Weekly subsidies to make working capital of fertilizer players more lucrative

The weekly payouts of subsidy receivable by fertilizer players under the DBT scheme augur well for the sector.

Aug 29, 2018 12:08 IST India Infoline News Service

The central government's direct benefit transfer (DBT) for the fertilizer sector has been implemented pan-India. Under the DBT scheme, fertilizer subsidy is paid to the fertilizer companies instead of farmers after retailers conclude the sale to the latter.

Farmers (beneficiaries) are identified through documents like Aadhar card, Kisan credit card, and voter identity. The sales of fertilizers are being made through point of sales (PoS) machines. Subsequently, fertilizer companies have started aligning their sales through the DBT mechanism.

Initially, fertilizer companies were required to wait for months to receive the subsidy amount for sale of fertilizers to the beneficiaries, which would lead to a significant burden on their working capital. It also led to higher short-term borrowings to finance the excess burden arising out of such outstanding subsidies.

Particulars (in Rs cr) Coromandel International RCF Chambal Fertilizers
Working Capital 4,346 2,479 3,027
Short-term borrowing 2,728 935 2,563
Short-term borrowing to Working Capital ratio 0.6 0.4 0.8
(Data as on March 31, 2018; Source: Company Data, IIFL Research)

Leading Indian fertilizer companies like Coromandel International, Rashtriya Chemicals & Fertilizers, and Chambal Fertilizers & Chemicals had significant short-term debt as on March 31, 2018. This was majorly to support their working capital requirements.

Now, the government has started to commence subsidy payments within a week after the company generates the sales bill. We expect this move to significantly improve the financial position of Indian fertilizer players. The significant increase in the cash flows is expected to reduce the working capital burden of these companies. This would lead to lowering of short-term borrowing availed for the same, thereby reducing the finance cost to the company.

The initial challenges with respect to connectivity at the beneficiary’s end have been majorly resolved (technology, compliance, and recording of transactions on the PoS machines). However, there are still a few system-specific issues relating to opening stocks during Q1FY19. The Department of Fertilizers is addressing these problems.

The government is focusing towards the development of the agricultural sector and on improving the rural economy. The first quarter of FY19 has commenced on a positive note with an almost-near normal monsoon and a healthy hike in the minimum support price (MSP) of major crops. Overall, we anticipate this move to augur well for the fertilizer players in India.

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