Fertiliser comapanies gain on government's urea decontrol talk

Fertiliser stocks gained on Monday on media reports that the government is considering urea fertiliser decontrol. This will be a welcome development for the industry, which has seen little capacity addition over the last 15 years. India is among the world’s top three urea consumers. As a result, the urea import bill has risen steadily.

“With different sets of rules for different producers based on feedstock, the urea subsidy system has become complicated without encouraging new capacities. Removing the price and import controls on urea and transferring subsidy directly to farmers will help improve domestic availability of urea and curtail usage distortions,” said Kalpana Jain, senior director, Deloitte in India.

“The total urea subsidy in 2014-15 is estimated at Rs 48,300 crore. Thus, 50 per cent increase in farm gate price of urea will help reduce fiscal deficit by 1.5 per cent compared with budgeted figures,” K Ravichandran, senior VP, co-head, corp sector ratings, ICRA, said. “The measures could be credit positive for urea manufacturers, as their profitability is negatively impacted due to several factors and they are unable to achieve the normative return on equity envisaged in the pricing policy,” he said.

“The maximum gain of decontrol will be for urea producers who are energy efficient and low-cost domestic gas users. If gas pooling is done for fertilisers, then energy efficiency and productivity will drive the welfare of manufacturers,” Deloitte’s Jain said.

According to ICRA’s Ravichandran, the urea plants of Tata Chemicals, Chambal Fertilisers and Aditya Birla Nuvo are the most energy efficient and, hence, would gain the most if the proposed measures are implemented.