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Tighter energy norms could reduce urea manufacturers' profitability by nearly 25% to around Rs 1,250 per tonne, while the impact could vary depending on gas prices, with higher prices potentially reducing the decline by Rs 75-100 per tonne this fiscal, Crisil said.
The rating agency said in its report, India's urea manufacturing capacity is broadly divided into two categories: legacy plants, which account for around 74 per cent of total capacity, and plants established under the New Urea Policy (NUP) 2012. It noted, plants under NUP 2012 are assured a 12 per cent return on equity and remain insulated from the latest tightening of energy norms until the policy period expires. The legacy plants are heavily reliant on government subsidies, which contribute 80-85 per cent of their revenue. Subsidy support comprises compensation for variable costs based on prescribed energy norms and a fixed cost component per tonne. The fixed-cost component for legacy plants was last revised in March 2007, while additional support introduced in 2020 only partly offset rising fixed costs, resulting in under-recoveries for several manufacturers. Due to this, the operating profitability for legacy plants has become increasingly dependent on energy efficiency, with manufacturers retaining the benefit of savings achieved below prescribed norms. The government has tightened these norms to improve sectoral efficiency, most recently in April 2018 and October 2020. By the end of FY25, the composite energy norm stood at around 5.77 Gcal per tonne, compared with actual consumption of about 5.5 Gcal per tonne. "This difference translated into energy-efficiency gains of nearly Rs 1,300 per tonne. The composite norm has now been reduced to about 5.67 Gcal per tonne from April 1, 2025 onwards," Crisil noted. With tighter norms, legacy urea plants are expected to undergo a structural reset. "Crisil Ratings expects energy-efficiency gains for these plants to decline, resulting in ~25% reduction in their profitability to ~Rs 1,250 per tonne from ~Rs 1,700 per tonne." However, the impact is likely to be uneven, with a sharper hit for manufacturers more dependent on legacy urea operations and plants that benefited most from earlier efficiency-linked savings. At the same time, gas prices will likely influence the eventual impact on profitability. Higher gas prices, including those stemming from the West Asia conflict, could partly offset the decline in profitability by around Rs 75-100 per tonne this fiscal. "Going forward, the pace and effectiveness of energy-efficiency capex will bear watching. Any policy support, including an upward revision in fixed-cost reimbursement, could further cushion profitability," Crisil noted. (ANI)
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