India Ratings and Research (Ind-Ra) believes the elevated prices and shortage of DAP are likely to result in lower usage of the fertiliser in FY22 and would result in the consumers switching to either single super phosphate (SSP) or nitrogen, phosphorus and potassium (NPK) compound as alternatives. However, the decline in DAP usage could be lower than that seen historically as the government had increased the subsidy amount considerably in May 2021 and then in October 2021 to counter the impact of high prices. Players with backward integration in DAP manufacturing would reap higher benefits than those without it, as the spread between rock phosphate and phosphoric acid (a key input in manufacturing DAP) remains strong. Also, if the trend of higher fertiliser prices were to continue, either the support from the government might be further increased or the MRP to farmers would have to be increased by the industry. The latter is likely to result in DAP demand declining more.

Margins on DAP Sales Could Come Under Pressure: International fertiliser prices have increased 80% yoy on the back of higher phosphorus prices, export ban of fertilisers and raw materials by China and higher energy prices.  However, the domestic MRP of DAP has remained unchanged as the government has increased the subsidy on DAP by 13x. The government has also asked fertiliser companies to remain considerate of the price hikes and has clarified that further subsidy increases could be difficult to come by till March 2022. Thus, if the prices of DAP were to further inch up, there exists limited room with players. Hence, players could look at lowering imports if the margins on such trading sales are not remunerative or they could look at look at alternatives such as NPK or SSP.


Shift to NPK and SSP Likely: To counter the impact of margins and risk of lower effective margins in case subsidy payments are delayed, players are likely to change the product mix towards other alternate phosphatic fertilisers —SSP and NPK. Domestic SSP prices have remained benign on account of government subsidy and this is a viable alternative to farmers.



Integrated Manufacturers Better Positioned: Ind-Ra opines integrated manufactures could be better positioned than standalone importers, given the increase in rock phosphate prices has been lower than that of DAP. Rock phosphate which is one of the main raw materials is available from the phosphate rock reserves mined mainly in China, Morocco, Western Sahara, the US and Russia. The prices are also moving up sharply on account of shortages. China's economic planning body, the National Development and Reform Commission has asked producers to restrict the export of phosphates until the middle of next year so as to keep enough stock for domestic demand. As per Bloomberg data, rock phosphate prices jumped 84% yoy in October 2021. 

DAP Subsidy Sees a 3x Jump:
To counter the impact of high international DAP prices and to keep the DAP MRP under check, the Indian government increased the subsidy in May 2021 to INR24,231/t from INR10,231/t. Additionally, the government approved a special one-time package in October 2021 for the pay-out of additional subsidy for DAP by INR8,760/t. Thus, effectively the centre increased its share of subsidy for DAP by 220% to INR1,600 per bag (one bag is 50kg of DAP) to keep retail prices consistent at INR1200 per bag. Although the subsidy has been increased, the effective margin for players would depend on the timely realisation of the subsidy dues. 

Impact on Subsidy Provisioning:
The government had allocated INR796 billion towards fertilisers subsidy in the FY22 budget, of which INR208 billion was earmarked for non-urea fertilisers. The sharp rise in prices and consequent subsidy increase led to the subsidy budget surging by INR65billion towards for DAP and three other NPK fertilisers. A timely release of the subsidy would aid the credit profile of players. Ind-Ra expects the government to provide a subsidy of INR140 billion on DAP alone in fiscal 2022. 

Inventories Running Low
: The inventory levels have dwindled to the lowest levels over the past five years, given the sharp increase in raw material and end-product prices, certain raw material availability bottlenecks coupled with healthy demand. The agency believes the inventories could remain low in the near term, if there is a margin decline on the trading of DAP and limited domestic production capacity. At a time when DAP inventories are running low, inventory levels of SSP stocks are healthy. Thus, the consumption of SSP and other fertilisers can see an increase in the near term. 


Rating Impact: Fertiliser manufacturers in Ind-Ra’s rating portfolio such as Kribhco Fertilizers Ltd, Coromandel International Limited, Rashtriya Chemicals and Fertilizers Limited have shown a healthy operating performance. A sharp decline in subsidy receivables in FY21, strong liquidity, cost-saving initiatives and strong linkages with parent would support the rating outlook for these companies in FY22.

Figure 6
Ind-Ra Rating Coverage of Fertiliser Companies

Name

Rated recent in FY

Long-term rating/Outlook

Short-term rating

Coromandel International Limited

2022

IND AA+/Positive

IND A1+

Fertilisers and Chemicals Travancore Limited

2022

IND BBB+/Positive

IND A2

Kribhco Fertilizers Limited

2022

IND AA-/Positive-

IND A1+

Ramagundam Fertilizers and Chemicals Limited

2022

IND A+/Stable

IND A1

Southern Petrochemical Industries Corporation Limited

2022

IND BBB+/Stable

IND A3+

Criyagen Agri & Biotech Private Limited

2021

IND BB+/Stable

IND A4+

FIL Industries Ltd

2021

IND BBB/Negative

IND A3+

Greenstar Fertilizers Limited

2021

IND BBB+/Stable

IND A2

Gujarat State Fertilisers & Chemicals Limited

2021

IND AA+/Stable

IND A1+

Indian Farmers Fertiliser Cooperative Limited

2021

IND AA/Stable

Provisional IND A1+

Indian Potash Limited

2022

IND AA/Stable

IND A1+

National Fertilizers Limited

2022

IND AA-/Stable

IND A1+

Rashtriya Chemicals and Fertilizers Limited

2022

IND AA/Stable

NULL

Source: Ind-Ra

 

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Analyst Names

  • Harshal Agrawal

    Senior Analyst

    7709018718

    Bhanu Patni

    Senior Analyst
    0124 6687276

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121