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Credit Profile of Fertiliser Players to Remain Comfortable in FY25


Gurugram-19 June 2024: India Ratings and Research (Ind-Ra) opines the credit profile of fertiliser players will remain comfortable in FY25, driven by the government of India’s (GoI) continued policy-level support to the industry by way of the healthy subsidy budget of INR1,640 billion. This is backed by a moderation in the raw material prices across urea and nutrient-based fertilisers starting 4QFY23, coupled with the likelihood of a continued healthy demand in view of the GoI’s focus to increase farmer income.

“Ind-Ra expects the credit profile of fertiliser players to remain comfortable in FY25, backed by the continued policy-level support with adequate subsidy allocations and timely subsidy payouts; gas prices also are expected to remain largely stable, leading to stability in urea profitability across the sector. The NPK segment profitability is likely to improve yoy during the year, led by a moderation of input prices and adequate subsidy outlay. Overall, the credit profile is likely to marginally improve”, Bhanu Patni, Associate Director, Corporate Ratings, Ind-Ra.

Demand in the fertiliser sector remained robust in FY24, led by higher availability of funds with farmers due to various policy measures, and the stable farm gate prices. Moreover, the sector over the past two-three years has seen supplementary budgetary allocations as and when the prices of key input materials were increased to enable raw material availability and economic viability with producers and importers. This is likely to continue in FY25 as well. This coupled with stability in natural gas prices and reduction in other raw material (phosphoric acid, rock phosphate, Sulphur, etc.) prices is expected to keep the budgetary allocation sufficient for FY25.

Ind-Ra expects the average pooled gas price to remain moderate at USD10-13/MMBtu in FY25 (FY24: USD17/MMBtu), led by i) a moderation in the Henry Hub Prices and of corresponding linked imported LNG, ii) relative stabilisation in the average prices of crude oil, leading to lower prices on the term LNG contracts based on the slope of Japan Crude Cocktail/Brent, iii) cabinet approval of the Kirit Parekh Committee, leading to a moderation in the administered price mechanism prices, and iv) cooling off of the spot LNG prices. RLNG formed 85% of the total consumption by the fertiliser sector in FY24 (FY23: 79%). The RLNG share has increased, led by the increase in the use of natural gas, given i) an increase the gas requirement, led by the operationalisation and ramp-up of the new urea plants and ii) diversion of any incremental domestic gas being produced towards the higher priority city gas distribution sector.

Furthermore, for nutrient-based fertilisers, the average prices for input raw material such as phosphoric acid, rock phosphate and sulphur have started to decline from 4QFY23, declining to USD968/t, USD203/t and USD150/t, respectively (FY24 average: USD974/t, USD213/t, USD335/t).

Led by the decline in natural gas price, Ind-Ra estimates the subsidy requirement for the sector to come down from the FY24 levels. Ind-Ra estimates a 1INR/USD depreciation would lead to an INR215/tonne increase in the subsidy burden and every USD1/MMBtu decrease in the pooled gas price would lead to an INR1,721/tonne decrease, assuming a weighted average energy consumption of 5.826Gcal/tonne. Similarly, for NBS subsidy, Ind-Ra expects the announced levels in the budget to remain sufficient, given the decline in key input prices.

Ind-Ra expects EBITDA/t margins for manufactured NPK products to marginally improve in FY25, led by the decline in the input prices and the corresponding reduction in NBS subsidy rates, while the farm gate prices could remain stable. The inventory losses faced by players in FY23-FY24 are expected to normalise in FY25. However, for urea manufacturers, the margins/t directly depend upon gas prices and exchange rate. Given Ind-Ra’s expectations for a sustenance in gas prices in the current range, the absolute EBITDA earned by urea players is anticipated to remain stable.

Ind-Ra expects the credit metrics of the rated sector companies to remain stable in FY25, led by stable EBITDA expectation from the urea segment, improved EBITDA from NPK segment, continued lower working capital debt requirements and modest capex plans.

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