Tighter energy norms to cut profitability of urea makers by a qtr: Crisil | Economy & Policy News

Legacy urea plants are set for a structural reset in profitability following the tightening of energy-efficiency norms announced on July 30, 2026, according to Crisil Ratings. The agency expects energy-efficiency gains for these plants to decline, resulting in a 25 per cent reduction in profitability to Rs 1,250 per tonne from Rs 1,700 per tonne.

Crisil said the impact will not be uniform, as it will be sharper for manufacturers with greater dependence on legacy urea operations and for plants that benefited the most from earlier efficiency-linked savings.

“However, manufacturers rated by Crisil Ratings are expected to absorb the impact without material pressure on their credit profiles, supported by earnings diversification across complex fertilisers, crop-protection chemicals and other businesses, as well as controlled leverage. Our analysis of urea manufacturers, which account for 70 per cent of the legacy capacity, indicates as much,” the agency said.

India’s urea manufacturing capacity falls into two categories: legacy plants, which account for 74 per cent of overall capacity, and plants set up under the New Urea Policy (NUP) 2012. The latter are assured a 12 per cent return on equity and remain insulated from the latest change in energy norms until the policy period ends.

Legacy plants, in contrast, are significantly dependent on subsidy inflows, which account for 80-85 per cent of their revenue. Subsidy support has two components, including compensation for variable costs based on prescribed energy norms and a defined fixed cost per tonne. The fixed-cost component for legacy urea plants was last revised in March 2007.

Additional fixed-cost support provided in 2020 only partly offset rising fixed costs, resulting in under-recoveries for several manufacturers. So, operating profitability has become largely dependent on energy efficiency, with plants retaining the benefit of any savings achieved over the prescribed norms. The government has tightened these norms over the years to enhance efficiency in the sector. The norms were last tightened in two tranches, in April 2018 and October 2020.

At the end of fiscal 2025, the composite energy norm stood at 5.77 gigacalories (Gcal) per tonne against actual consumption of around 5.5 Gcal per tonne. This difference translated into energy-efficiency gains of Rs 1,300 per tonne. The composite norm has now been reduced to about 5.67 Gcal per tonne from April 1, 2025, onwards.

“For legacy plants, nearly three-fourths of operating profitability from urea is linked to energy-efficiency gains. With the latest tightening, these gains are set to narrow, lowering operating profitability to Rs 1,250 per tonne. The impact will be most visible for the most efficient plants, where earnings from energy savings have historically been the highest,” said Anand Kulkarni, Director, Crisil Ratings.

He added that over the medium term, manufacturers may partly offset this loss through targeted energy-efficiency capex, although the benefits will vary depending on plant age and the scope for technological upgrades.