Additional DAP subsidy to support volumes
Subsidy revision in NPK may follow
In light of the rise in RM prices globally, the Centre has raised the subsidy on DAP
* The price of Fertilizers has been increasing due to the raw materials prices (phosphoric acid and ammonia) rising internationally.
* To avoid the burden of higher prices falling on farmers, the government on 20th May’21 has increased the subsidy on DAP Fertilizer by 140% to INR1,200/bag. Farmers will continue to receive the same at INR1,200/bag. The move is unlikely to impact volumes, which was a concern for the Fertilizer industry. Last year, the actual price of DAP stood at INR1,700/bag. With the government subsidy at INR500/bag, the cost to farmers stood at INR1,200/bag.
* At the actual price of INR2,400/bag, the cost of DAP to farmers would have increased by 58%, assuming the old subsidy INR500/bag.
* The central government typically spends ~INR800b on chemical Fertilizer subsidies annually. With the increase in DAP subsidy, the Government of India will incur an additional INR147.8b as subsidy in the current Kharif season.
The focus now shifts to the revision of NPK subsidy
* A notification on NPK is still awaited. As per industry sources, Complex Fertilizer is coming under NBS (nutrient-based subsidy), and excluding NPK from the current hike is not possible as the Government of India needs to change the policy. Thus, an increase in the subsidy for NPK can also be expected soon.
Impact on Coromandel International
* CRIN’s DAP sales volumes constitute 11%/~13% of overall Fertilizer volumes/Phosphatic Fertilizer sales of 4.8MMT/4MMT in FY21. NPK constitutes 58%/70% of total Fertilizer volumes/Phosphatic Fertilizers, where the subsidy hike notification is still awaited. The hike in DAP subsidy and keeping the price to farmers at the same level will drive demand for DAP. This will be a positive for the industry as well as CRIN.
* The subsidy hike in DAP will increase the government subsidy to CRIN by 20% to INR45b in FY22E.
* We believe the government will notify the hike in NPK subsidy soon. This will be incrementally positive for CRIN as NPK constitutes a large part of its Fertilizer business. If the subsidy on NPK is not revised, it will impact CRIN’s volumes adversely.
* The concern for industry players would be timely payment of subsidy as the government needs to allocate the incremental subsidy of INR147.8b. We have modeled 40 days of government subsidy days for CRIN. Any further delay in subsidy payment will increase its working capital requirement.
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