Urea subsidy likely to rise due to gas price hike, says Crisil
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Urea subsidy likely to rise due to gas price hike, says Crisil

Last Updated: Friday, June 28, 2013, 21:06
 
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Urea subsidy likely to rise due to gas price hike, says Crisil
Mumbai: The government decision to nearly double the price of natural gas will leave a "net impact" of up to Rs 2,500 crore on government finances due to additional subsidy burden on urea, Crisil said on Friday.

For every USD 1 increase in gas prices, the subsidy on domestically produced urea will increase by Rs 2,000 to Rs 2500 crore, Crisil said in a note.

The government has announced that natural gas price will increase by USD 4.35 per million metric British thermal units (mmBtu) from USD 4.205.

"Assuming that urea prices are retained at Rs 5,360 a tonne, the subsidy burden on fertilisers is estimated to increase by Rs 9,000 crore in FY15," the Crisil note said.

After deducting the royalty received from sale of gas held by the sovereign, the "net impact on the government will be close to Rs 2,000-2,500 crore", the note said.

Yesterday, the Cabinet Committee on Economic Affairs had approved an oil ministry proposal to price all domestically produced natural gas as per a complex formula suggested by a panel headed by PM's Economic Advisor C Rangarajan, under which prices of natural gas will go up to USD 8.4, from the current USD 4.2 per mmBtu.

Crisil said that the decision, which is to be implemented from April 1, 2014, is a big positive for upstream players like Reliance Industries, ONGC and Oil India.

It also said that the decision would hit others like city gas distribution companies and urea producers in the form of higher interest burden on higher working capital needs as subsidy pay back is normally given at the end of year or quarter.

ONGC's pre-tax profit will move up by Rs 13,000 crore, while for Oil India, it would be Rs 1,500 crore. For RIL, which will be the biggest beneficiary, the gains will start accruing from FY16 onwards, Crisil said.

For fertiliser companies which manufacture urea, the impact will be limited to additional working capital burden, and interest thereof, because the government subsidises urea, it said.

"Delay in payment of subsidies will result in higher working capital requirement, thereby increasing the interest cost for fertiliser manufacturers. As per Crisil estimates, the increase in interest cost will result in 30 to 40 basis points decline in net profit margins of urea manufacturers," it said.

The profitability of gas-based petrochemical players like Gail, which is dependent on domestic natural gas as feedstock, will be impacted, as the pre-tax margin would halve to around 22 percent from the 41 percent in FY13, it said.

Similarly, for the city gas distributors like Indraprastha Gas and Mahanagar Gas, every USD 1 increase will push up their input costs by 10 percent.

"We believe that the profitability of these players would be impacted, since they would be able to pass on the increase in cost, only partially" the Crisil note said.

PTI



First Published: Friday, June 28, 2013, 21:04


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