After two years of poor rainfall, the good progress of the South-West Monsoons has come as a relief for the farm sector. On a cumulative basis, as on Sept 22, 2016, the monsoons have been 4% lower than the normal levels.
ICRA research, in its September 2016 update of the Fertiliser Industry Report series entitled “Fertiliser Volumes, Price Trends & the Agro-Climatic Updates,” says: “Despite normal monsoons, fertiliser volumes at the manufacturers/ trader’s end fell sharply by 16% YoY during 4m FY2017 to 14.68 MMT. The sharp drop in volumes has been on account of high systemic inventory levels at the beginning of the year. While urea sales fell by 13%, non-urea sales de-grew by 22% in 4M FY2017. However, fertiliser consumption at the farmers’ end has been better and the systemic inventory of P&K fertilisers has come down to moderate levels and stood at 1.75 MMT as on end-July 2016 as against 2.98 MMT as on end-January 2016.”
Mr. K. Ravichandran, Senior Vice-President & Co-Head, Corporate Ratings, said: “During Q1 FY2017, the financial performance of the industry[1] continued to remain moderate. The revenues of the domestic fertiliser industry posted a de-growth of 13% to Rs. 15.8 billion in Q1 FY2017 from Rs. 18.24 billion in Q1 FY2016 due to lower volumes of fertilisers and lower gas prices for urea, resulting in lower retention prices. Further, sales of associated chemicals witnessed de-growth due to the downcycle in commodity prices. Pressure on margins was evident in P&K segment even while the absolute level of profitability remained steady for urea operations. The coverage indicators however remained moderate during Q1 FY2017.”
The 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 prices, along with lower ammonia and sulphur prices, lead to lower manufacturing cost and enabled the private players to undertake cuts in the retail prices as advised by the 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.
Regarding the current year outlook, Mr. K. Ravichandran said: “Though overall sales volumes for the year FY2017 are expected to remain subdued at 3-5%; healthy monsoons and liquidation of systemic inventory to more reasonable levels have improved the outlook for fertiliser sales in H2 FY2017. Also, good monsoons during the kharif season would lead to better moisture and reservoir levels and should lead to healthy sales growth during the rabi season. Lower retail prices of NPK fertilisers should also favourably aid the volume growth during the second half of the year.”
“The urea industry would continue to benefit from the subdued energy price environment, which is likely to keep the cost of production low. On the P&K front, despite a reduction in raw material prices, profitability pressures should remain in FY2017, with subdued DAP prices, lower NBS rates, the cut in the retail prices and inventory losses,” Mr Ravichandran added.
