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India urea policy can unleash Rs40,000 cr investmentsqrcode

Jan. 7, 2013

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Jan. 7, 2013
Lending a little sparkle to an otherwise tasteless sector of urea / fertilisers for retail investors, the Indian government on last Thursday night notified the new investment policy.
 
The policy is expected to mobilise dormant plans of fertiliser players in the country bringing about a wave of investments to the tune of `40,000 crore in the next five years.
 
“We are ready now. We have waited for a long time for a favourable policy,” said Satish Chander, director general of the Fertiliser Association of India.
 
He said there are plans in place for an investment of up to rs40,000 crore in urea capacities which could enhance domestic output by up to 10 million tonne in five years.
 
According to the notification, the amount of subsidy to be given by the government will be based on the gas price and import parity prices (IPP). The subsidy given to urea companies will ensure minimum and maximum return on equity of 12% and 20%, respectively, for a gas price between $6.5 per million metric British thermal units (mmBtu) and $14 per mmBtu and the current IPP.
In case the gas price increases beyond $14 per mmBtu, the subsidy outgo to companies will be directly linked to the increase in price of gas based on a prescribed formula.
 
In a report released on Friday, HDFC Securities analyst Satish Mishra called the policy practical and said it addresses most of the industry’s concerns. It is a “positive for Chambal Fertilisers, RCF, Tata Chemicals, GSFC, Zuari Agro, Nagarjuna Fertilisers and L&T”.
 
However, mood of the market remained subdued on Friday as most fertiliser stocks did not post major gains.
 
“The move might lead to some re-rating but it is a long-term policy and will not have any substantial impact on the sectors immediately,” said a senior analyst with a domestic brokerage who did not wish to be named.
 
According to experts, the demand for urea has been growing at a rate of 3% annually but because ofpolicy uncertainty till now, the sector has not seen any investments in the last 15 years in the country.
 
As a result, while India’s production has remained stagnant at 21 mmtpa, its imports have risen to 9 mmtpa now from nil in 2001, thereby increasing the government’s subsidy burden.
 
The government subsidy bill for 2011-12 on urea stood at close to `30,000 crore, which was 35% of the total fertiliser subsidy.
 
Out of this, 36% was on imported urea.
 

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