Tighter energy-efficiency norms in India threaten to reduce earnings from legacy urea plants by nearly a quarter, challenging the dominance of older facilities amid ongoing sector reforms.
Legacy urea plants in India are set to see a structural squeeze in earnings after the government tightened energy-efficiency norms on 30 July, according to Crisil Ratings. The agency said operating profitability from these older units could fall by about 25 per cent, to roughly Rs 1,250 a tonne from Rs 1,700 a tonne, as a bigger share of gains from lower energy use disappears. Crisil said the effect will be uneven, with plants most reliant on legacy urea operations likely to feel the sharpest strain.
The pressure comes at a time when legacy plants still dominate the sector, accounting for about 74 per cent of India’s total urea capacity. These facilities depend heavily on subsidies, which make up around 80 to 85 per cent of revenue, while the fixed-cost payment has not been revised since March 2007. As a result, profitability has increasingly depended on retaining savings generated by operating below prescribed energy norms. Crisil said the latest change reduces the composite energy norm to around 5.67 gigacalories a tonne, from about 5.77 gigacalories a tonne at the end of fiscal 2025, versus actual consumption of roughly 5.5 gigacalories a tonne.
Even so, Crisil expects the credit impact to remain manageable for the rated companies it covers, which account for about 70 per cent of legacy urea capacity. The agency said diversification into complex fertilisers, crop-protection chemicals and other businesses, together with restrained leverage, should cushion the hit. It added that legacy urea operations contribute only about 30 per cent of EBITDA across the rated universe, limiting the strain on group-level credit profiles. The agency also said investments in efficiency upgrades could soften the blow over time, although the gains would depend on plant age and the scope for technological improvement.
Crisil also pointed to gas prices as a partial offset. It estimated that higher gas costs, including those linked to the West Asia conflict, could narrow the profitability decline by Rs 75-100 a tonne in the current fiscal year. Earlier this year, the ratings agency said prolonged Middle East disruption could cut domestic output of urea and complex fertilisers by 10-15 per cent if supply chain strains persisted, though government gas allocation and existing inventories may reduce immediate pressure. In a separate note last year, Crisil said India’s urea import dependence was expected to ease to 10-15 per cent from around 30 per cent in fiscal 2021 as new capacity came on stream, but warned that policy changes could still affect older plants’ earnings.
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