“The revision in the energy norms was impending from April 1, however due to the COVID lockdown-led delays in the implementation of energy savings projects by the industry, the deadline has been extended. With the revision in the energy norms, the profitability of urea players will moderate to some extent, given that the energy savings post revision of norms will be lower for most of the players vis-a-vis pre -revision levels,” Icra Group Head and Senior Vice-President K Ravichandran said.
Several players expected some relief in the implementation of energy norms through extension of current energy norms for another couple of years, however, as per the notification, the government’s intent appears clear in terms of the revision in the energy norms in order to save subsidy payouts, he added.
The government in a notification in March 2020, had notified the revised fixed costs for urea units with an incremental fixed cost of Rs 350 per tonne for all urea units and an additional Rs 150 per tonne for urea units that converted from naphtha to natural gas and are more than 30 years old.
The notification, however, removed the floor of Rs 2,300 per tonne on the minimum fixed cost for urea units and thus also the maximum contribution urea units could earn on production beyond the reassessed capacity, the Icra report stated.
“The revision in the energy norms and the removal of the floor on the minimum fixed cost for urea units will result in the moderation of profitability for the urea units going forward. With the industry already reeling under weak profitability driven by under-recoveries on account of fixed costs and elevated working capital borrowings due to subsidy delays, the further dent on profitability will be a credit negative for the urea players,” Icra Senior Analyst Varun Gogia said.
The fertiliser industry, however, has been witnessing robust growth in sales volumes in FY2021, driven by expectation of a normal monsoon and possible early buying by farmers to hedge against difficulty in procuring fertilisers due to social distancing norms and lockdown restrictions, the report stated.
The sales of urea, DAP/NPK complexes and MOP witnessed a growth of 15 per cent year-on-year, 37 per cent and 11 per cent, respectively in the first quarter of FY2021, Icra report said.
The subsidy delays, however, continue to affect the industry given the restrictions by the finance ministry on release of subsidy amounts through a graded mechanism, it said.
As a result, the working capital borrowings of the companies are expected to witness a rise in the second quarter of FY2021, the report added.