Fertiliser manufacturers’ credit metrics to improve in FY22: Ind-Ra

Fertiliser manufacturers' credit metrics will improve in the upcoming fiscal given the strong likelihood subsidy backlog clearance post allocation of an additional subsidy in the revised estimate (RE) of FY21, India Ratings and Research said in a report.

As per the report, the grant of an additional Rs 626 billion fertiliser subsidy in the revised estimate (RE) of FY21.

Consequently, the rating agency said "Will substantially reduce working capital debt and interest expenses."

"This would also encourage the industry players to increase capital intensity to further improve their operating efficiencies," the report said.

"Urea manufacturers would specifically benefit as their share of subsidy is generally 70 per cent of the revenues as opposed to 30 per cent for nitrogen-phosphate-potash (NPK) manufacturers."

The report cited that subsidy budget estimate (BE) for FY22 is 11.5 per cent higher at Rs 795 billion than the FY21 BE of Rs 713 billion, the urea subsidy BE has been increased by 22.9 per cent to Rs 588 billion and the NPK subsidy BE has been reduced by 11.7 per cent to Rs 208 billion.

"Ind-Ra estimates the fertiliser sector debt to be in the range of Rs 535 billion- Rs 565 billion at FYE20, up from around INR495 billion in FY17. The debt is primarily working capital in nature and corresponds to an increase in subsidy receivables outstanding to Rs 470 billion - Rs 495 billion in FY20 from about Rs 455 billion in FY17."

"The subsidy receivables contribute 85-90 per cent to the sector level debt. Accordingly, the sector's net leverage was high at around 6.6x in FY20 (FY19: 6.5x) and interest coverage was modest at 2.2x (2.1x)."

However, the additional subsidy allocation is likely to substantially increase the sector's cash flow from operations and free cash flows in FY22 from estimated Rs 55 billion and negative Rs 4 billion, respectively, in FY20.

"Ind-Ra does not expect any significant capex in the industry, other than for urea efficiency improvement for some players and regular maintenance and upgradation capex, in the near term."

Accordingly, Ind-Ra estimated that clearance of full subsidy backlogs in FY22 would result in the sectoral net leverage declining to around 2x and interest coverage to moving upwards of 5x.

Furthermore, the resultant savings in interest expense are likely to improve return on equity for sector entities especially urea manufacturers up to double digits from the current range of 4-7 per cent.