The delay in revision of fixed cost, delay in payment of subsidy and rising input prices have exerted pressure on urea manufacturers’ profitability.
The fixed costs were last revised in April 2014, under the Modified New Pricing Scheme-III. As per the proposal, there was a rise of ₹350 a tonne for all urea units with a minimum fixed cost of ₹2,300 a tonne and ₹150 a tonne of additional fixed costs reimbursement for urea units which have been operating for over 30 years.
However, the government is yet to implement the revised subsidy as companies continue to receive the fixed cost reimbursement on the basis of cost data of 2002-03. Moreover, as majority of the urea manufacturers have booked the increased fixed costs on an accrual basis over the last four years, any reversal of policy decision on this account will lead to write-down of profits for the units concerned, said rating agency ICRA.
In May, the Cabinet Committee on Economic Affairs approved the proposal of Department of Fertilizers to continue urea subsidy scheme up to 2020 at an estimated cost of ₹1,64,935 crore and implement it through Direct Benefit Transfer.
K Ravichandran, Senior Vice-President, ICRA, said the revision in fixed costs has now been pending for over 16 years leading to significant pressure on the profitability of the urea units which have been witnessing rising fixed costs owing to inflationary pressures. The Di-Ammonium Phosphate and/NPK (Nitrogen, Phosphate and Potash) fertilizer manufacturers are facing inverted duty structure with the end product being taxed at 5 per cent, while inputs such as phosphoric acid and ammonia are taxed at 12 per cent and 18 per cent. As a result, fertiliser companies faced significant amount of stranded input tax credits and blockage of working capital. The rise in gas prices in recent times is another concern for urea players.