After two years of poor rainfall, good progress of monsoon and favourable agro-climatic conditions have helped in improved outlook for the fertiliser sector in the second half of this financial year and is set to remain stable, a report by rating agency Icra Ltd said.
“Despite normal monsoons, fertiliser volumes at the manufacturers/traders end fell sharply by 16% year-on-year during four months of financial year (FY) 2016-17 to 14.68 million tonne (MT),” Icra research, in its September 2016 update of the fertiliser industry report series titled ‘Fertiliser Volumes, Price Trends & the Agro-Climatic Updates’ said.
The sharp drop in volumes has been on account of high systemic inventory levels at the beginning of the year. While urea sales fell by 13%, non-urea sales fell by 22% in the first four months of FY2017.
However, fertiliser consumption at the farmers end has been better and the systemic inventory of phosphatic and potassic (P&K) fertilisers has come down to moderate levels and stood at 1.75 MT at the end of July 2016 as against 2.98 MT in January 2016, Icra said.
“During the first quarter (Q1) of FY2017, the financial performance of the industry continued to remain moderate. The revenue of the domestic fertiliser industry posted a fall of 13% to Rs.15.8 billion in Q1 FY2017 from Rs.18.24 billion in Q1 FY2016 due to lower volumes of fertilisers and lower gas prices for urea, resulting in lower retention prices,” K. Ravichandran, senior vice-president and co-head, corporate ratings, Icra, said.
Furthermore, sales of associated chemicals witnessed a fall due to the down cycle in commodity prices. Pressure on margins was evident in P&K segment even while the absolute level of profitability remained steady for urea operations.
The coverage indicators, however, remained moderate during Q1 FY2017, Ravichandran said.
Regarding the current year outlook, Ravichandran said, “Though overall sales volumes for the year FY2017 are expected to remain subdued at 3-5%; healthy monsoons and liquidation of systemic inventory to more reasonable levels have improved the outlook for fertiliser sales in Q2 FY2017.”
“Also, good monsoons during the kharif season would lead to better moisture and reservoir levels and should lead to healthy sales growth during the rabi season. Lower retail prices of NPK (nitrogen, phosphorus, and potassium) fertilisers should also favourably aid the volume growth during the second half of the year,” he added.
The urea industry would continue to benefit from the subdued energy price environment, which is likely to keep the cost of production low, Ravichandran said.