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Following lower fertiliser prices globally over past few months, the cabinet has reduced subsidy rates for non-urea fertilisers under Nutrient Based Subsidy (NBS) rates for FY13. This will lead to higher revenue contribution from farmers vis-à-vis govt subsidy – a step forward towards complete decontrol of the sector. These rates are on expected lines and we believe that at current global fertiliser prices, these NBS rates give ample cushion for Indian fertiliser companies to maintain their per tonne EBITDA margins.
Lower NBS subsidy approved for FY13, in line with expectations
On account of lower global fertiliser prices and a strengthening INR against USD, the cabinet has approved lower subsidy rates under NBS for non-urea fertilisers for FY13 vis-à-vis FY12. The NBS subsidy for N, P and K in terms of INR/kg is lowered to 24, 21.8 and 24 vis-à-vis 27.2, 32.3 and 26.8, respectively.
Structural change in revenue mix to result in WC efficiency
While these rates are in line with expectations, most of the benefit from lower global prices and INR appreciation is being retained by govt. This leaves slight scope for fertiliser companies to cut farm gate prices. The same is, however, in line with govt’s objective to de-control the sector by lowering the subsidy over long term. With these NBS rates, the revenue proportion for non-urea companies is likely to be in 60:40 ratio from farmers and govt subsidy, respectively, from the current 50:50. This is likely to result in better working capital efficiency for these companies.
Non-urea companies to maintain their EBITDA margin per tonne
In case of global prices remaining at current levels over the next few months (without any upward movement until April/May 2012 when most of the contracting for FY13 is likely to happen), we believe that these NBS rates would enable fertiliser companies to pass on some benefit to farmers and despite that maintain their per tonne EBITDA margin. In case of DAP, while the peak contract price for FY12 was at USD677/MT, the current US Gulf export price is at USD518/MT fob, leaving a benefit of ~USD140/MT. At exchange rate of INR49/USD, this translates into an equivalent of INR6,860/MT while the govt is lowering the DAP subsidy by INR5,415/MT.
New subsidy rates for non-urea fertilisers under NBS scheme for FY13 are expected to come into effect from April 01, 2012. The new NBS rates for non-urea fertilisers for FY13, based on these rates for N, P and K, are expected to be notified by the Department of Fertilisers shortly. We currently have ‘BUY’ recommendation on Coromandel International and Zuari Industries, and ‘HOLD’ on Chambal Fertilisers.
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