Budget 2012-13 (Fertiliser): Awaiting urea price hike, cash transfers

Budget: Sectors in the spotlight

Fertiliser companies, even if they are completely off the radar of investors for the rest of the year, usually perk up around the annual Budget exercise. It may be no different this year due to the following reasons.

One, subsidy allocations for fertilisers announced in the Budget are usually a good indicator of realisations and profitability for producers in the year ahead. With about 50 per cent of the realised price for phosphatic fertiliser producers and 55 per cent for urea coming in through the government's subsidy reimbursement, it is subsidies that decide the volumes, profits and even product mix for fertiliser makers.

Subsidy expenses

The government's expenses towards fertiliser subsidy have overshot the budget by about 27 per cent in 2011-12. With a new Food Security Bill also on the anvil, fertiliser subsidy allocations are unlikely to be generous this year.

In this backdrop, any signs that the government is now willing to push through direct cash transfers of subsidy to farmers, will spell great news for fertiliser companies.

Two, any initiative by the government to correct the imbalanced usage pattern, where farmers use too much urea and too little of phosphatic fertilisers, is also keenly awaited.

For 2012-13, the government has already trimmed the per tonne subsidy on phosphatic fertilisers by about a third. This leaves little room for reduction in DAP and complex fertiliser prices, which are at 2-3 times the selling prices of urea.

Restoring balance

The only option to restore some balance to the equation would be a steep hike in urea prices.

This move, if it comes about in the Budget, would save the government outlays towards subsidy. It will not alter realisations for urea producers such as Tata Chemicals, Chambal Fertilisers or Nagarjuna Fertilisers but may solve some of their working capital and cash flow problems.

The third significant policy move that is expected in the Budget is clearance to the new urea investment policy. Recently approved by the empowered group of Ministers, the new investment policy envisages reimbursing import parity prices to domestic fertiliser makers who set up new or expansion projects for urea. A similar policy in 2008 saw not much response.

If such a policy is announced now, firm commitments on gas allocations to urea and pass-through mechanisms for feedstock costs, will be the key details that investors must watch for.

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