Cheaper gas to cut urea subsidy bill; to boost profitability of urea makers: CRISIL Ratings

Profitability of urea makers is likely to surge due to reimbursement of additional fixed cost, as cheaper gas will reduce urea subsidy bill by Rs 12,000 crore, according to a report

Press Trust of India June 01, 2020 17:38:44 IST
Cheaper gas to cut urea subsidy bill; to boost profitability of urea makers: CRISIL Ratings

Mumbai: Profitability of urea makers is likely to surge due to reimbursement of additional fixed cost, as cheaper gas will reduce urea subsidy bill by Rs 12,000 crore, according to a report.

A steep fall in gas prices in sync with crude oil will reduce the urea subsidy bill of the government by a fourth, or over Rs 12,000 crore, in the current financial year, CRISIL Ratings said in the report.

That will keep a leash on the working capital requirement of urea makers.

Earlier, in March 2020, the government had agreed to the long-pending demand of reimbursement of 'additional fixed cost'.

This will lead to a one-time relief of about Rs 5,000 crore and, going forward, an annual inflow of Rs 850 crore for all urea makers, it added.

CRISIL expects the prices of natural gas, which is the feedstock for urea plants and accounts for 75-80 percent of their total cost, to be 25-30 percent lower this fiscal.

Urea is a regulated commodity with its retail selling price (RSP) fixed by the government.

To incentivise farmers to use fertilisers for better crop yield, the government keeps the RSP significantly lower than the market rate and reimburses the deficit to urea makers through subsidy payments.

While the lower cost of gas is a pass-through for urea makers and will not impact their profitability, it will reduce the government's subsidy bill.

That, in turn, will cull both revenue and receivables of urea makers. "Lower gas prices will certainly ease the working capital pressure on urea makers.

Despite the implementation of the direct benefit transfer scheme, large subsidy arrears continue to be a structural issue, which has elongated the working capital cycle of urea makers, as reflected in an increase in receivable days to 180-200 days (as on 31 March) from 140-160 days (March 31, 2018)," CRISIL Ratings Senior Director Sachin Gupta said.

Another positive for urea makers is the clarity the government has finally provided in March on reimbursement of additional fixed cost.

Earlier, this was done based on cost estimates as on March 31, 2003, which did not reflect any increase in cost thereafter, and led to lower operating profits for urea makers.

Now, the government has allowed the calculation to be based on March 31, 2013, estimates, which will lead to obvious benefits.

"The reimbursement of an additional fixed cost of Rs 850 crore will be tantamount to 10-12 percent of the current operating profits of urea makers. That, along with the Rs 5,000 crore arrears from fiscal 2015 can potentially cut down the industry's total working capital debt by 8-10 percent,” CRISIL Ratings Associate Director Nipun Anand said.

The lockdown has not impacted the offtake of urea for the kharif season much. Urea makers have reported steady production and sales for April and May.

The recent proposals under the 'Aatmanirbhar Bharat' package for the agriculture sector also augur well for urea demand, CRISIL said.

Besides, steps such as attracting investments in the farm sector and amendments in the agricultural produce marketing committee or APMC legislations are aimed at better price realisation for the farmers. These measures can increase the income levels for farmers and should be positive for agriculture-linked sectors such as fertilisers.

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