New fertiliser investments in 2012 to follow policy change: Fitch
27 Jan 2012
Fitch Ratings says that fresh investments by Indian fertiliser companies in 2012 will depend upon changes in government policies, allocation of natural gas and long-term tie-ups for key inputs.
In iuts fertiliser sector outlook, 2012 Outlook: Indian Fertiliser, Fitch notes there was no major capex by Indian fertiliser players over 2002-2011, a period of high economic growth for the Indian economy. The agency has a stable outlook on its ratings for fertiliser entities based on their low levels of long-term debt, moderate-to-low leverage, reasonable cash balances, sufficient government support towards subsidies and robust demand.
"Fitch expects the government of India (GOI) to announce policy measures in 2012 for the industry, which will help kick-start new investments in urea," says Salil Garg, director on the corporates team.
These initiatives could include de-control over urea pricing, firm allocations of natural gas, fiscal concessions through tax breaks for new investments, and the rationalisation of sales tax. If implemented, these initiatives will reduce the growing gap between the domestic demand for and supply of fertilisers. The increasing gap is a result of no major investments in the domestic fertiliser sector over the last 10 years - the period coinciding with the 10th and 11th Five-Year Plans.
Bringing urea under the nutrient-based subsidy (NBS) scheme, expected this year, will result in a uniform subsidy regime for all fertilisers. GOI moved major fertilisers, except urea, under the NBS scheme in 2010. NBS entails a fixed subsidy per tonne for each nutrient and keeps the retail price floating.
Fitch's ratings of fertiliser companies are based on the expectation that the GoI will continue to support the sector with adequate and timely subsidies in cash through budgetary allocations, given their strategic role in achieving the larger objective of national food security. Consequently, ratings for fertiliser companies are not likely to be affected by the subsidy policy.