New SAPM Avi Final

8/8/2019 New SAPM Avi Final

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Security Analysis and Portfolio Management case

study on Fertilizer Sector

Submitted by:

Avinash S. Lokhande

Roll No.71 (MMS II)

Submitted to:

Prof. (Dr.) Kaustubh A. Sontakke


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Indian Fertilizer Industry

Introduction

India is primarily an agriculture based economy

The agricultural sector and its other associated spheres provide employment to a

large section of the country's population and contribute about 25% to the GDP

The Indian Fertilizer Industry is one of the allied sectors of the agricultural

sphere.

The Indian fertilizer industry is the 3rd largest producer in the world.

The most widely used fertilizers include nitrogenous (N), phosphatic (P) andpotassic (K). Potassic fertilizer is not manufactured in India and is imported.

Monsoon holds the key to the fertilizer industry. A good monsoon will spurt foodgrains production and consequently the demand for fertilizers.

The Indian Fertilizer industry, given its strategic importance in ensuring selfsufficiency of food grain production in the country, has for decades, been underGovernment control

The Government has over the years, provided subsidies/ concessions throughthe fertilizer companies to farmers and the manufacturers have beencompensated through various schemes.

Though , the fertilizer industry in India shows an upward rising trend that would

challenge the broader market in future years


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Economic Analysis for Fertilizer sector

The several consecutive years of very strong growth, the Indian Fertilizer sector

has recovered its worst recession

The financial crisis started in the third quarter of 2008. It was followed in the lastquarter of the year by a deep economic crisis of worldwide magnitude.

The Fertilizer sector are in recession in the first half of 2010, and it is likely thatthis situation will continue during the second half of the year even if there aresome signs of possible improvement by the end of the year

Fertilizer sector have been severely hit by this downturn as well.

Fertilizer industry attention was focused on food inflation and food security.However, a potential food crisis is still looming, and the fertilizer industry and itspartners should be ready to respond to that challenge.

The strong economic downturn can influence fertilizer demand in the followingways, among others: credit unavailable or unaffordable for farmers and inputretailers; large, high-priced fertilizer inventories in the distribution pipeline;greater recycling of organic nutrient sources; and long-term changes in farmersbehavior

As a consequence, crop prices dropped in the second half of 2009 before slightlyfirming in the first half of 2010. The prices for agricultural commodities arecurrently relatively strong compared to 2008/09 levels.

The fertilizer industry in India shows an upward rising trend that would challenge

the broader market in future years

With an outstanding investment of Rs. 20, 677 Crore in the September, 2007

quarter, the sector will witness burgeoning production that will reach new heights

in the coming years

Most of the companies are expecting an approval for their huge capital

expenditure plans from the Department of Fertilizers in India


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Industry Analysis for Fertilizer sector

KEY POINT

Supply High dependence on imports. Government regulations restrict theproduction and disallow exports.

Demand Seasonal, depends heavily on monsoon.

Barriers to entry Highly capital intensive and uncertain, government regulations.However undifferentiated products allow new entrants relativelyeasy entry

.

Bargaining powerof suppliers

High, since the main feedstock, gas, has alternative uses inindustries such as power and petrochemicals.

Bargaining powerofcustomers

High, as industry/farmers lobby is powerful.

Competition Manufacturers compete on prices.

Production and Heavy gap

demand


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Production capacity, demand and supply gap

The dramatic development of the fertilizer industry and the rise in its production

capacity has largely been attributed to the favorable policies. This has resulted in

large scale investments in all three sectors viz. public, private and co-operative.

There is having huge gap between demand and supply

The reports showed the total installed capacity of fertilizer production in 2004 to

be 119.60 LMT of nitrogen and 53.60 LMT of phosphate. These figures went up

to 120.61 LMT of nitrogen and 56.59 LMT of phosphate in 2007. Though the

target production was not met

The following table elucidates the installed capacity of each sector

Sl. No Sector Capacity (LMT) Percentage Share

N P N P

1 Private Sector 53.94 35.13 44.73 62.08

2 Public Sector 34.98 4.33 29.0 7.65

3 Cooperative Sector 31.69 17.13 26.27 30.27

Total 120.61 56.59 100.0 100.0

In India there is have huge gap between demand and supply

Year Supply

N+P

Demand

N+P+K

Demand Supply

Gap N+P+K

Demand of K

2007-08 16950 23125 8835 2660

2008-09 17585 24085 9305 2805

2009-10 18595 25035 9405 2965

2010-11 E 19912 25960 9178 3130

2011-12 E 19965 26900 10235 3300


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Feedstock

Another important issue confronting the sector is with respect to the feedstock.

Naphtha and natural gas are the key feedstocks for the fertilizer industry.

With the changes made in the new energy consumption norm only the gas-

based units will be able to survive the deregulated era.

Natural Gas is used both as fuel and as a feedstock and constitutes as

much as 40% of variable cost of manufacture. With increasing use of gas in

other industries like power and petrochemicals, the fertilizer industry is

facing a shortage of gas.

Natural gas which is the main feedstock for production of nitrogenous fertilizers is

available in limited quantities and the industry competes with the power sector for

its share.

With the Government policy favouring conversion to gas based units, the demand

for gas is only expected to go up in the future, which may in turn lead to further

shortages.

Similarly, in the case of phosphates, on account of the limited availability of

phosphoric acid and rock phosphate in the country, domestic units are dependent

to a large extent on imports.

In view of the limited availability of the main feedstock within the country,

fertiliser companies today are exploring the possibility of setting up joint ventures

abroad to tie up their feedstock requirements.

In view of the limited availability of the main feedstock within the country,

fertiliser companies today are exploring the possibility of setting up joint ventures

abroad to tie up their feedstock requirements.


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Challenges before Indian Fertilizer Industry

The growth trajectory of the Indian fertilizer industry has camouflaged the impending

challenges with which it is faced.

The challenges before the Indian fertilizer industry relate to the incertitude in the supply

of fertilizers. There has been a surge in the demand for fertilizers in the past few years.

The robust growth in consumption propensity has not been met with the required surge

in fertilizer production. The Indian fertilizeris faced with the piquant situation, which

demands a balance between the needs of the farmers and the fertilizer manufacturers.

This has widened the gap between the demand and supply of fertilizers, which has led

to an increase in the dependence of the country on imports. This also reflects on the

lack of realizing of the domestic capacity utilization of the reserves in the country.

Another important factor that has led to the stunted growth of the fertilizer industry is the

rise in prices of the feedstock.

The fertilizer industry is dependent on gas for the production of urea and phosphoric

acid for the production of phosphatic fertilizers and DAP. The country imports its much

more inputs from other countries

The government has introduced policies to decontrol the prices but delayed theimplementation of the parameters that have not augured in favor of the industry.

The small size of the older plants and the low efficiency of the public sectors also pose

as drawbacks of the industry.


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GOVERNMENT POLICIES

Government policies and Indian fertilizer industry share a direct nexus, with

pricing mechanisms, productive growth and subsidies forming the crux of the

economic objectives of the government.

The government policies for the fertilizer industry are devised to ensure a

sustainable growth and development path in one of the most intensive sectors of

the Indian economy.

Growth, production and usage of the fertilizer industry are directly dependent onthe government policies

The policies pursued by the government are devised in response to the

recommendations of the high-powered committees of the country.

The Sivaraman Committee Report (1966) highlighted the importance of the

balanced use of fertilizers along with providing adequate credit support for its

distribution and usage.

The Retention Price Scheme introduced by the government followed the

recommendation of the Marathe Committee that explored the possibilities of

maintaining the farm gate prices of fertilizers. This would enable the government

to maintain prices of the fertilizers during the time of crisis.

The first decontrol policies of the government were introduced in 1992 and as per

recommendation Phosphatic and potassic fertilizer industries were decontrolled

by the government while urea industry continued to produce under subsidizedrates.

Then the complex fertilizer industries were subdivided onto two categorie. Group

I comprised of imported industrial units using gas while Group II included

industries using naphtha or fuel oil.


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Company Analysis:-

Uni-dimensional Analysis (Rs. InCr.)

Comp. A-Tata Chemicals

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Revenue 3,689.74 4,100.45 4,703.99 8,416.43 5,328.88

Gross Profit 590.14 652.92 687.06 1,005.01 872.78

Net Profit 353.03 444.21 949.18 452.05 434.78

Capital 215.16 215.16 234 235.23 243.32

Debt 1,454.49 1,041.77 2,345.28 3,676.10 2,946.51

Fixed Asset 1,464.20 1,407.52 1,343.20 1,544.98 1,592.44

Net Current

Asset 1,350.46 565.89 662.45 980.53 485.9

Investment 560.82 506.48 657.64 969.8 611.19

Comp. B-Rashtriya Chemicals and Fertilisers

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Revenue 3,090.48 3,889.98 5,343.94 7,861.12 5,732.31

Gross Profit 242.71 327.53 348.64 664.73 323.15

Net Profit 147.96 148.74 158.15 211.58 234.87

Capital 551.69 551.69 551.69 551.69 551.69

Debt 437.24 955.23 1,243.48 1,424.23 1,330.84

Fixed Asset 872.41 1,015.91 1,054.14 1,077.16 1,242.71

Net CurrentAsset 740.42 1,267.07 1,252.35 1,747.30 1,769.92

Investment 0.17 0.17 359.69 35.61 15.3


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Comp. C-Gujarat State Fertilizers Company

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Revenue 2,993.64 3,429.79 3,564.40 5,859.17 4,054.27

Gross Profit 562.65 502.7 488.82 984.77 449.67

Net Profit 293.79 266.91 238.45 499.36 254.47

Capital 79.74 79.7 79.7 79.7 79.7

Debt 1,085.72 964.79 559.5 324 687.58

Fixed Asset 1,448.00 1,329.57 1,257.47 1,202.32 1,081.49

Net Current

Asset 641.21 854.9 542.09 396.1 1,143.34

Investment 129.85 139.31 221.34 606.09 424.98

Comp. D- Chambal Fertilizer & ChemicalsParticulars 2005-06 2006-07 2007-08 2008-09 2009-10

Revenue 2,751.38 2,597.09 2,728.78 4,604.67 3,576.40

Gross Profit 467.33 479.36 481.07 708.03 636.85

Net Profit 203.12 151.13 203.8 230.56 249.05

Capital 416.21 416.21 416.21 416.21 416.21

Debt 981.25 2,029.98 1,893.63 2,481.70 2,615.97

Fixed Asset 1,544.39 1,819.55 1,620.83 2,870.64 2,932.01

Net Current

Asset -24.42 499.47 392.7 11.68 613.13Investment 259.57 365.98 307.41 610.89 417.21

Comp. E-Coromandel International

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Revenue 1,559.20 2,014.57 2,118.50 3,754.97 9,962.06

Gross Profit 119.99 159.89 207.45 436.29 824.09

Net Profit 69.19 83.55 100.74 209.76 496.38

Capital 25.41 25.41 25.41 27.98 27.98

D

ebt248.13 395.21 515.62 912.68 1,627.00

Fixed Asset 365.31 358 371.14 724.55 764.04

Net Current

Asset 120.97 307.71 471.56 620.39 918.7

Investment 134.88 161.81 174.08 351.34 1,043.60


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Multi-dimensional Fundamental Analysis

ParticulasComp.

A Comp.B Comp.CComp.D

Comp.E

Revenue 5,328.88 5,732.31 4,054.27 3,576.40 9,962.06

Gross Profit 872.78 323.15 449.67 636.85 824.09

Net Profit 434.78 234.87 254.47 249.05 496.38

Capital 243.32 551.69 79.7 416.21 27.98

Debt 2,946.51 1,330.84 687.58 2,615.97 1,627.00

Fixed Asset 1,592.44 1,242.71 1,081.49 2,932.01 764.04

Net Current

Asset 485.9 1,769.92 1,143.34 613.13 918.7

Investment 611.19 15.3 424.98 417.21 1,043.60

Current Ratio 0.57 1.25 2.19 1.95 0.79

Debtor's Ratio 6.84 4.27 7.29 5.87 92.2

Inventory

Turnover Ratio 10.91 33.01 6.76 14.7 7.27

Gross Margin 12.66 3.84 7.68 10.6 8.05

Profit Margin 7.83 4.09 6.15 6.83 5.13

Earning Per

Share (EPS) 17.87 4.26 31.93 5.98 35.48

DividendPayout Ratio 58.71 30.13 16.43 37.02 32.97

Return on

Capital

Employed 11.38 9.53 14.89 11.12 32.18

Return on

Equity 10.17 12.78 11.86 17.91 32.62

P/E Ratio 20 19.5 9.78 10.8 9.9

Dividend Yield 2.8 1.4 2.8 3.1 3.2

Total Debt to

Equity 0.69 0.72 0.32 1.88 1.44


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Conclusion:-

I feel that whole fertilizer will be going for re-rating, as the profitability of the

company will increase in coming years. Things won`t be that fast but patient

investor will reap good profit .As things are now started moving in rightdirection for fertilizer sectors. Gas supply which is major input of any fertilizer isgoing to double in the years to come, conducive govt. policy and an increasedfocus on the growth of agricultural sector will see fertilizer companies reapinggood profit

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