The revision in nutrient-based subsidy (NBS) rates for fiscal 2018 announced recently will not impact the operating profit margins of fertiliser players, which had risen 75-100 basis points in fiscal 2017 following a sharp fall in the prices of key raw materials such as phosphoric acid and ammonia over the past 12 to 15 months.
 

The revision in nutrient-based subsidy (NBS) rates for fiscal2018 announced recently will not impact the operating of margins of fertiliser players. While the new NBS rates may have left room to reduce retail prices of di-ammonium phosphate (DAP, 18:46:0)1, and some other commonly used phosphatic fertilisers such as 20:20:0, 12:32:16 and 15:15:15 by Rs 500 to Rs 1000 per tonne, an expected rise in contracted phosphoric acid price, ammonia prices and international DAP prices will preclude any correction.
 

On the other hand, a sharp reduction in the subsidy for the ‘K’ (potash) nutrient will mean players may have to increase the price of muriates of potash by Rs 1,000 per tonne – after having had to reduce it by Rs 5,000 per tonne in fiscal 2017.

Says Subodh Rai, Senior Director & Head Analytics, CRISIL Ratings: “While the revision in NBS rates is credit-neutral for phosphatic fertiliser players, the introduction of the direct benefit transfer (DBT) scheme, if successfully implemented, will be a credit positive in the long term. DBT has potential to reduce the government’s subsidy bill by curtailing leakages and diversion of fertilisers to other uses, which, in turn, will enable the government to clear subsidy dues without changing subsidy allocation and improve working capital cycle of players.”
 

In the interim, DBT may temporarily elongate the working capital cycle of fertiliser players because at present subsidy is payable to them on dispatch of material from the plant, while DBT subsidy would be payable once the sale is registered at a retail outlet through a point of sale machine. However, the implementation of DBT is expected to be gradual given the challenges such as inadequate support infrastructure. Hence the impact is expected to be muted.
 

CRISIL-rated large manufacturers are likely to sustain profitability at the improved levels in fiscal 2018 with minimal impact on working capital cycle because of the flexibility to manufacture different grades of complex fertilisers, backward integration, ability to negotiate favourable phosphoric acid prices given strong raw material tie-ups, and relatively good pricing flexibility.
 

The Cabinet Committee on Economic Affairs announced NBS rates for phosphatic and potassic fertilisers on March 31, 2016. While subsidy for P (phosphorus) and K nutrients have been slashed by Rs 1.24 per kg and Rs 3.075 per kg, respectively, or by ~10% and 20%, respectively, the subsidy for N (nitrogen) nutrient has been increased by Rs 3.135 per kg or by 20%.
 

The government has also expressed its intention to implement DBT from June in the fertiliser sector after a successful pilot in 16 districts.