Cheaper gas to cut urea subsidy bill; to boost profitability of urea makers: Crisil Ratings

Profitability of urea makers is likely to surge due to reimbursement of additional fixed cost, as cheaper gas will reduce urea subsidy bill by Rs 12,000 crore, according to a report. A steep fall in gas prices in sync with crude oil will reduce the urea subsidy bill of the government by a fourth, or over Rs 12,000 crore, in the current financial year, Crisil Ratings said in the report. That will keep a leash on the working capital requirement of urea makers. Earlier, in March 2020, the government had agreed to the long-pending demand of reimbursement of ”additional fixed cost”. This will lead to a one-time relief of about Rs 5,000 crore and, going forward, an annual inflow of Rs 850 crore for all urea makers, it added. Crisil expects the prices of natural gas, which is feedstock for urea plants and accounts for 75-80 per cent of their total cost, to be 25-30 per cent lower this fiscal. Urea is a regulated commodity with its retail selling price (RSP) fixed by the government. To incentivise farmers to use fertilisers for better crop yield, the government keeps the RSP significantly lower than the market rate and reimburses the deficit to urea makers through subsidy payments. While lower cost of gas is a pass-through for urea makers and will not impact their profitability, it will reduce the government”s subsidy bill. That, in turn, will cull both revenue and receivables of urea makers. “Lower gas prices will certainly ease the working capital pressure on urea makers.

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