Domestic complex fertiliser¹ manufacturers will see operating profitability decline ~10% on-year to Rs 3,200-3,300 per tonne in fiscal 2025 due to lower realisations amid higher-than-expected raw material prices. However, they will recover most of it next fiscal on the back of an expected softening of raw material prices.

Despite volatility in profits, credit profiles will remain healthy, backed by strong balance sheets and absence of any significant subsidy buildup.

A Crisil Ratings analysis of players, comprising ~45% of domestic sales, indicates as much.

Profitability in complex fertilisers is a function of three factors - input cost, nutrient based subsidy (NBS) rates decided by the government, and retail sales prices. Given India’s significant import dependence, NBS rates are in sync with international raw material cost to keep prices stable for farmers. However, given that NBS rates are typically announced for a six-month period (see Chart 2 in Annexure), there can be a lag in alignment of subsidy with the costs, especially amid the volatility in prices of imported raw material seen over the past few fiscals.

The impact of such a lag this fiscal is visible in diammonium phosphate (DAP), the second-highest selling fertiliser in India². DAP has seen ~11% cut (on average) in its subsidy realisation³ this fiscal, with the same retail prices. Meanwhile, its input cost has remained either similar or marginally higher, leading to weak returns for manufacturers. Importers have been impacted even more, given the recent uptick in international DAP prices. This is despite government intervention via additional compensation of Rs 3,500 per tonne applicable for the first nine months of this fiscal.

Says Anand Kulkarni, Director, Crisil Ratings, “Historically, operating profit of complex fertiliser manufacturers has been at Rs 3,500-4,000 per tonne. While returns will be subdued this fiscal, companies with substantial backward integration will be less impacted due to relative cost advantage via in-house production of phosphoric acid. Meanwhile, to offset, manufacturers have prioritised production of NPK (nitrogen phosphorous potassium) – fungible with DAP – which saw better returns due to higher pricing flexibility. Next fiscal, overall profitability should normalise with expected softening of key raw material prices, led by improved global supply.”

An expected reduction in gas prices should lower ammonia prices, while lifting of export restrictions in key supplier markets should ease imported DAP and rock phosphate prices going forward.

Despite the inherent volatility, steady-state profitability will be supported by timely government intervention, with the NBS policy outlining reasonable returns for manufacturers. Moreover, strong balance sheets and adequate budgetary allocation towards subsidy vis-à-vis requirement will cushion financial risk profiles.

Says Nitin Bansal, Associate Director, Crisil Ratings, “For entities rated by Crisil Ratings, net leverage, as measured by the ratio of net debt to earnings before interest, taxes, depreciation and amortisation, is projected at ~1.35 times this fiscal, in line with last fiscal. Adequate subsidy allocation against reduced subsidy requirement amid lower NBS rates, track record of timely subsidy disbursement and no significant expansion plans will support balance sheets.”

Any increase in input cost, ability of the manufacturers to take commensurate price hikes, or any additional government support to protect profitability will bear watching.

¹ Complex fertilisers include DAP and various grades of NPK fertilisers
² Comprised ~17% of overall domestic fertiliser volume sales and ~52% of complex fertiliser volume sales in fiscal 2024
³ 40-45% of overall realisation recovered via subsidy in fiscal 2024