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The Government of India (GoI), notified increased nutrient-based subsidy (NBS) rates applicable for complex fertilisers for 2011-12 (refers to financial year, April 1 to March 31). In CRISIL’s opinion, the new NBS rates augur well for complex fertiliser players, since the rates take into account the increase in international prices for di-ammonium phosphate (DAP) and for key raw materials from the second half of the current fiscal year.

CRISIL believes that producers with strong supplier relationships will now be better placed to negotiate raw material prices, benefitting the industry at large. Therefore the profitability of complex fertiliser manufacturers, which has improved in the first year (2010-11) of the NBS regime, is likely to remain healthy in 2011-12, resulting in sustenance of their credit risk profiles. The increased subsidy rates will also benefit the farmer, as it will obviate the need for producers to substantially increase retail prices.

The first year of the NBS regime has seen good profitability for complex fertiliser manufacturers. CRISIL believes that the profitability margin of its rated players, which account for nearly 60 per cent of India’s complex fertiliser production, will increase by 2 per cent in 2010-11 over the previous year. Says Mr. Pawan Agrawal, Director, CRISIL Ratings, “The improvement in profitability of complex fertiliser manufacturers in the first year of NBS has been due to the fact that in the first half of the year, players were successful in sourcing raw material at prices conducive to the subsidy rates fixed by GoI. Furthermore, since the NBS policy gives pricing freedom to the manufacturers, these players have increased retail prices, particularly during the second half, in order to pass on input price increases to the farmers.” Adds Mr. Agrawal, “The retail price increases have been absorbed by the farmer without any adverse impact on the demand for complex fertilisers.”

With the objective of reining in its subsidy burden for 2011-12, GoI had earlier in November 2010 notified NBS rates that were significantly lower than in 2010-11. This was done, anticipating that producers would have enough time to negotiate raw material prices to lower levels compared with the prices then prevailing.

However, the import parity prices have increased since the announcement was made in November 2010. The latest notification will compensate producers for this increase. CRISIL has always maintained that, given the strategic importance of this sector in ensuring food security, even in a fixed subsidy NBS regime, GoI will intervene if raw material prices reach levels that make the production of fertilisers unviable (refer to CRISIL release, “Efficient players well placed under NBS,” dated February 22, 2010)

Concluded.

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