisers and key inputs. Besides, the cash flow issues for the industry are expected to ease to some extent as
subsidy flow has eased during YTD FY15 and the GoI has approved a Special Banking Arrangement for the industry. The lower-than-anticipated gas price increase has also
come as a breather to the domestic fertiliser industry as it will lead to limited increase in the blockage of working capital in the form of subsidy. However, the issue of gas
availability for P&K manufacturers remains and it remains to be seen how the GoI resolves the issue going forward. On the investment front, with the GoI clearing the way for
new fertiliser projects with the notification of the amended NIP-2012 and the approvals expected to be finalised in the near term, a limited number of projects (3-4) may come up
over the next five years.
In terms of reforms, the government is working on a comprehensive fertiliser policy, which is expected to address several aspects of the fertiliser industry and usher in reforms in
the sector, particularly on the urea pricing front, in the near-to-medium term. Reforms in the fertiliser sector would determine the direction that the industry will move in the
medium-to-long term. Measures to improve soil health and optimise nutrient consumption, thereby improving yields of various crops should be the underlying motif based on
which the reform agenda needs to be worked out to ensure long-term food security of the country.
4. I C R A L I M I T E D Page 4
Subscribe to the Full Report for details on the following...
I. Brief update of the Indian Fertiliser Sector
Trends in fertiliser consumption in 7m FY15 vis-a-vis 7m FY14
Monsoon trends in Kharif 2014 and impact on P&K fertiliser sales and inventories
Demand outlook for urea and P&K fertilisers for FY15
Global and domestic price trends of key fertilisers and raw materials
II. Why the domestic gas price increase is not that bad a news for the fertiliser industry
Workings and changes to the Rangarajan Committee formula
Impact of change in gas costs for (a) Urea players (b) P&K fertilisers & allied chemicals manufacturers
Improvement in subsidy flow and improved volumes results in better aggregate financial performance during YTD FY15
III. Amendments to New Investment Policy – 2012 for Urea
Why marketing risks would increase for new projects
Risks to new projects in case of decontrol / introduction of nutrient-based subsidy for urea
Investment proposals and expectations for projects post the amendments
IV. Industry Outlook
V. Brief Coverage on the following fertiliser majors
1. Chambal Fertilisers & Chemicals Limited
2. Coromandel International Limited
3. Deepak Fertilisers & Petrochemicals Corporation Limited
4. Gujarat Narmada Valley Fertilizers & Chemicals Co. Ltd.
5. Gujarat State Fertilisers & Chemicals Limited
6. Mangalore Chemicals & Fertilizers Limited
7. National Fertilizers Limited
8. Nagarjuna Fertilizers & Chemicals Limited
9. Rashtriya Chemicals & Fertilizers Limited
10. Tata Chemicals Limited
11. Zuari Agro Chemicals Limited
VI. A Primer on Subsidy Framework for Fertilisers
Subsidy rates for 2014-15 and changes in subsidy rates for various fertilisers
5. I C R A L I M I T E D Page 5
Please contact ICRA to get a copy of the full report
CORPORATE OFFICE
Building No. 8, 2nd Floor,
Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
Fax; +91-124-4545350
REGISTERED OFFICE
1105, Kailash Building, 11
th
Floor,
26, Kasturba Gandhi Marg,
New Delhi – 110 001
Tel: +91-11-23357940-50
Fax: +91-11-23357014
CHENNAI
Mr. Jayanta Chatterjee
Mobile: 9845022459
Mr. Leander Rayen
Mobile: 9940648006
5th Floor, Karumuttu Centre,
498 Anna Salai, Nandanam,
Chennai-600035.
Tel: +91-44-45964300,
24340043/9659/8080
Fax:91-44-24343663
E-mail: jayantac@icraindia.com
leander.rayen@icraindia.com
HYDERABAD
Mr. M.S.K. Aditya
Mobile: 9963253777
301, CONCOURSE, 3rd Floor,
No. 7-1-58, Ameerpet,
Hyderabad 500 016.
Tel: +91-40-23735061, 23737251
Fax: +91-40- 2373 5152
E-mail: adityamsk@icraindia.com
MUMBAI
Mr. L. Shivakumar
Mobile: 9821086490
3rd Floor, Electric Mansion,
Appasaheb Marathe Marg, Prabhadevi,
Mumbai - 400 025
Ph : +91-22-30470000,
24331046/53/62/74/86/87
Fax : +91-22-2433 1390
E-mail: shivakumar@icraindia.com
KOLKATA
Ms. Vinita Baid
Mobile: 9007884229
A-10 & 11, 3rd Floor, FMC Fortuna,
234/ 3A, A.J.C. Bose Road,
Kolkata-700020.
Tel: +91-33-22876617/ 8839,
22800008, 22831411
Fax: +91-33-2287 0728
E-mail: vinita.baid@icraindia.com
PUNE
Mr. L. Shivakumar
Mobile: 9821086490
5A, 5th Floor, Symphony,
S. No. 210, CTS 3202,
Range Hills Road, Shivajinagar,
Pune-411 020
Tel : +91- 20- 25561194,
25560195/196,
Fax : +91- 20- 2553 9231
E-mail: shivakumar@icraindia.com
GURGAON
Mr. Vivek Mathur
Mobile: 9871221122
Building No. 8, 2nd Floor,
Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
Fax; +91-124-4545350
E-mail: vivek@icraindia.com
AHMEDABAD
Mr. Animesh Bhabhalia
Mobile: 9824029432
907 & 908 Sakar-II, Ellisbridge,
Ahmedabad- 380006
Tel: +91-79-26585049/2008/5494,
Fax:+91-79- 2648 4924
E-mail: animesh@icraindia.com
BANGALORE
Mr. Jayanta Chatterjee
Mobile: 9845022459
'The Millenia', Tower B,
Unit No. 1004, 10th Floor,
Level 2, 12-14, 1 & 2, Murphy Road,
Bangalore - 560 008
Tel: +91-80-43326400,
Fax: +91-80-43326409
E-mail: jayantac@icraindia.com
