Complex fertilisers volume to grow 4-5% next fiscal Adequate NBS rates to support profitability and credit profiles

Domestic sales volume of complex fertilisers1 will revert to the historical growth rate of 4-5% in fiscal 2025 after a  strong 7-8% jump in this fiscal. This will be supported by expectations of a normal monsoon and stable retail prices.  

Lower volatility in raw material cost will support commensurate nutrient-based subsidy (NBS) by the government and  help improve operating profitability of manufacturers to a normalised level of about Rs 4,000-4,500 per tonne next  fiscal after a decline this fiscal.  

That, along with timely release of subsidies — in line with the trend seen in past few years — will keep working capital  requirements low for fertiliser makers and credit profiles stable.  

Says Naveen Vaidyanathan, Director, CRISIL Ratings, “The high volume growth this fiscal is riding on better  availability and record pre-buying by farmers in the first half in anticipation of retail price hikes in the second  half. Next fiscal, we expect it to be supported by expectations of adequate NBS rates and a normal monsoon.  

The medium-term growth outlook for complex fertilisers is positive as balanced soil nutrition is imperative for  better productivity and yields, and availability is adequate and at subsidised rates.” 

Profitability, however, will see a sharp cut this fiscal before rebounding in the next.  

For complex fertiliser makers, profitability is typically a function of raw material input prices, commensurate NBS rates  and retail sales prices. NBS rates are typically revised bi-annually, in sync with raw material input prices, to keep the  retail prices for farmers largely stable. This results in largely stable profitability. 

The story has been different this fiscal. Declining raw material prices in the first half led to a slashing of NBS rates for  diammonium phosphate (DAP) and nitrogen, phosphorus and potassium (NPK) grades by 40% for the second half.  However, contrary to expectations, prices of raw materials such as phosphoric acid, ammonia, rock phosphate and  sulphur subsequently rose and are higher2than first-half levels.  

Says Nitin Bansal, Associate Director, CRISIL Ratings, “Operating profitability of complex fertiliser makers is  expected to decline 30-35% to Rs 3,000-3,500 per tonne this fiscal as limited ability to pass on higher raw  material prices amid a sharp reduction in NBS rates will result in lower profits. But next fiscal, profitability is  expected to normalise to Rs 4,000-4,500 per tonne on expected revision in NBS rates in line with more stable  raw material prices.” 

That said, reduced subsidy requirement3 due to lower NBS rates and timely disbursement of subsidies are largely  offsetting the impact of reduced profitability on net leverage. 

Leverage, as measured by the ratio of net debt to earnings before interest, taxes, depreciation and amortisation  (Ebitda), is projected at 1.5 times this fiscal versus 1.4 times last fiscal. 

Going ahead, rise in raw material prices without a commensurate increase in NBS prices will be monitorable. 

Chart 2: NBS rates announced by the government