The central government’s fertiliser subsidy bill set to touch an all-time high of ~Rs 1.65 lakh crore this fiscal against Rs 1.05 lakh crore budgeted, due to an unprecedented rise in the cost of raw materials and prices of fertilisers globally.

To be sure, the government has been proactive in addressing the situation. In the past two fiscals, it has paid an additional Rs 1.2 lakh crore and increased the budgeted subsidy. However, the steep rise in raw material prices has been negating this, and another intervention may be needed in this fiscal. Not doing so would take the subsidy arrears to an all-time high of over Rs 75,000 crore by end of this fiscal (see Chart 1 in annexure).

Says Nitesh Jain, Director, Crisil Ratings, “Over 85% of the subsidy arrears could be contributed by urea. This is because pooled gas prices ― a blend of domestic gas and imported LNG considered for billing to fertilisers plants ― had shot up more than 75% last fiscal, and is expected to remain elevated for most part of this fiscal because of the Russia-Ukraine conflict. At the same time, retail prices of urea have stayed put, increasing the government’s subsidy burden. This would be despite some respite likely from the commissioning of new domestic capacities that could potentially halve India’s import dependence for urea from nearly 28% in fiscal 2021.”

The retail selling price (RSP) of urea is fixed by the government. To spur farmers to use fertilisers for better crop yield, the government keeps the RSP significantly lower than the market rate, and reimburses the urea makers through subsidy payments. While this protects the profitability of urea makers to a large extent, the RSP remaining unchanged despite rising costs will mean the government will have to foot a bigger subsidy bill.

Likewise, prices of phosphoric acid and rock phosphate — ingredients for non-urea fertilisers¹ — have also gone up by 92% and 99%, respectively, in the past 12 months through March 2022. Furthermore, given that Russia, Belarus and Ukraine are the major suppliers of non-urea fertiliser ingredients, the ongoing conflict will only exacerbate the situation.

While non-urea makers have hiked prices, it may not be sufficient to cover the escalation in cost. For non-urea fertiliser makers, the government pays subsidy as per the nutrient-based subsidy (NBS) rates, which are yet to be announced for this fiscal. Therefore, a revision in NBS rates bear watching here.

In this backdrop, the credit profiles of fertiliser makers will depend on two factors: additional subsidy outlay, mainly for urea makers, and revision of NBS rates for non-urea makers. Any delay in, or inadequacy of, subsidy payments can have a bearing on the cash flows of fertiliser makers, and lead to higher working capital needs.

Says Ankit Kedia, Associate Director, Crisil Ratings, “Any increase in working capital requirement affects credit metrics. For instance, interest cover and leverage (debt to equity ratio) for the fertiliser sector improved to ~10 times and ~0.5 time, respectively, for fiscal 2022, from ~2.5 times and 1.5 times, respectively, on average, during the five fiscals through 2020. The metrics this fiscal will depend on revision in the NBS rates and timeliness of additional subsidy as the current budget will get exhausted in 8-9 months. In the absence of additional subsidy and revision in NBS rates, interest cover may fall sharply to 4-5 times this fiscal (see Chart 3 in annexure).

Our assessment assumes ~3% on-year growth in demand for fertilisers and a moderation of raw material and fertiliser prices in the second half of this fiscal. If demand is higher than expected, or input prices do not soften even in the second half, the subsidy bill may inch up to Rs 1.8-1.9 lakh crore.

¹ Non-urea fertilisers: Nitrogen, phosphorous and potassium (NPK), di-ammonium phosphate (DAP), and muriate of potash (MOP)