Indian Agriculture

Boosted by the revival of monsoon rains, the fertilizer sector had been buzzing the whole of Monday. On Tuesday too, most of the fertilizer majors were trading in a high range on the back of the news of existing fertilizer policy, NPS III, being altered.

The government will now bring NPS IV, a note for which is expected to go to Cabinet. The government eventually wants to bring urea along with complex fertilizer under the NBS regime.

“Complex fertiliser decontrol is a step towards reform,” said Kapil Mehan, Executive Director of Tata Chemicals, adding that the new policy would not have any major changes.

US Jha, Former Chairman, Fertilizer Association of India too does not expect it to be dramatically different and said, “The industry wants urea to be under NBS as well.”

Commenting on how the space is expected to perform in the near term, Mehan said though the prices of complex fertilizer have shot up to Rs 600 a tonne since the nutrient-based subsidy (NBS) regime was implemented there is no depression in demand seen for the same.

Expressing concern over the state of the urea space, Mehan said there had been no serious investment in urea since the past few years. “Also, the sales and marketing costs have not been revised in the past 10 years.”

Here is a verbatim transcript of the exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: This time how have pre-monsoon season sales been for fertiliser companies because June was a bit of a sticky month for many parts of the country, did you witness any kind of sluggishness in sales or is there optimism in sales before monsoons this time?

Mehan: First quarter sales are likely to be slightly less than last year and that is not because of any seasonal factors. It is primarily because the pre-placement in the markets has been less this year as the expectation in the market was that there is abundant availability of fertilizers, the contracting has been done for most of the fertilizers for the whole of the year and the arrivals have already stated and with that expectation. I think the sales in the April-June quarter, which is an off-season quarter, have been slightly less than the previous year primarily in phosphate and potash segments.

Q: Along with the growth in volumes, is there any scope at all for a relook by the government in terms of a pricing increase because globally as it seems fertilizer companies are struggling?

Mehan: As far as price increase is concerned, there are three major nutrients for fertilizers that get sold in India, nitrogen, for which urea is the primary source and the price has already been increased with effect from April 1 by 10%. Phosphate and potashic fertilizers which have been brought under the nutrient based subsidy scheme, the price increases have been of the order of about Rs 600 per tonne with effect from April 1 and that increase has not led to any depression in demand and that price increase is well accepted. We expect that with the monsoon spread now getting wider and far across the country, we should see much better offtake this year on an overall seasonal basis.

Q: In terms of the policy, the NPS IV note is expected to go to the cabinet soon, do you expect any dramatic changes in this note for the sector?

Jha: I don’t expect any dramatic changes because it will be only little refinement of the existing NPS III policy. In fact what the industry wanted was that urea could also come under NBS and thegovernment has agreed. It is only a transition arrangement instead of bringing urea also straightaway under NBS they want to keep NPS for sometime. I don’t know what is going to be the duration, it could be six months or one year or it could be one-and-a-half year, but not much. So we don’t expect much because the changes have taken place, the costs have undergone a change. So I think to capture some of these things, the NPS will bring but basically I think the framework is going to be the same.

Q: You don’t expect any major overhaul in the urea policy over the next month or so?

Jha: No. I don’t think so.

Q: The Supreme Court (SC) judgement in terms of pricing of gas didn’t make any real impact for fertilizer companies but do you expect this policy part IV to address allocation in any shape and form for fertilizer companies?

Jha: No, because the SC has only upheld the price of gas what the government had fixed and we all had contracted at that price. Also, the government has given the highest priority to the fertilizer sector so that remains. So the SC order doesn’t make any difference to the fertilizer sector as such.

Q: At which point over the monsoon period will you get a sense of whether or not sales or at least volumes are significantly higher than last year which was a drought year for us?

Mehan: I think the sales of July should reflect the correct assessment of the monsoon which is likely to be good and if we see the last four-five days when the monsoon has advanced into most parts of northern region and eastern parts of the country, I think most of the country is now covered except the central parts of India and northwestern parts where the rains are still slightly deficit. So I think the sales of July should reflect the revival of demand and expected offtake which is likely to be much better than the last year.

Q: There is a lot of anticipation building up around your sector given that the government has been able to move on oil sector pricing, natural gas pricing over the last few weeks. Are you expecting any major changes in terms of policy for your sector in NPS IV or whatever form?

Mehan: As far as the fertilizer sector is concerned, I think the reforms have already begun and the nutrient base subsidy scheme which the government has introduced for phosphate and potashic fertilizers is, in a way, a major reform where the selling price to the farmer has been decontrolled and it is the maturity with which the industry is moving and not leading to any runaway increases in prices because the backlash on demand can be detrimental in the long run.

I entirely agree that there is not expected to be any major increases. But having said that for the last 19 years the government has been tightening the norms as far as the urea sector is concerned. Due to this, the profitability and the margin structures have either remained stable or have declined and with the result, the last 12 years no serious investment has come into the sector. Also, let us face that it is the only sector which can attract major investments in this sector and we are expecting that government would be taking note of these developments and will not do anything which will not attract investment because that is what is needed as the dependence on import for Indian demand is increasing. Also the size of our country with food security and agriculture being such an important issue can ill afford and I think the highest priority which has been given for allocation of gas, the NPS IV also we expect that the government will give some concessions to theindustry, as it has recognized some of the cost increases which have happened. For example, the sales and marketing costs have not been revised for the last 12 years. The last revision which happened was in 1999-2000 and that is something we expect that the government would correct and while NPS III modified or NPS IV maybe for a shorter while but theindustry is looking forward to nutrient based subsidy scheme getting extended to urea also.

Q: While you were at the helm of RCF, was there any plan then mooted to develop the real estate in Chembur because that seems to have come back now, is it conceivable? I know that you are not engaged in a management of the company any more but is it conceivable from past experience that such a development plan could come about?

Jha: I won’t comment on that.

Q: Can you confirm that the size of the plot that we are talking about is 300 acres and it is in the Chembur area?

Jha: The question is that the fertilizer plant has been set up—the land has been taken for a particular purpose. So we believe that we should go for expansion of the capacity there for fertilizer production.

So these are all conjectures coming, I won’t comment. In any case the management of RCF will deal with these things.

Q: You were heading the Fertilizer Association, what is your sense of how fast the government will move on the NPS IV, we understand that it has already got a bit delayed?

Jha: I think the government should come soon with the policy because the adjusting NPS policy is only upto March 31, 2010. So from April 1, the policy has to come. The government too is very keen to bring a policy in place for urea also.

Source- moneycontrol.com