Can fertiliser companies keep their heads above water?

The fertiliser industry has its back against the wall. Leading players have reported a massive slump in their revenue and profitability in FY24. Gujarat State Fertilisers , for instance, saw its profit crashing 89 per cent for the year! The bust year was on two accounts: 1) Bad monsoon. Erratic rainfall during the year affected crop production, leading to lower demand for fertilisers and denting the industry's volumes. 2) Downsizing of government subsidies. Since raw material prices had eased at the end of FY23, the government cut down subsidy rates for the next year. However, raw material prices turned volatile and escalated costs. As a result, the shortfall in subsidy support with high input costs eroded the industry's profitability. So, what's next for the industry? Before we delve into that, let's briefly understand how the industry is dependent on subsidies. How subsidies work The government keeps fertiliser prices under check by capping their retail prices. This is done to ensure affordability for farmers. To compensate for this, fertiliser companies are paid subsidies, which is simply the difference between their cost of production and the selling price of fertilisers. The treatment of subsidies differs for urea and non-urea fertilisers. The selling price for urea fertilisers is fixed at Rs 5.6 per kg. The spread between the cost of producing these fertilisers and the fixed selling price is paid to urea manufacturers. For non-urea fertilisers, the pricing is decontrolled, meaning companies decide selling prices on their own. But the subsidy paid to them is fixed. Which is why they have to keep their costs as low as possible, while maintaining a competitive price against numerous other players. Further, as state-run IFFCO is the largest