The price hike announced by the Modi government for domestically produced natural gas will push up production cost of fertilizer companies by almost Rs 2,720 per ton. In a big reform push, the government on Saturday deregulated diesel prices but hiked natural gas tariff by 46 percent that will push up fertiliser, power, CNG and PNG rates.
Speaking to CNBC-TV18, RG Rajan, CMD of state-run Rashtriya Chemicals and Fertilisers (RCF) said gas price hike will to impact its working capital by Rs 100 crore which means for full year FY15, it stands at Rs 1700 crore. He informed that the company has received the entire subsidy for the FY14, but is awaiting receipt of Rs 1,600 crore subsidy for FY15.
Gas price increase had been deferred on three occasions previously.
Below is the verbatim transcript of the interview.
Menaka: Can you talk us through what you expect will be the impact of this almost USD 2 increase in gas prices as of now?
A: It is a gas price rise of around 50 percent. This will impact on our working capital by around Rs 100 crore. On the profitability there may not be much impact on the Phosphatic and Potassic (P&K) fertilisers because we will be raising the prices to compensate for the higher gas price.
Sonia: What exactly would be the extent of additional working capital requirement that RCF would need because of the gas price hike?
A: It is about Rs 100 crore for two weeks. In one year the total impact is around Rs 700 crore for RCF on the gas price hike and working capital impact would be maximum around Rs 100 crore.
Menaka: Maximum Rs 100 crore for the year? Are you talking about the year under consideration FY15 or are you talking about a full 12 month period?
A: I am talking about the working capital requirement. This is not per year it is throughout. Working capital requirement currently it is around Rs 1600 crore and it will go by Rs 100 crore to Rs 1700 crore for FY15.
Sonia: What is the current subsidy receivable from the government and how much do you think it could increase to in FY15?
A: Current subsidy receivable is around Rs 1600 crore. The total impact in one year on the subsidy will be around Rs 700 crore. So, depending on the funds with the government subsidy amount will be based.
One good news is that the recent government has announced additional special banking arrangement (SBA) for around Rs 14000 crore. So, that also will help to pay the subsidy.
Sonia: So, this is a short term impact that you have told us but in the longer term what could the impact on the industry be because some analysts believe that in the longer term it could be a positive since gas supply to companies like yours would increase. Would you concur with that view?
A: If we get more gas, with the higher prices we will get more domestic gas and that is good because we can replace LNG. LNG is very costly. In case by this higher gas price we get more domestic gas allocation definitely it is a welcome step.
Sonia: How much subsidy support has already been received by the company so far for FY15 and is there anything pending from FY14 as well?
A: FY14 entire subsidy has been received. Including the subsidy for last year and this year so far about Rs 3000 crore we have received from the government so far.
Menaka: One question and I suppose it is difficult to answer at this point in time because we don't know how gas prices will fluctuate but there will be half yearly revisions to prices based on some of the benchmarks that will now determine the gas price in India. As this is linked to how much money you get through the subsidy route what are the gaps you expect there will be between lets say upward revision of gas price and you getting the commensurate amount through the subsidy route, do you expect this to put your operations in jeopardy in any fashion whatsoever?
A: If subsidy is not paid on time we will have higher interest charges. Last year we had around Rs 150 crore higher interest charges. So, subsidy payment should be paid on time and we hope that government will now give adequate provision in the Budget. Further on we hope that the price of urea needs some revision and hopefully government will take a call in the coming few months on the urea price also.
Menaka: Can you detail to us what your expectations are with regards to government action on urea prices?
A: Now very low price of urea is causing a imbalance in the N-P-K ratio. We expect that there should be some substantial hike in the price of urea so that the subsidy level, now around 80 percent is subsidy and 20 percent from market. So, we should get a better ratio and market should bear more.
Menaka: Could you detail what ratio you are expecting or you hope that the government will grant?
A: That is for government to decide. I should not give any number at this stage but I think it should be some substantial increase in the price of urea so that the subsidy level is manageable. Right now subsidy is on higher side for urea.
Sonia: Now that the gas supply issue will be resolved to a certain extent will you postpone your plans of sourcing gas from abroad because that was an issue that you had spoken about earlier that you would be looking out for gas supply sources overseas as well, does that still continue?
A: For the expansion projects especially Thal III we are not sure of the domestic gas supply. For the expansion projects we will be looking for some tie-ups with various companies and that effort is going on.
Sonia: You were planning to set up some plants abroad is that still on the cards and if yes when can we expect some action on that front?
A: You are right that we had some plans for setting plants abroad. Right now it is under preliminary stage. We are having discussions with our potential partners and we hope that next financial year some decision can be taken in the matter.
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