Chambal Fertilisers & Chemicals Ltd


BSE: 500085 | NSE: CHAMBLFERT | ISIN: INE085A01013 
Market Cap: [Rs.Cr.] 1,754 | Face Value: [Rs.] 10
Industry: Fertilizers

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Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

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The Company has three business segments namely Fertiliser, Shipping and Textile. TheManagement Discussion and Analysis Report covering all the three business segments of theCompany is as under:

FERTILISER DIVISION

I. Industry Structure and Developments

(a) Raw Material

Natural Gas is the main input for production of Urea which is procured through twosources- a) domestically produced Natural Gas and b) Re-gasified Liquified

Natural Gas (RLNG). The Liquified Natural Gas (LNG)

is imported and re-gasified in India. LNG imports are made in India through long termand spot contracts. The Gas prices in last few years has been on rising trend due toincrease in crude oil prices and increased demand of LNG in Japan after Fukushima nucleardisaster. Both the fertilizer plants of your Company are operating with Natural Gas in theform of feed and fuel. Your Company sources Natural Gas from multiple sources and has longterm Gas Supply Agreements with the suppliers. Your Company resorts to spot purchase ofgas in event of shortfall in gas supply to maintain production schedule. The RLNG cost hasincreased due to increase in its prices as well as sharp decline of the Rupee against theUS Dollar.

(b) Demand-Supply Scenario

The Urea demand- supply gap in the country has been gradually increasing in the absenceof new investment in this sector. India imported around 8 million MT of Urea during theyear 2012-13, which was about 27% of the total urea consumption in the country. Ureaimport prices were volatile during the year and varied between USD 394 and USD 536 per MT.In order to reduce the dependence on imports, the Government of India has recentlyannounced a New Investment Policy 2012 for attracting fresh investments in Urea sector.

(c) Developments in Government Policies

New Pricing Scheme (NPS) Stage III which was valid upto March 31, 2010, has beenfurther extended provisionally.

The announcement of New Investment Policy 2012 (NIP) for Urea is being perceivedpositively by Urea Industry and there is a lot of enthusiasm for fresh investment in Ureasector. Many existing players have chalked out plans to expand their Urea productioncapacity through brownfield expansion plans. The setting up of new plants will largelyreduce the demand - supply gap in Urea. NIP provides a structure of an Import Parity Price(IPP) linked 'floor and ceiling price' based on the delivered gas price, for thecalculation of amount of subsidy payable to urea units. The NIP will only cover thoseunits whose production starts within five years from the notification of the policy.Further, the dispensation of guaranteed buy-back under the policy will be available to theunits for a period of eight years from the start of production. The new policy has createdconducive environment for new investment in Urea sector as the policy provides a cover forincrease in gas prices. The Government of India proposes to give fertilizer subsidydirectly to the farmers as against routing it through fertilizer producers. The task forceconstituted under the chairmanship of Mr. Nandan Nilekani to implement the direct subsidyto farmers has suggested a three phase roadmap for this purpose. Under Phase -I, the dataregarding supply of fertilizers upto to the retailer point has to be captured in thesystem. Phase - II envisages payment of fertilizer subsidy to the retailers and thesubsidy is proposed to be paid directly to the farmers under Phase - III. The Governmentof India has already rolled out Phase - I during the year and the subsidy payment has beenlinked to acknowledgement of receipt of material by retailer. The roll out of Phase -II isyet to be announced.

II. Opportunities & Threats

After the announcement of New Investment Policy 2012 for manufacture of urea, yourCompany plans to expand existing capacities at Gadepan to produce additional 1.30 MillionMT per annum prilled neem coated Urea through a Brown-field Expansion Project (Gadepan-IIIProject). The Board of Directors has already approved setting up of the project at a costnot exceeding USD 850 million. The Company has issued Letter of Intent to theLump-Sum-Turn-Key contractors for Gadepan-III Project and further actions are underway.The implementation of Gadepan-III Project will place the Company in a different league andwill further strengthen its position in Urea segment.

Implementation of Nutrient Based Subsidy by the Government of India has given majorimpetus to the trading activity of the Company. The strong marketing network and brandimage gives an upper hand to the Company in ramping up its sales volumes of tradedproducts.

The Company has set up a Single Super Phosphate (SSP) production facility at Gadepanwith a capacity of 600 MT per day. There is a good potential for SSP business as there arenot many big players in production of SSP. SSP is also used as a substitute to Di-AmmoniumPhosphate (DAP) and has very good potential in view of prevailing high retail prices ofDAP.

If there is substantial capacity addition in Urea sector during next few years, it mayresult into an over supply situation. Further, the glut in the Phosphatic fertilizermarket due to high product prices may also put pressure on the trading business of theCompany.

III. Risks and Concerns

The Urea segment of Fertiliser Industry operates in the Government controlled regimeplacing high dependence on Urea pricing policy of the Government of India. Further, in arising interest cost environment, a delay in payment of subsidy by the Government causeserious financial burden on the industry as was observed in the current year. Highvolatility in foreign exchange rates, likely reduction in demand of DAP due to high marketprices, higher interest costs due to delay in payment of subsidy by the Government and theextended credit period in the market may impact the profitability from trading activitiesof the Company.

IV. Outlook

It is quite unlikely that Urea will face any challenge in terms of sales volumes innear future in view of demand-supply gap. The positive monsoon predictions are likely tosupport the growth plans of the Company in traded products and SSP

V. Operational and Financial Performance

The performance of Fertiliser Division is summarized below:

Particulars 2012-13 2011-12
Urea Production (MT in lac) 20.92 21.46
Single Super Phosphate (SSP) Production (MT in lac) 0.31

-

Sales including Agri inputs (Rs. in crore) 6669.25 5750.93
EBIDTA (Rs. in crore) 676.97 856.00

Your Company sold 20.25 MT of urea (Previous Year 21.26 lac MT) and 0.31 MT of ownmanufactured Single Super Phosphate (SSP) during the year 2012-13 (Previous Year NIL).In-spite of better plant production rate per day of urea, the production was lower due tolesser number of stream days. The sale of urea was also lower due to lesser production.

The turnover of traded products increased to Rs. 3043.62 crore in the financial year2012-13 from Rs. 2729.11 crore in the previous year. The Company sold 5.99 lac MT of DAP(Previous Year 5.25 lac MT), 0.60 lac MT of Muriate of Potash (Previous Year 0.53 lac MT),0.22 lac MT of Complex fertilizers (Previous Year 1.01 lac MT), 1.50 lac of SSP (PreviousYear 1.08 lac MT) and 0.71 lac MT of other fertilizers (Previous Year 0.57 lac MT) in thefinancial year 2012-13. The sales of pesticides have gone up to Rs. 272.50 crore asagainst Rs. 243.33 crore achieved last year. The turnover from sales of seeds was Rs.41.46 crore as against Rs. 55.69 crore achieved during previous year.

During the year, your Company expanded its marketing network by setting up a marketingoffice at Bhatinda, Punjab, in addition to the existing office at Chandigarh.

VI. Material Developments in Human Resources/ Industrial Relations

Your Company places very high reliance on its human capital which is the backbone ofits continuous growth and prosperity. The Company promotes open and engaging workenvironment for its employees to harness their full potential. The Company is running twohigh tech plants at Gadepan, Rajasthan which requires qualified and trained manpower.Further, the market environment is becoming increasingly competitive. Therefore, retentionof trained and experienced manpower is very critical for operations of the Company and tokeep its competitive edge.

As part of its talent retention and augmentation strategy, your Company has adoptedsuitable interventions including engagement surveys and retention incentives for keypersonnel. As part of Company's long term plan to focus on quality manpower, it has beeninducting fresh talent from premier Engineering and Management institutes. Priority isalways given to internal resources when it comes to career and growth opportunitiesthrough job rotation, job enrichment and consequently promotion. Wherever essential, thepersonnel are recruited externally to bridge critical gaps in knowledge and experience. Anappropriate manpower plan has been drawn up to prepare for planned future growth of theCompany.

Training and development of its people for their growth, aligned with business needs,is an on-going process. Apart from in-house training programmes, the employees werenominated for various external Management Development Programs. As on March 31, 2013,total employee strength of fertilizer division was 949. The fertiliser division continuesto maintain open and cordial employee relations.

INDIA STEAMSHIP-SHIPPING DIVISION

I. Industry Structure & Developments

The Shipping industry is cyclical in nature and highly dependent on the developments inglobal trade; therefore, any adversity in the global economic environment affects theprospects of global shipping industry. The dry bulk, containers and tankers are majorsegments of the Shipping Industry. World economy is passing through a difficult phase andgrowth plans of the major economies are under tremendous pressure. While the concerns ofthe US economy have not yet disappeared, the Euro Zone challenges continue to give shiversto the trade across the globe. A tender recovery in the global economy has been visiblelately, but many issues, mostly fiscal, could impact growth in either direction over thecoming months.

The tanker freight and asset rates have touched historical lows and are hovering aroundthe same level. The high uncertainty and absence of a definitive trend are not allowingthe players in the Industry to take long term decisions. They are following a 'wait andwatch' policy.

II. Opportunities and Threats

Demand in the large capacity vessels is expected to drive overall demand in the yearahead. Long-haul routes from the Middle East Gulf to the Far East as well as Intra-FarEast routes are projected to enjoy firm trade volume growth in the year ahead, generatingsignificant demand for the 70,000- 100,000 DWT sized product vessels. The crude

tanker fleet is projected to expand by 3.3% year-over-year in 2013. Thus, thesupply-demand balance is projected to narrow in 2013, though the cumulative fleet growthof recent years is likely to cause difficulties for owners in the year ahead. For 2013,world oil demand growth remains steady from the previous assessment. The large part ofthis growth is seen coming from China, followed by the Middle East and Latin America. Incontrast, demand from OECD countries is expected to fall further. However, the currentforecast indicates a number of potential downward risks. The recent downward trend incrude prices is making it difficult to forecast how the tanker market is going to pan outin the near future.

III. Risk and Concerns:

The economic imbalances have prolonged across the developed nations over last few yearsand can impact the sea-borne trading volumes to remain subdued during the year's2013-2014. In addition, the factors such as orders in hand with the global shipyardsresulting in constant flow of vessel deliveries is expected to further worsen the over-supply position of global fleet and thereby adversely affecting the vessel freight rates.

The usual perils of the sea, volatile bunker prices and currency rate fluctuation areother causes of concern to the shipping industry.

IV. Outlook

The crude tanker demand is projected to increase by 2.6% year-on-year in 2013 asagainst fleet expansion of 3.3%. Oil demand growth in the economies of non-OECD Asia,particularly China, is likely to underscore demand growth in the VLCC (Very Large CrudeCarrier) sector, which is projected to increase by 4.9% year-on-year in the year 2013. Thecharterers are choosing to fix larger Suezmaxes at the expense of Aframaxes, which islikely to enable Suezmax owners to increase their market share. These factors, coupledwith significant exposure to fragile European oil demand, are projected to lead to Aframaxdemand declining by 4.4% year-over-year.

V. Financial and Operational Performance

The summarized performance of Shipping Division during the year was as under:

Particulars 2012-13 2011-12
Sales (Rs. in crore) 309.67 390.41
EBIDTA (Rs. in crore) 94.39 77.63

VI. Material Developments in Human Resources development/ Industrial Relation

The relation between the employees and the management remained cordial during the year2012-13. The committed shore based staff provides its prompt and efficient support andguidance to the floating staff on a continuous basis, which helps to maintain effectiveperformance and operational efficiency at all times. The Shipping Division continues tofocus & emphasize on safety, quality, environment and training, while reviewing andimproving the skill sets of its employees. The Shipping Division continues to conducttraining programmes for its marine officers which help it to buildup an efficient and wellqualified cadre of experienced seafarers for its fleet. The Shipping Division had 62employees in its shore office and 121 floating staff onboard as on March 31, 2013.

BIRLA TEXTILE MILLS - SPINNING DIVISION

I. Industry Structure and Developments

The Indian Textile Industry plays a vital role through its contribution to industrialoutput, employment generation and the export earnings of the country apart from providingone of the basic necessities of life. The sector contributes about 14% to industrialproduction, 4% to the Gross Domestic Product (GDP) and 17% to the country's exportearnings. It provides direct employment to over 35 million people, being the secondlargest provider of employment after agriculture. Thus, the growth and all rounddevelopment of this industry has a direct bearing on the improvement of the economy of thenation.

II. Opportunities & Threats

India is the second biggest textile manufacturer worldwide, after China. Similar trendis demonstrated in the cotton production and consumption trend where India ranks justafter China and USA.

Demand remained sluggish across the textile value chain in the year 2012-13. Ordersizes reduced for apparel exporters resulting in a fall in volumes. However, rupeerealisations increased partially due to rupee depreciation against the USD and Euro whichresulted in moderate growth in revenues. The year was also marked by stability andrestoration of operating margins for textile players across the value chain led by steadycotton prices. Investment activity slowed down across the value chain due to uncertaindemand and volatile raw material prices.

The Indian textile industry is set for strong growth, buoyed by both strong domesticconsumption as well as export demand. Abundant availability of raw materials such ascotton, wool, silk and jute and skilled workforce has made India a sourcing hub. India hassuccessfully placed its innovating range of Man Made Fiber textiles in almost all thecountries across the globe.

The Government of India has promoted a number of export promotion policies for theTextile sector in the Union Budget 2012-13 and the Foreign Trade Policy 2009-14. In theannual supplement 2013-14, it has also allowed 100% Foreign Direct Investment in textilesunder the automatic route. The industry which was growing at 3-4% during the last sixdecades has now accelerated to an annual growth rate of 8-9% in value terms.

III. Risk & Concerns

The cotton and cotton yarn prices are expected to remain stable in the year 2013-14.However, any unexpected volatility could adversely impact textile companies. Fabricprocessing and garmenting are highly labour-intensive and labour costs are rising inIndia. Therefore, setting up units overseas or outsourcing work to low-labour-costcountries such as Bangladesh could be instrumental in protecting margins. Power is animportant cost component, particularly for spinning mills and fabric units, which are moremechanised than garment units. Companies with coal-based captive power generationfacilities are viewed favourably as they are self-sustained and more cost effective. Highinterest costs continue to impact net profitability and interest coverage.

IV. Outlook

Cotton yarn's outlook is stable with the pick-up in demand from China and stable cottonprices. Synthetic yarn has a negative outlook as lower demand and rising cost of inputsare squeezing their margins. Production of man-made filament yarn decreased by 0.2%year-on-year and production of blended and 100% non-cotton yarn grew at 0.1% year-on-year.

The outlook of Fabric is negative to stable as fabric manufacturers' margins are onslower revival due to increased input cost such as labour, power and fuel costs thus offsetting input price decrease.

V. Operational & Financial Performance

The summarized performance of Textile Division during the year was as under:

Particulars 2012-13 2011-12
Yarn Production (MT) 18701.27 17883.00
Sales (Rs. in crore) 379.52 328.33
EBIDTA (Rs. in crore) 37.25 5.79

The average spindle utilization for the year 2012-13 was 93.19% against 86.38% in theyear 2011-12. The sales of yarn during the year were 19163 MT against 18054 MT during theprevious year.

VI. Material Development in Human Resources/ Industrial Relations

Being a labour intensive industry, training and development of human resources is ofparamount importance. Well structured in-house training programmes conducted byexperienced and competent faculty have improved the employee skill levels and theircommitment. As on March 31, 2013, the manpower deployment in the Textile Divisioncomprises of 1477 workers, 259 staff members (including subordinate staff) and292Trainees.

The industrial relations remained cordial during the year.

INTERNAL CONTROL SYSTEM

The Company has a strong system of internal controls comprising authorization levels,supervision, checks and balances and procedures through documented policy guidelines andmanuals, which provide that all transactions are authorized, recorded and reportedcorrectly and compliance with policies and statutes are ensured.

The operational managers exercise their control over business processes throughoperational systems, procedure manuals and financial limits of authority manual, which arereviewed and updated on an on going basis to improve the systems and efficiency ofoperations.

The Company places prime importance on an effective internal audit system. During theyear, the internal audit was carried out jointly by the internal audit team of the Companyand M/s. Deloitte Touche Tohmatsu India Private Limited based on the internal auditprogramme duly approved by the Audit Committee of the Board of Directors. The internalaudit programme is aligned to the previous years' observations, suggestions from theoperating managers and statutory auditors, existing systems and procedures, financiallimits of authority and also the risk areas, which are identified and reviewed.

The internal audit carries out audit effectively throughout the year covering all areasof operations including the follow up action. The audit approach is based on random sampleselection and takes into consideration the generally accepted business practices. Theinternal audit reports are first discussed by the Management Committee and subsequentlyplaced before the Audit Committee of the Board of Directors along with the direction/action plan recommended by the Management Committee. The directions are implemented by therespective divisions and Action Taken Report is placed before the Audit Committee.

CAUTIONARY STATEMENT

The report may contain certain statements that the Company believes are, or may beconsidered to be "forward looking statements" that describe our objectives,plans or goals. All these forward looking statements are subject to certain risks anduncertainties, including but not limited to, Government action, economic development,risks inherent to the Company's growth strategy and other factors that could cause theactual results to differ materially from those contemplated by the relevant forwardlooking statements.

   

Peer Comparison

Company Market Cap
(Rs. in Cr.)
P/E (TTM)
(x)
P/BV (TTM)
(x)
EV/EBIDTA
(x)
ROE
(%)
ROCE
(%)
D/E
(x)
Tata Chemicals 7,228.82 14.01 1.36 8.72 12.6 11.6 0.69
Coromandel Inter 6,252.65 21.97 2.87 8.80 19.5 15.9 1.04
G S F C 2,345.17 8.80 0.59 3.92 13.9 16.2 0.28
R C F 2,021.94 9.40 0.86 5.54 12.4 12.1 0.66
Chambal Fert. 1,754.33 5.47 0.88 8.60 16.2 9.4 2.30
F A C T 1,413.85 0.00 -7.38 0.00 0.0 0.0 0.00
G N F C 1,366.14 4.97 0.50 6.54 10.5 9.2 0.99
Natl.Fertilizer 1,277.96 0.00 0.81 398.69 -6.6 -0.5 2.58
Deepak Fert. 1,103.82 5.83 0.84 5.01 11.6 12.3 0.80
Mangalore Chem. 782.82 18.55 1.56 8.41 14.0 8.7 2.68
Zuari Agro Chem. 611.76 0.00 0.77 12.75 3.2 6.4 3.72
S P I C 294.06 0.00 2.34 0.33 18.6 -1.0 0.00
Madras Fert. 257.76 1.81 -0.84 5.61 14.0 12.6 0.00
Liberty Phosphat 253.13 27.14 1.55 6.55 21.0 22.5 0.60
Zuari Global 245.82 9.25 0.41 5.80 4.6 5.8 0.00

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Key Information

Key Executives:

S K Poddar , Chairman  

Anil Kapoor , Managing Director  

R N Bansal , Director  

Dipankar Basu , Director  


Company Head Office / Quarters:
Gadepan Village,
Distt Kota,
Kota,
Rajasthan-325208
Phone : 91-7455-274121/22/23/24/25
Fax : 91-7455-274145
E-mail : ms.rathore@chambal.in
Web : http://www.chambalfertilisers.com
Registrars:
Zuari Investments Ltd
Corporate One 1st Fl
5 Commercial Centre
Jasola
New Delhi-110025

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