Fitch: Capex likely by Indian fertiliser companies in 2012
Chemical

Fitch: Capex likely by Indian fertiliser companies in 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.

  • By ICN Bureau | January 29, 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.

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.

Natural gas demand for fertiliser units in the country could increase to 113mmscmd in FY17 (FY12: 41mmscmd). However, the availability of natural gas is unlikely to increase in the near term. The government has assigned priority to gas allocation to the fertiliser sector, but a reduction in the gas output from a major source in the KG Basin makes it a difficult proposition.

The Outlook could be revised to Negative if subsidy support from the GoI is either inadequate, does not arrive in a timely manner, or both. A significant decline in government support is, however, highly unlikely. Very large debt-funded capex programmes could change the Outlook to Negative for entities with moderate-to-low rating headroom. Significantly lower-than-projected earnings, from a sharp upturn in input prices and which cannot be passed on through subsidies or prices, could also lead to a Negative Outlook.

Fitch-rated Indian fertiliser companies include Tata Chemicals Limited (\'BB+\'/\'Fitch AA(ind)\'/Stable), Gujarat State Fertiliser and Chemicals Limited (\'Fitch AA+(ind)\'/Stable), Indian Farmers Fertiliser Cooperative Limited (\'Fitch AA(ind)\'/Stable) and Coromandel International Limited (\'Fitch AA+(ind)\'/Stable).

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