"Our subsidy outstandings are close to Rs 1,500 crore as of now. The subsidy outstandings which traditionally were around Rs 35,000-40,000 crore have climbed up to over Rs 1 lakh crore. If the same level of subsidy underpayment were to continue, by next year we expect about Rs 165,000 crore outstandings and I think it is a burden which the industry cannot take," said R Mukundan, MD, Tata Chemicals , on CNBC-TV18.
Below is the edited interview of R Mukundan of Tata Chemicals on CNBC-TV18
Q: How the inventory situation is panning out in the industry on the complex fertiliser front?
A: On the complex fertiliser it is absolutely right that the robust monsoon as well as the good outlook for the farm has meant that the inventory levels are now at reasonable levels and we do believe that industry is very comfortably placed, both in terms of supply and demand and inventory. You are looking at a very balanced situation on the ground.
Q: What is the outlook on the demand scenario on the domestic side of the complex fertiliser business? What is the latest update with regards to your Haldia plant?
A: Haldia plant is producing to normalcy and we have had no disruption in terms of supplies post the last two rounds of price agreements. Also we have had very good sourcing of supplies, both of finished Di-ammonium phosphate (DAP) internationally. So availability has not been a problem. Raw material sourcing has not been a problem and also the market demand has been quite okay. So we have been producing whatever we can. The only issue on the horizon has been a sudden spike in sulphur prices which we think is more related to one or two supply dislocations which have happened. But these could self-correct themselves, and are not big issues. So, on a broad trend I would say the complex fertiliser is on a very balanced footing as of now.
Q: We are seeing a mild softening in raw material prices, especially of complex fertilisers globally. How can we expect this to improve your profitability post this raw material price correction?
A: Operating margins would remain okay and pretty similar to what it was. There will be some stock adjustments, which happen in any case as the price moves either up or down and I will not give too much credence to that. In terms of margins per tonne, they would continue to remain at the normal level which they have remained so far. Essentially, the prices would remain stable, because the inventory situation has eased. Our big problem was a sudden spike in the foreign exchange rates which now appear to have stabilized. We hope the stability in the foreign exchange regime continues. The big issue for the industry is in terms of the subsidy outstandings. We see this pressure building up on the working capital. That remains our big concern and is actually very acute concern for urea manufacturers, but also let us not leave out the issue that both muriate of potash (MOP), DAP and complex fertilisers are also equally impacted. As of now, the big issue for the industry is whether we can actually run a plant without a working capital and not so much the issue related to raw material, market price or the margin structure.
Q: What is the status of the subsidy payments from the government? Has there been no improvement at all? For you what is the current subsidy outstanding?
A: Our subsidy outstandings are close to Rs 1,500 crore as of now. It is not beginning to impact. I have made this point that the business is under continuous pressure for the last more than 18 months because of the subsidy outstandings. The subsidy outstandings, which traditionally were around Rs 35,000-40,000 crore at any given point of time, have climbed up to over Rs 1 lakh crore. If the same level of subsidy underpayment were to continue, by next year we expect about Rs 165,000 crore of outstandings and I think it is a burden which the industry cannot take. This is the news we have.
Two of the PSU units maybe under pressure in terms of continuing operations and very soon many of us will come under pressure. The intensity of pressure is high in urea and less in DAP but I think it will catch up with everybody. Thus, the fertiliser subsidy is a problem. Firstly there is a carryover amount plus under-provision for the current year; both are beginning to impact us. Obviously the government is trying to manage its fiscal position through delaying payments, but then industry has only that much of a backbone to stand up on.
Q: Are things shaping up the way we saw in the UP sugar industry scenario? Has the industry made any kind of representation on this matter? Even the government would now be finalising the subsidy figures in the vote on account?
A: Of course we have represented our case well and the central government understands the issue well and I think it is not because of lack of understanding the payments are getting delayed. The issue, fundamentally, is that usually during the winter session there is a supplementary which is passed which helps the industry to tide through the balance three months. This year that has not been so and we believe with continuing issue of underpayment and under-provisioning this problem will be more acute than what we used to face in the previous years. This has been highlighted to the government. We have asked the government to do everything within its power to ensure this industry does not have the difficulty and is not forced into a corner where working capital becomes an issue and it stops operations.
In addition to that, each one of us is actually bearing a huge interest burden. If you look at other utilities like electricity companies or power companies, they do get reimbursed on the delayed payment through at least adjustment on the interest rates. Here we are bearing interest costs on our own balance sheet which is also manageable up to only a point. Beyond a point it will lead into running margins and then we will have to again have a serious look at whether to run the operations or not. Ours is not an issue in terms of pricing policy or any other policy. Ours is an issue in terms of just delay in payments.
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