>FERTILISER (ICICI SECURITIES)

POLICY EXPECTATIONS 2.0

The dormant fertiliser sector saw path-breaking policy changes in ’08, which raised hope that stagnant cash-making companies make above-normal profit; however, the global slowdown was a deterrent. We believe the policy changes are a paradigm shift in the operating milieu and domestic fertiliser companies are bound to gain in the medium-to-long term, with improvement in global
environment. But, this improvement is still nascent as only excess inventory is being addressed, with recovery still a few quarters away. Rising crude inspires confidence in recovery of fertiliser prices, which have been hovering near the past low three-year levels.

All policy changes, as on date, have been aimed at attracting fertiliser capacity in India, albeit without success. Our note addresses changes required to make the fertiliser space attractive; some of these are also the focus of policy makers. A few of these structural changes, although radical and with not many takers, could see the light of day and, thereby, favour capacity addition in the sector.

■ Fixed subsidy and floating MRP. As per the fixed-subsidy policy, the government would allocate a nutrient-wise (NPK) budget for fertilisers in a financial year. If nutrient costs rise, the government would increase the nutrient’s MRP to ensure overall fertiliser subsidy remain within the budget. Pakistan follows such a model, where the government fixes per-kg fertiliser subsidy, while the MRP is determined by market forces. However, as the policy directly impacts farmers, which is the largest vote bank in India, this model may not be popular with the Indian political lobby; however, a modified version of the same cannot be ruled out. A fixed-subsidy policy, in any form, would be a positive for the sector, albeit inconsequential for companies’ profitability.

■ Uniform subsidy across gas-based plants. A uniform subsidy for all gas-based plants would encourage production efficiency. Such a model would be based on uniform fixed-cost reimbursement & efficiency parameters across all gas-based plants. With improving gas availability (KG Basin gas), a large part of the capacity would be 100% gas-based. We believe this uniform subsidy is aimed at bringing all production plants at a level playing field, thereby shifting to a market-based pricing model vis-à-vis a fixed farm-gate pricing model. These changes would be beneficial for efficient companies such as Tata Chemicals (which uses 5.2Gcal/te of urea) and
Chambal Fertilisers & Chemicals (Chambal; which uses 5.4Gcal/te of urea).

■ Reform in subsidy payment system. In FY09, government focus significantly increased on timely release of subsidy payment, thereby leading to large working capital funding to fertiliser companies. This increase in focus was aimed at shifting to automation, where subsidy payment is based on fertiliser delivery. If implemented, such a change could be critical and could positively impact the business model of fertiliser companies, reducing their working-capital requirements.

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