India’s urea import dependency to drop to 10-15 percent this fiscal year: CRISIL Report

India's urea industry, which meets 55 percent of the nation's chemical fertilizer demand, is steadily moving towards self-sufficiency. The sector’s reliance on imports, which peaked at 30 percent in fiscal 2021, is anticipated to shrink to just 10-15 percent in the near to medium term. This reduction will be driven primarily by the commencement and stabilization of new production capacities, according to a CRISIL Ratings study.

These new plants are expected to achieve steady regulated returns as their utilization rates improve. Legacy plants are also likely to see stable profits this fiscal year, thanks to consistent raw material prices, favorable policies, and adequate subsidy allocations. A CRISIL Ratings analysis, covering urea producers responsible for 70 percent of industry capacity, supports these findings.

Historically, from fiscals 2007 to 2012, urea demand outpaced domestic production, causing import dependence to surge to 20-25 PERCENT of consumption. To counter this, the Indian government introduced the New Investment Policy (NIP) 2012 in fiscal 2013. Under this policy, six plants with a combined capacity of 7.62 million tonnes (25 PERCENT of domestic capacity) have been gradually commissioned over the past five years.

“The NIP 2012 has been pivotal in structurally reducing import dependence,” said Anand Kulkarni, Director at CRISIL Ratings. “The new plants are expected to operate at full capacity this fiscal, compared to 85-90 percent last fiscal, as operations stabilize. Additionally, the commissioning of another plant by next fiscal will further enhance domestic production.”

The higher capacity utilization is likely to improve both operating efficiency and profitability for these new plants, which benefit from a minimum committed return on equity of 12 percent under NIP 2012. Meanwhile, profitability for the remaining 75 percent of the industry is expected to remain stable, supported by steady natural gas prices and consistent policy norms related to energy efficiency and fixed-cost reimbursements.

Working capital cycles have remained stable, aided by government measures, with the urea industry heavily reliant on government subsidies, which constitute 80-85 percent of sales.

“The budgetary allocation of Rs 1.19 lakh crore for urea will be sufficient this fiscal, preventing any significant build-up of subsidy receivables,” noted Nitin Bansal, Associate Director at CRISIL Ratings. “Additionally, timely subsidy disbursements, consistent with the government’s track record in recent years, will help maintain stable credit profiles. With no major capital expenditure planned, net leverage is expected to remain comfortable at 3.0 times this fiscal, similar to fiscal 2024.”

Looking ahead, increased adoption of nano urea could further accelerate India’s path to self-sufficiency. However, potential policy changes, such as stricter energy norms, could impact profitability, though energy efficiency investments by industry players may help mitigate such effects.