Budget2013: Fertiliser Subsidy - Underbudgeting continues...

Fertiliser subsidy is budgeted at almost same level for FY14 as per Revised Estimates for FY13. Usually we could never establish link between budgeted amount and actual requirement. This is typically under budgeted every year keeping in mind targets for fiscal deficit number at the time of presenting budget. This year Government has not paid industry its dues from June’12 on imported P&K fertilisers, July’12 on domestically produced P&K fertilisers and August’12 for domestically produced Urea. There was huge carryover of FY12 which was paid at the beginning of FY13, which resulted in budget getting exhausted in first 3-4 months itself during FY13.

FY14 may be marginally better with carryover of over Rs 25,000 crore from FY13 which will leave almost 40,000 crore for subsidy payments during FY14. It should also be seen in light of proposed per tonne subsidy reduction in P&K fertilisers by at least 20% - 25% under NBS for FY14. Subsidy on domestic Urea remains a worry as proposed allocation will fall short after settling bills from Sep’12 – Mar’13 during FY14. Gas price hike proposed by Rangrajan committee which proposes to almost double gas prices will have huge burden on production cost of Urea. Urea subsidy requirement may go up by over 10,000 crore if gas price is hiked by $4/mmbtu. Clearly FM has not provided for possible hike in subsidy needs after gas price increases, which leaves us with option of looking at price hike to pass on impact of gas price hike to farmers. 10% price hike in Urea can save Rs 1600 crore. Thus to mitigate full impact of over 10,000 crore on account of higher gas prices, Urea prices hike of over 60% will be required. We don’t foresee this to happen in a election year as government has faced protest even for 10% price hike from its own ministers being a politically sensitive issue which goes against the interest of large number of farmers.

SUBSIDY ON FERTILISERS  (Rs crore)	Actual	Budget	Budget (RE)	Budget
	2011-12	2012-13	2012-13	2013-14
1. Indigenous(Urea) Fertiliser	20208	19000	20000	21000
2. Imported (Urea) Fertiliser	13716	13398	15398	15545
3. Sale of decontrolled Fertiliser	36790	28576	30576	29427
Total	70714	60974	65974	65972

Government can get much better valuation for disinvestments

Government can get much better valuation for disinvestments

Government has chalked out large divestment programme again. After a failed ONGC issue, outcry of large foreign investor in Coal India, what should be governemnt doing?

Solution to several economic issues is to keep all resources prices linked to markt prices. Let ONGC, CIL sell Oil & Coal at market price and their profits will zoom. Let IOC, BPCL and HPCL charge for Petrol/Diesel based on market orces and let them earn refining margins without subjecting them to cough up part of oil subsidies.

From higher profits, Govt can get much higher dividends and using that dividend, it can directly subsidize end product like Power, Diesel or LPG rather than indirectly subsidizing by keeping prices lower and jeopardiing interests of minority hareholders. Government can charge for land acquisition, more genuiene figure for Royalty, so that argument of subsidiing inputs for these companies can also be addressed.

Linking prices to market will also help in getting much better valuation for these Navratna companies while government undertakes disinvestments.

If goverment continue to plan to intervene with business operations in companies that it owns, It is better to buy-out miority shareholders and De-list these companies. Let government alone bear the consequences of populist/socialist agenda by taking full control of these companies i.e. 100% equity stake.

How can someone invest in country when its ministers tell shareholders to leave (sell out) if they are not happy!! I am yet to come across such statements by anyother country especially when India does so many roadshows abroad to attract investments in indian economy.

Lavasa or Lonavala??

Lavasa, is no more a name which most people are not aware of. Following environmental ministry's objections over Lavasa, which is the first attempt to build a planned city in the 'free India' (We had planned cities in India like Chandigarh, but that was pre-independence era. However, work at Lavasa is stuck after MoEF's notice for over 2 months now.

Lavasa, promoted by Hindustan Construction Company (HCC) is going through many controversies. It's owners included names like Mr. Sadanand Sule, 'Son in-law' of NCP leader Mr. Sharad Pawar in 2003-04 and why not, who in this country can claim to successfully acquire 20,000 acres without help from 'politicians'. After all, Lavasa needed huge tracts of land as the dream was to build a city, and not a small 'row houses' project. Look at the mess at all big cities in India. Traffic, water supply, sanitation, green cover(?), open spaces(??)...Lavasa was dream of building a city where these issues are taken care of by intense urban planning.

Because of sheer size, the project has come in the eyes of MoEF. If Lavasa would not have been a single project under one identifiable promoter, i guess there wouldn't have been any issues!! Just look at Lonavala, Shimla, Mussorrie or several other hill stations and the quantum of urbanization at these places (which is imminent!)

There are hundreds of different projects offering apartments/villas/bungalow plots in the hills of Lonavala and no one bothers about the traffic, water supply and sustainable development. But, if someone dreams of creating planned urban space like Lavasa...MoEF says...You can't do it.

I don't understand which way one should go? Should India continue to build cities the way Mumbai, Lonavala, Shimla are built (unplanned, haphazard manner in which townships and projects are being launched) or should planned developments like Lavasa be given a chance to show a alternate model of development..

The question in the end is which of the two are more dangerous kind of developments to environment...Lavasa or Lonavala? Which of the two appears to be more green, more planned, likely to put less pressure on resources, infrastructure and less hazardous...Lavasa or Lonavala??

Fertiliser Sector - APM Gas price hike impact

APM Gas price hiked to $4.2 per mmbtu
Government has hiked price of APM gas from $ 1.82 per mmbtu to $4.2 per mmbtu. The current supply of natural gas is approximately 170 million metric Standard cubic meters per day (MMSCMD). OIL and ONGC sell ~64 MMSCMD gas under APM. Fertiliser sector consumes 42 MMSCND out of India’s total consumption of 170 MMSCMD. Out of 42 MMSCMD that Fertiliser sector consumes, ~23 MMSCMD comes through APM route.

Additional outgo of ~Rs.3400 crore for the Fertiliser Industry
It will result in additional outgo for fertiliser companies on account of gas to the extent of ~ $740 mn (Rs.3400 crore). However, that does not mean that fertiliser industry is going to take the hit of entire Rs.3400 crore. In fact, most (85-90%) of APM gas goes into Urea manufacturing, which is under NPS-lll policy and not NBS.

Urea manufacturers are not impacted as gas cost is pass-through
The decision does not impact Urea manufacturers such as well such as Chambal Fertilisers, National Fertilisers Limited, Nagarjuna Fertilisers. However, as all fertilisers except Urea are under Nutrient based Subsidy (NBS), where subsidy per tonne of nutrients are fixed and feedstock (gas) cost is not pass-through, will be taking hit due to higher feedstock price. Unless, they hike prices of decontrolled fertilisers or government revises fixed per tonne subsidy on nutrients (unlikely in our view), it will hit profitability for decontrolled fertiliser makers.

No impact on Coromandel International and Zuari industries
Companies like Coromandel international and Zuari Industries will not be hit at all as the earlier doesn’t get APM gas while later runs its plans on Naphtha in absence of connectivity of gas pipeline.

Development negative for RCF, GSFC and Deepak Fertilisers
In absence of details on APM gas uses between Urea and Decontrolled fertilisers, it is difficult to quantify impact on individual companies. However, we assume 85-90% of APM gas goes towards manufacturing of Urea, which is pass-through cost under NPS-lll policy that governs urea pricing. So, ~Rs.3000 crore will be the hit that government will take in form of additional subsidy burden on increased feedstock cost, while companies which use APM gas for manufacturing DAP and complex fertilisers (such as RCF, GSFC and Deepak Fertilisers) will be taking a total hit of ~Rs.400 crore.

This development is negative on GSFC, Deepak Fertilisers and RCF. GSFC and Deepak Fertilisers trade at P/E of 6.4x and 6.3x based on TTM EPS of Rs.39.6 and Rs. 16.9, which is quite cheap, where as RCF trades at P/E of 20.1x at cmp of Rs.78.2. I have negative view on the RCF owning to expensive valuations.

Fertiliser Policy changes - My Views

Urea price hiked by 10%, NBS to be implemented from April’10

The government has approved to implement the Nutrient Based Subsidy (NBS) Policy on decontrolled Phosphatic & Potassic fertilizer with effect from 1st April, 2010. Under NBS, subsidy on the nutrients ‘N’ - Nitrogen, ‘P’ - Phosphorus, ‘K’ - Potash and ‘S’ – Sulphur contents will be fixed for the year 2010-11. In addition to the fixed subsidy on each of the nutrients as above mentioned nutrients, there will be an additional per tonne subsidy for subsidized fertilizer carrying other secondary nutrients and micro nutrients (such as Zinc, Boron etc) in formulations approved under FCO 1985.

Earlier, there were 19 identified products including complex fertilisers which were under fixed price regime. Any other combination of nutrients; along with micro nutrients were not covered by existing subsidy regime. With implementation of NBS, new innovative fertilizer products under various combinations would be developed to meet the vast requirements of Indian agriculture.

The intent of the Government to move towards NBS in fertilizer sector was announced in the Budget of 2009-2010. The NBS regime is expected to depict the actual demand of fertilizers in the country and promote realistic pricing of fertilizer products in the international market. With decontrol of prices, fertilizer industry is expected to attract fresh investments in complex and speciality fertilisers.

Urea price hiked by 10%, Subsidy burden to be reduced by ~ Rs. 1200 crore

Urea which has the maximum tonnage consumed nitrogenous fertilizers in the country will continue to be under the current MRP regime. However, government has decided to increase the MRP of urea by 10% from Rs.4830/- per MT to Rs.5310/- per MT with effect from 1st April, 2010. This will result in reducing of subsidy burden by ~ Rs 1200 crore for the government. The price hike does not benefit the profitability of the industry as higher price paid by the farmer will only result on lower subsidy burden to be paid by the government. However, this will result in lower dependence on subsidy to the extent of price hike, which results in lower working capital needs in case of delay in subsidy payments. However, it is very marginal compared to overall urea subsidy.

Prices will be deregulated while subsidy per nutrient will be fixed

Under the Nutrient Based Subsidy (NBS) regime, since the subsidy on the subsidised nutrients and consequently subsidized fertilizers will remain fixed, the retail prices of subsidized fertilizers at farmgate level will be decided by the Companies.

Government has decided to form an Inter-Ministerial Committee under the Chairmanship of Secretary of Fertilizers to examine various scenarios and make recommendations for finalization of per nutrient subsidy to the Government under the proposed Policy.

Prices deregulated, however will be around current levels for this year

However, there is a fine print which reads that “The Fertilizer Industry has assured that under NBS regime, the price line around the current level would be maintained during Kharif-2010”. We believe that fixed subsidy per nutrient will be decided in a manner that the farm-gate prices of non-urea fertilizers remain near the current prices (MRP fixed by government) so that the farmers are not adversely affected immediately.

Subsidy to be paid through industry

The NBS regime will be implemented with effect from 1st April, 2010. The subsidy will continue to be disbursed through the Industry during the first phase. The industry will receive subsidy based on certification of sale by the State Governments / Statutory Auditors of the Company as in the past.

Our take on policy and fertiliser stocks

We give Thumbs up to the policy decision as The NBS regime is expected to promote balanced fertilization, which is currently skewed towards ‘N’ due to higher consumption of Urea, one of the highly subsidised fertilisers. It will increase agriculture productivity by improving soil conditions and fertility in the country through higher usage of secondary and micro nutrients.

Hike in Urea price doesn’t affect urea manufacturers such as Tata Chemicals, Chambal Fertilisers, National Fertilisers Limited as price hike does not result in higher margins for the players. it will only reduce subsidy burden for the government. Implementation of NBS comes positive for all phosphatic, potassic and complex fertiliser manufacturers. Companies such as Coromandel International, Deepak Fertilisers, RCF and GNFC will benefit. Out top pick is Coromandel International due to its leadership position in complex fertilisers with strategic tie-ups to source inputs such as phosphoric acid and rock phosphate. The full impact on earnings would be possible to estimate only government decides amount of per nutrient subsidy.

China creates unique new jobs, Mumbai will follow

Let me share something unique that I read today. 

This is about new jobs being created in China, and will definitely be created in Mumbai once the “Mumbai Metro” starts its operations. Click Here to know about it. 

As the metro starts in Mumbai, with just 4 coaches in every train on congested Versova – Ghatkopar route, It will  be interesting to see how Metro maintains its schedule in a city, where people are not used to 'doors' in trains. I didn't come across images of metro trains across the world without 'doors' till now; however Mumbai can set an example as authorities may have to think of running trains even if doors are not closed in order to make sure that trains run as per schedule. Frankly, i don't think that's going to happen. So, Mumbai too will have to employ people to push commuters in train so that door get closed and help trains in running on schedule.

My life and mumbai's mornings are going to change

NSE/BSE to open trade at 9 AM

It was announced that Trading will begin at 9 AM from Friday (18th December) instead of 9.55 AM currently. On 17th Dec Morning i.e. today, I witnessed emotional scenes in train. "train Friends" - the category of friends only found in Mumbai were saying good bye to each other as their years of togetherness every morning was set to undergo a change with groups being divided into 2 i.e. "market wale" and "others". Promises were being made and numbers getting exchanged to keep in touch and meeting on Saturdays to enjoy "nashta" which is brought by fellow commuters. People were also getting advised for train timings around 7 AM, so that they can reach offices by 8.15 - 8.30. Today one more announcement came, which suggested that instead of early trade from tommorrow, It will be from 4th Jan. So, the misery starts from Jan 4, and not tommorrow. Currently RTGS transactions start at 9.45AM. Expect Banks to start this at 8.45AM before Jan 4.

Life is going to change a lot for me as well. Normally, we need to reach office at least 40-45 minutes before the market opens. I need to put alarm of 5.45...gone are the days, when i used to sleep till 7AM. I can't think of having breakfast at home (6.30 AM is too early for breakfast) now, which i thought i will have after wedding. I can't read news paper with morning tea (unless my news paper delivery boys prepones his schedule by 1 hour). Morning rush hour in Mumbai, which used to be 8-10 AM has been extended by 1 hour. Currently we see rush after 7.30 from Borivali towards Churchgate, which will shift to 6.45 onwards. Commuters who are not related with markets and travel after 8 AM were hoping to see less crowded trains as "market guys" travel from trains starting between 7-8 AM rather than 8-9 AM trains. Those who used to move out of home early to avoid traffic on road, may have to move out late now to avoid traffic!!

Who all are going to be affected apart from "market guys" - Their families of course, then bankers who have to start RTGS at 8.45 AM, people who wash cars, drivers, newspaper (as lot of guys take paper from home to read in train), vendors who sell breakfast at footpath in Nariman point and lots more...