Sharp cut in NBS rates

New rates have seen 22-54% rate cuts in subsidy rates for Nitrogen, Phosphorus, Potassium and Sulphur. Cut in NBS rates was expected, given the prices of key raw materials — Ammonia, Phosphoric Acid and Sulphur — have declined ~34-80%, over the last year.

Companies may have to take a one-time inventory loss, as industry-wide inventory across different fertilisers remains high this year. Analysts at IIFL Securities do not expect margins for NPKs to be materially impacted, as the subsidy cut is largely in line with declining input costs. However, profitability for imported DAP that had skyrocketed during Rabi-22/23, is likely to normalize.

New rates

Subsidy per kg of nitrogen, phosphate, potash and Sulphur has been cut by 22%, 39%, 37% and 54%, respectively for this Kharif season. Revised rates imply ~25-50% reduction in product-wise subsidies. These would be effective from 1^st April, 2023 to 31^st September, 2023. Further, it also approved subsidy allocation of Rs. 380 billion for P&K fertilisers and Rs. 700 billion for Urea.

Declining prices could lead to further NBS cuts for Rabi

Prices of raw materials viz. Ammonia currently down ~62% from Q4FY23; while sulphur is down ~17%. DAP too is down ~8.4%, which has led to such a steep cut in subsidy in H1’24. If prices remain at the same level or decline from here, we can expect the government to further reduce NBS rates for the Rabi season, starting 1^st October 2023.

P&L could have one-time impact, but BS will strengthen

Cut in NBS rates likely to lead to one-time inventory loss in Q1. However, it will also improve working capital cycles and consequently, reduce debt and finance costs. In its recent earnings call, Coromandel alluded making some provisions to mark down its inventory anticipating downward revision in NBS rates. Over the longer term, analysts at IIFL Securities do not expect margins to move materially versus FY23 levels. Cut in subsidy rates is largely in line with declining raw material prices.