Figure 3

 Figure 4

Fertiliser Pooled Gas Prices Marginally Impacted by Domestic Gas Prices: The affirmation of domestic gas prices at USD1.79/mmbtu would keep the increase in pooled gas prices under control, despite the increase in global LNG prices during the winter months globally. Over FY17-FY21, the pooled gas price movements were more driven by the price dynamics of LNG markets than domestic gas prices. This is because the share of cheaper domestic gas fell to 36% in 11MFY21 (FY17: 51%) while imported LNG share increased to 64% (49%). The latter was a result of low domestic gas production while demand has continued to increase (Figure 5). The pooled gas prices were around USD7.5/mmbtu during 11MFY21. Ind-Ra believes a USD1/mmbtu increase in domestic gas prices and imported LNG prices would result in a USD0.3/mmbtu and USD0.6/mmbtu increase, respectively, in pooled gas prices, assuming 35%:65% in domestic to LNG mix.

  Figure 5

Limited Impact on Fertiliser Subsidy Burden and Credit Metrics: The affirmation of gas prices is likely to keep the subsidy burden under check, as the pooled prices are unlikely to increase. However, the driver of the subsidy burden would continue to be imported LNG prices. For every USD1/mmbtu decrease in the pooled gas prices and in the imported LNG prices, the urea subsidy burden decreases by INR1,750/tonne(t) and INR11,20/t respectively, assuming a weighted average energy consumption of 5.826Gcal/t and INR/USD of 74.5. A lower subsidy burden would lead to a corresponding decrease in the working capital requirement for manufacturers which could reduce the borrowings and supports the credit metrics. Moreover, lower domestic gas prices would not have any benefit for NPK fertiliser manufacturers, as majority of them are using imported RLNG for meeting their feedstock requirements. However, rising RLNG and other raw material prices could impact the near-term profitability, if end-product prices are not increased. The strong demand momentum because of the strong growth witnessed across rural consumption items such as tractors, fertilisers and pesticides during 9MFY21 could aid higher acceptance of price hikes by end-consumers. Even if the profitability is impacted, the profit before tax of fertiliser companies should be strong, given the likely low interest burden on account of i) a lower subsidy burden and ii) clearance of all past dues post additional allocation in the fertiliser budget.