Credit profiles of manufacturers seen stable on steady profitability, adequate subsidy
India's urea industry, contributing to ~55% of chemical fertiliser demand, has taken strong strides towards self-sufficiency. The import dependency1 in the sector is expected to reduce to 10-15% in the near to medium term from its peak of ~30% seen in fiscal 2021. This will be mainly driven by commencement and stabilisation of new capacities.
These new plants will see steady regulated returns as utilisation improves. As for the legacy capacities, profits will remain stable this fiscal, in line with raw material prices and policies. That, and adequate subsidy allocation will keep credit profiles stable. A CRISIL Ratings analysis of urea makers, which account for ~70% of the industry capacity, indicates as much.
Urea demand growth had outpaced production between fiscals 2007 and 2012, because of which the share of imports rose to 20-25% of consumption. To boost domestic production, the government notified the New Investment Policy 2012 (NIP 2012) in fiscal 2013. Under this, six plants with a total capacity of ~7.62 million tonnes (~25% of the domestic capacity) have been gradually commissioned over the past five fiscals (see Chart 2 in Annexure).
Says Anand Kulkarni, Director, CRISIL Ratings, "The NIP 2012 has played a crucial role in reducing import dependence structurally. The new plants are expected to operate at ~100% capacity utilisation this fiscal, as against 85-90% in the previous fiscal, as operations stabilise. The likely commissioning of one more plant by next fiscal will further boost domestic production."
Higher capacity utilisation will improve operating efficiency and profitability of the new plants this fiscal. These plants have healthy profitability due to minimum committed return on equity of 12% under NIP 2012. For the rest of the industry (~75% of the capacity), profitability should hold the line given stable natural gas prices2 and unchanged policy norms on energy efficiency and fixed-cost reimbursements3.
Working capital cycles remain stable, too, backed by government measures. The urea industry relies heavily on government subsidies4, which is typically 80-85% of sales.
Says Nitin Bansal, Associate Director, CRISIL Ratings, "The budgetary allocation of Rs 1.19 lakh crore for urea will be adequate and hence no major build-up of subsidy receivables is expected this fiscal. Additionally, expectation of timely subsidy disbursement by the government, in line with the track record over the past few years, augurs well for credit profiles. With no significant capital expenditure, the net leverage5 is expected to remain comfortable at ~3.0 times this fiscal, in line with fiscal 2024." |
