Fertiliser direct benefit transfer could hurt companies’ cash flow

The government is firm on stopping subsidy reimbursements to fertiliser companies unless they install point-of-sale (PoS) devices at the retail end, but the industry has said this will hit their financials.

Several representations have been made by the industry to the government to fine-tune the programme before a nationwide launch of the scheme on June 1.

The government has threatened to stop subsidy payments unless companies start installing PoS devices at retail outlets to identify beneficiaries.

The industry is not opposed to direct benefit transfer but it wants the mechanism to be fine-tuned. The fear subsidy clearance from the government will be affected hurting their cash flow.

Rating agency ICRA in a recent report said though the net earnings of the 11 listed fertiliser companies improved to 4.4 per cent in the first nine months of 2016-17, their return indicators remained weak.

Credit metrics of the fertiliser companies were under pressure due to a high reliance on working capital borrowings to fund subsidy receivables, ICRA said.

As soon as a farmer purchases a bag of fertiliser, he will have to identify himself through a PoS device or Aadhar card. The subsidy will then be credited into the bank account of companies within seven days.

This has been designed to protect farmers from making big payments for fertilisers as the difference between the market rate and the subsidised rate is large.

Industry executives said the process would further delay subsidy clearance. “We initially used to produce bills for reimbursement as soon as the material was dispatched from factories, later it was after the material reached the districts and was entered into the mobile fertiliser monitoring system. Now, the claim can be raised only seven days after actual sales,” an executive said.

Though fertiliser dispatches happen all through the year to retailers and dealers, actual sales take place in June-July and October-November. Thus for fertiliser dispatched in March-April, the subsidy will be credited in June-July. Companies will have to borrow to meet their cash flow requirement.

Officials said subsidy bills generated during a pilot project in 16 districts in November had not been cleared yet.

“The uptick in international gas prices is expected to result in an increased cost of production for the urea industry, which should translate into higher subsidies," K Ravichandran, senior vice-president and group head of corporate ratings at ICRA, said in a research note.

While the subsidy backlog at the end of 201617 is expected to decline to ~30,000-32,000 crore, rising gas costs and higher global fertiliser prices will result in a higher backlog at the end of 2017-18, according to Ravichandran.

Primary sales of fertilisers declined nearly 1 per cent during 2016-17 despite a big fall in urea sales. The decline in urea sales was partially offset by the growth in non-urea fertiliser sales, ICRA added.