| The fertiliser sector finally witnessed its long awaited policy makeover as the ministry approved:
1) The Nutrient Based Subsidy (NBS) Policy on DAP and complex fertilisers and 2) a 10% increase in urea prices for farmers w.e.f 1 stApr' 2010. decontrol of the fertiliser sector Ministry of Chemicals and Fertilisers finally approved the Nutrient Based Subsidy regime (NBS) yesterday after almost a year of announcing its intent to do so in the 2009-10 Budget. We would like to highlight that the government had changed its subsidy calculation formula on complex fertiliser (DAP and NPK) from earlier cost plus to IPP linked subsidies since April'2009. Under the current NBS policy, there will be a fixed subsidy for nutrients. Unlike in the past, when the MRP was fixed by the government, the current NBS policy will facilitate complex fertilizer players to determine their selling price. However, In the event of wide fluctuation in prices, we do not rule out government intervention. While urea will continue to be under the current MRP regime, the government has announced a 10% increase in the MRP for urea from Rs 4830 / mt to Rs 5310 / mt. How it will benefit companies Though more details on the NBS policy are required, we believe that it will positively impact efficient companies due to the following reasons – Ø equity, distribution network etc by charging competitive prices to farmers Ø farmers and can charge differential prices, which will improve their margins Ø strategic location with lower landed cost can now expand their market to woo sales volumes Ø complicated, helping companies determine their subsidy arrears accurately Ø on subsidies will come down resulting in lower working capital. 10% urea price increase points towards a conducive policy environment While the plan to increase urea prices by 10% for farmers from Rs 4830/mt to Rs 5310/ mt will not have an immediate impact on companies' bottomline, it is a positive policy decision. It will help the government reduce its subsidy by approximately Rs 14 bn (3% of FY10 total fertiliser subsidy and 9% of total urea subsidies). It will help companies reduce their working capital. Fertiliser prices were last increased in 2002 by 5%, followed by an unsuccessful attempt by the government to increase prices by another 5% in 2004. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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