Indian Fertiliser Sector Non-payment of revised fixed costs to urea units impacting viability of indigenous urea production

Transcription

1 Indian Fertiliser Sector Non-payment of revised fixed costs to urea units impacting viability of indigenous urea production K. Ravichandran Varun Gogia Aashay Choksey Satyajeet Senapati P h o t o C r e d i t s : s h u t t e r s t o c k. c o m August 2018

2 What s inside? CONTENTS EXECUTIVE SUMMARY... 3 UPDATE ON INDIAN AGRI INDUSTRY... 6 INDUSTRY UPDATE: VOLUME & PRICING TRENDS COMPETITIVE SCENARIO: KEY PLAYERS & MARKET POSITION GAS PRICING SCENARIO REGULATORY DEVELOPMENTS SPECIAL FEATURE ON FIXED COST REIMBURSEMENT TO UREA UNITS CAPEX PLANS AGGREGATE FINANCIAL PERFORMANCE INDUSTRY OUTLOOK INDUSTRY PEER COMPARISON ICRA RATINGS FOR INDIAN FERTILISER COMPANIES COMPANY SECTION CHAMBAL FERTILISERS & CHEMICALS LIMITED COROMANDEL INTERNATIONAL LIMITED DEEPAK FERTILISERS & PETROCHEMICALS CORPORATION LIMITED GUJARAT NARMADA VALLEY FERTILISERS& CHEMICALS CO. LIMITED GUJARAT STATE FERTILISERS & CHEMICALS LIMITED MANGALORE CHEMICALS & FERTILISERS LIMITED NATIONAL FERTILISERS LIMITED NAGARJUNA FERTILISERS & CHEMICALS LIMITED RASHTRIYA CHEMICALS & FERTILISERS LIMITED ZUARI AGROCHEMICALS LIMITED A PRIMER ON SUBSIDY FRAMEWORK A PRIMER ON SUBSIDY FRAMEWORK ANALYST CONTACTS ICRA Limited P a g e 2

3 INDIAN FERTILISER SECTOR Industry Review August 2018 EXECUTIVE SUMMARY Healthy sales volume growth in Q1 FY2019 driven by non-urea sales; expectation of normal monsoon and higher MSPs drives sales Kharif sowing gathers pace after remaining low owing to pause in monsoon progress and delay in announcement of MSPs Global urea prices remain subdued owing to oversupply situation in global markets; impact of US sanctions on Iran remains uncertain Fertiliser sales witness healthy growth in Q1 FY2019: Fertiliser sales have witnessed healthy growth of 6% YoY in Q1 FY2019 mainly driven by higher sales growth witnessed in non-urea sales. Expectations of a normal monsoon and higher Minimum Support Prices (MSP) as indicated during the budget for FY2019 are expected to have provided tailwinds to the fertiliser sales. Additionally, the decline in systemic inventory levels at the end of FY2019, particularly for DAP and NPK fertilisers led to healthy growth of sales in Q1 FY2019. With regards to urea, the indigenous urea sales witnessed a decline of 4% YoY during Q1 FY2019. Urea imports were up 20% in Q1 FY2019. Indigenous urea production was up 7.7% YoY in Q1 FY2019 mainly due to low base effect as a number of urea plants had undertaken shutdown during Q1 FY2018. P&K fertiliser sales have witnessed healthy growth of 9% YoY in Q1 FY2019 mainly driven by higher NPK (22% growth YoY) and SSP (13% growth YoY) sales. MOP sales have witnessed de-growth of 4% YoY in Q1 FY2019 though the base remains smaller. DAP sales witnessed 3% growth YoY as DAP imports rose significantly replacing the decline in indigenous DAP production. The healthy growth in sales has been on account of lower systemic inventories at the end of FY2018 primarily due to implementation of DBT on pan-india basis. Owing to implementation of DBT, the companies refrained from pushing inventory into the channel. Kharif sowing gathering pace, though expected to be lower than FY2018: Kharif sowing has been gathering pace after the announcement of the higher MSPs and decent progress of monsoon post a pause in June Kharif sowing had been lower by nearly 22% by the end of June 2018 owing to delay in progress of monsoon which was nearly 7% lower than the Long Period Average (LPA) at that time and delay in announcement of MSPs by the GoI. However, post announcement of significantly higher MSPs for majority of the crops and also good progress made by monsoon since the beginning of July where the rainfall was ~3% lower than the LPA, kharif sowing has picked up pace. While the sowing was lower by 10% YoY than FY2018 as on July 13, 2018, it is expected to pick-up in the remaining sowing season which would last till early weeks of August However, the overall sowing levels should witness a decline YoY given the levels of sowing witnessed in coarse cereals which have seen a decline of ~16.6% along with an 8% decline in oilseeds and rice. Global urea prices remain subdued given the abundant supply: Global urea prices had witnessed sharp decline to $214/MT in December 2017, mainly due to weak global demand for urea while supplies remained abundant. Exports from China have continued to decline in Q1 CY2018 with only 0.3 MT of urea being exported out of China, nearly 75% decline over Q1 CY2017. Despite significant decline in exports from China the prices remained subdued as demand remained weak from key end users i.e. Brazil and India. Chinese exports have been weaker owing to lower production rates driven by higher coal costs as well as natural gas costs in the recent months. However, urea supply continues to remain abundant in the international market while demand from Western Europe and the US have remained weak due to late onset of spring season. The prices have seen minor uptick in the trades seen in the month of June 2018 mainly due to the uncertainties related to the impact of trade sanctions on Iran. However, the prices are expected to remain subdued in the near to medium term. ICRA Limited P a g e 3

4 EXECUTIVE SUMMARY Supply cuts and healthy demand keeps DAP prices firm Rising share of R-LNG in the mix of gas consumed by fertiliser sector driving pooled prices up; R-LNG prices to remain firm given strong demand from China Continued delay in reimbursement of revised fixed costs to urea units to negatively impact the viability of the indigenous urea industry International DAP prices on an uptrend driven by plant closures, production cuts and rising raw material prices: International DAP prices have witnessed a sharp uptrend in recent months mainly driven by plant closures in the US, lower production rates in the Middle-East and China, rising feedstock costs and healthy demand growth. The international prices were up ~14% YoY by the end of May 2018 at $407/MT (FoB). Rising rock phosphate prices, resulting from lower production given production cuts on environmental concerns, have also resulted in an upward pressure on international DAP prices. Healthy demand from Brazil and India has also provided support to international prices. With rising feedstock prices mainly phosphoric acid ($758/MT for Q2 FY2019 as against $567/MT in Q2 FY2018) Indian DAP manufacturing may become economically less attractive vis-à-vis NPK production resulting in higher DAP imports in FY2019 which will provide support to international prices. Rising share of R-LNG driving pooled prices up: Urea industry receives natural gas under gas pooling mechanism wherein the price of natural gas is same for all urea units thus enabling them to compete on the basis of energy savings. Pooled price has been on an uptrend since the beginning of FY2018 owing to increasing share of R-LNG in the total share of pooled gas. Since R-LNG prices have been on uptrend as well during FY2018, average pool price for the fertiliser sector rose nearly 16% YoY in FY2018 to Rs. 564/mmbtu from Rs. 486/mmbtu in FY2017. Natural gas prices have witnessed significant increase over the last twelve months given healthy demand from China and rising crude oil prices. The demand from China has been strong driven by the Chinese government s initiative to cut pollution and drive the economy towards cleaner fuel from polluting coal. The Chinese gas demand in CY2017 rose to 237 billion cubic metre a 15% YoY increase. The demand from China is expected to remain strong in CY2018 as well while domestic production will remain inadequate to meet the demand, rising imports will keep the international gas prices elevated. With rising share of R-LNG in the gas consumed by the fertiliser sector, rising R-LNG prices will lead to higher pooled gas price for the sector. While higher gas prices result in higher energy savings, they also result in higher receivables and thus higher working capital borrowings and higher interest costs. Additionally, it also results in lower contribution from production beyond RAC as the international prices have remained subdued in the recent past and the trend is expected to continue in the near to medium term. In a scenario of sustained low international urea prices and elevated natural gas prices, the production beyond RAC will be impacted and majorly so for high energy consumption urea units. Continued delay in reimbursement of revised fixed costs to urea units to impact viability of indigenous urea production: Urea in India is sold at GoI controlled Maximum Retail Price (MRP) which is ~25%-30% of the cost of production. The cost of production in excess of the MRP is reimbursed by GoI through a subsidy mechanism which includes a variable cost component and a fixed cost component. The variable costs include feedstock, bagging cost etc. which are revised on a quarterly basis. The fixed costs include costs related to employee costs, contract labour costs, chemicals & catalysts etc. along with capital related charges i.e. depreciation, interest on working capital and 12% return on net worth. The fixed costs were to be revised every three years, however the urea units continue to receive fixed costs reimbursement based on cost estimates of while the actual fixed costs have witnessed significant increase over the years leading to significant under recoveries on this account. GoI had notified revised fixed costs in April 2014 wherein the fixed costs for all gas-based urea units was to increase by Rs. 350/MT and an additional fixed cost reimbursement of Rs. 150/MT for plants which had achieved 30 years of ICRA Limited P a g e 4

5 EXECUTIVE SUMMARY age subject to minimum fixed cost of Rs. 2300/MT. However, the revised fixed costs are yet to be paid out to the urea industry and as per ICRA estimates, urea industry is yet to receive nearly Rs crore from GoI on this account. Additionally, nonpayment of the revised fixed cost to the industry also undermines the ability of the urea industry to undertake production beyond re-assessed capacity in a scenario of low international urea prices with rising gas costs.while the revised fixed costs are also significantly lower than the actual increase in the fixed costs faced by the urea units., the revised fixed costs were expected to aid the profitability of the urea units to certain extent. However, non-payment of the revised fixed costs has adversely impacted the profitability of the urea units in the country. Moreover, as majority of the urea manufacturers have booked this hike on an accrual basis over the last four years, any reversal of policy decision on this account will lead to write down of profits for the concerned units. Inverted duty structure on manufacturing of phosphatic fertilisers to moderate post reduction of GST rate on phosphoric acid Operating margins improve 40 bps YoY to 9.6% in FY2018; net profit at six year high for the industry Stable outlook for the kharif season as sowing picks up post announcement of the MSPs and improvement in progress of monsoon GST rate reduction on phosphoric acid to reduce working capital requirement for the DAP/NPK manufacturers: GST council in its meeting held on July 21, 2018 reduced the GST rate applicable on fertiliser grade phosphoric acid to 5% from the earlier applicable rate of 12%. DAP/NPK fertiliser manufacturers were facing inverted duty structure owing to the end product being taxed at 5% while inputs i.e. phosphoric acid and ammonia being taxed at 12% and 18% respectively. As a result, fertiliser companies faced significant amount of stranded input tax credits and thus blockage of working capital. As per ICRA estimates, stranded input tax credits on DAP manufacturing would reduce by ~Rs /MT for companies which would reduce the working capital requirements for the fertiliser companies. Overall performance of the industry witnessed improvement in FY2018: Operating income witnessed 14% YoY growth owing to the healthy turnaround in the fertiliser segment for some of the major players as well as continuing contribution from the chemical segment. The profitability of the sector has also improved in line with overall revenues; operating margins at 9.6% in FY2018 vis-à-vis 9.2% in FY2017. Net profits recorded significant growth with PAT margins at 4.6% in FY2018 as compared to 4.0% recorded in the previous fiscal. Also, comparatively lower working capital debt levels and soft interest rates resulting in lower interest costs and improved operating profits have resulted in an improvement in interest coverage to 3.8 times (2.7 times in FY2017) for the industry. Outlook for kharif season stable: Fertiliser sales during the upcoming kharif season are expected to witness healthy growth given the improving advancement of monsoon and significant increase in the MSP of various crops announced by the GoI. While sowing had lagged last season levels, it has picked up in July 2018 post announcement of the MSPs and improvement in advancement of the monsoon. The spatial and temporal distribution of monsoon will play a critical role as the kharif season progresses, as presently key agricultural states like Uttar Pradesh, Gujarat, Jharkhand and Orissa have witnessed deficient monsoons. ICRA Limited P a g e 5

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