Based on the robust fertiliser off-take by the farmers in Q1 FY2021 coupled with strong growth visible across segments, ICRA expects the industry players to register healthy profitability in the current fiscal year, FY2020. As per ratings agency’s note, the fertiliser sales volume witnessed a growth of 69% Y-o-Y, 115% Y-o-Y, 120% Y-o-Y, 70% Y-o-Y and 43% Y-o-Y for urea, Di-Ammonium Phosphate (DAP), Complexes, Muriate of Potash (MOP) and Single Super Phosphate (SSP) respectively. Despite, the implementation of Covid-19 pandemic led lockdown, fertilisers production and dispatches remained largely unaffected owing to their classifications as Essential Commodities. In the initial phase of the lockdown, dispatches were affected due to the shortage of labor and few fertiliser plants located in the integrated chemical complexes were shutdown. However, with relaxations provided by the local authorities and safety norms implemented by the companies, the operations were restored in the month of April 2020.
Commenting on the development, K Ravichandran, Group Head & Senior Vice President, ICRA said, “Q1 FY2021 has witnessed robust growth in fertiliser off-take by farmers and it appears mostly because of the thinking by farmers to stock fertilisers early in order to avoid shortages in case implementation of lockdowns or other social distancing measures hamper availability later in the season. Additionally, with GoI transferring funds under various government schemes, the purchasing power of farmers also improved with cash in hand which could have also supported fertiliser off-take. As a result of robust volume growth, the fertiliser companies are expected to post healthy profits in Q1 FY2021. Phosphatic fertiliser companies will be major beneficiaries of the volume growth as the sales volume for this particular segment has nearly doubled Y-o-Y in Q1 FY2021 while raw material prices have remained subdued. With healthy monsoon forecasted, sales should remain buoyant in the rest of the year as well, albeit not maintained at the elevated levels of Q1.The market collections for fertiliser companies too have been healthy as well resulting in easing of the liquidity pressure in the fertiliser companies.”
The subsidy inflow from GoI however has been slow after a sizeable chunk being paid out in April 2020. The subsidy inflow in the month of May and June 2020 has been low and the working capital borrowings of the companies are expected to rise given the increase in the fertiliser sales volume not being supported by an equivalent increase in the subsidy payout by GoI. However, with market collections being much better than the prior periods, the liquidity position of the phosphatic fertiliser companies is expected to be much better given a smaller component ~30%, of their overall realisation coming from subsidy. Urea players however would witness a significant increase in the working capital borrowings as subsidy forms a major portion ~70% of their realisations. Going forward, the subsidy budget for FY2021 is expected to remain inadequate to meet the subsidy requirement for the year resulting in an increase in the subsidy backlog for the industry. Thus, toward the second half of FY2021, ICRA expects the working capital borrowings for the fertilisers companies to increase resulting in the moderation of the credit profile.
