During Q1 FY2017, the profitability of the P&K players has been weak on account of high systemic inventory levels and inventory write downs, while the benefit of lower raw materials prices was realized only during part of the quarter. However, although the sales volume at the manufacturers/traders’ end have shown sharp de-growth, fertilizer consumption at the farmers’ end have been better and the systemic inventory of P&K fertilizers have come down to moderate levels and stood at 1.75 MMT as on end-July 2016 as against 2.98 MMT as in end-January 2016.
As per Mr. K. Ravichandran, Senior Vice President & Co-Head, Corporate Ratings, “Recent reduction in phosphoric acid prices by 14-16% to US$600-620/MT in Q2 FY2016 (as against US$715/ MT in H1 CY2016 and US$810/MT in H2 CY2015) is beneficial for the P&K players. Lower phosphoric acid price along with lower ammonia and sulphur prices leads to lower manufacturing cost and provides scope for the private players to undertake cuts in the retail prices as advised by GoI. Nevertheless, increasing Government intervention in the pricing decisions for a supposedly deregulated market is a credit negative for the industry, as it could weaken the profit metrics of the players.”
In ICRA research’s view, despite lower phosphoric acid prices, the profitability for the DAP manufacturers would remain modest. Further, as DAP prices remain subdued, imports would provide marginally better profitability and consequently, the players might continue to fulfill the DAP demand largely by imports. Nevertheless, players with integrated plants, i.e. captive production of phosphoric acid, are better placed than non-integrated players as prices of rock phosphate and sulphur have fallen sharply. Also, lower raw materials prices augurs well for the NPK players as well which would continue to remain more profitable than DAP and hence, industry players might continue to prioritise NPK production over DAP.
As per Mr. K. Ravichandran, lower retail prices might also lead to a pick-up in demand for NPK fertilizers with the narrowing of the price differential between urea and non-urea fertilizers and normal monsoons. Moreover, lower systemic inventory levels should aid sales growth during H2 FY2017. Additionally the industry players expect phosphoric acid prices to fall further from current levels, which if happens, should also aid profitability in H2 FY2017.
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