Chambal Fertilisers & Chemicals Ltd

The management of Chambal Fertilisers and Chemicals Ltd. is pleased to present itsanalysis report covering segment-wise performance and outlook.

The Company has three business segments viz. Fertiliser, Textile and Shipping of whichthe Fertiliser Division is the largest.

I. Industry Structure

Urea production capacity in India has been stagnant for the last 11 years as no newplant came up since 1999. The country is therefore far from self-reliant both innitrogenous and phosphatic fertilisers’. There was only a marginal growth of around3% in consumption of fertilisers during the year 2009-10. India has imported over 5.2million of Urea during financial year 2009 -10. Urea import prices (FOB) varied rangingbetween USD 254 per MT in September 2009 to USD 315 per MT in January-February 2010. Thedependence on imports of this vital nutrient is increasing and reaching levels wherefuture food security could be jeopardized. Accordingly there is an urgent need to increasedomestic production of Urea.

Further growth in capacity through investments in Greenfield or Brownfield projectswill depend upon assured Gas supply on a long term basis at a fair price.

II. Developments in Government Policies

Pending formulation of a pricing policy for Urea, New Pricing Scheme (NPS) -Stage IIIwhich was valid upto March 31, 2010, has been further extended provisionally.

The new Fertiliser Investment Policy for Urea was notified last year. The main featureof the new policy is the shift from ‘cost plus’ approach to ‘Import ParityPrice’ basis for the new investments i.e. Revamp, Brownfield, Greenfield or Revival.For determining the import parity, the floor and ceiling prices have been fixed at US$ 250per MT and US$ 425 per MT, respectively. The additional Urea from the Revamp of existingunits, expansion projects and Brownfield projects will be recognized at 85%, 90% and 95%respectively of the Import Parity Price. As the policy is predicated upon the continuedavailability of KG-D6 basin gas supplies at a fair price, there is an urgent need toaugment Gas supplies domestically or come to formula wherein potential investors areassured of a cost neutralization of inputs beyond a level.

The Government is currently working on a suitable amendment to this policy to take careof industry concerns and the company is actively tracking these developments.

The Government has also notified the Operation of the Nutrient Based Subsidy Scheme(NBS) for Potassic and Phosphatic fertilisers although Nitrogenous fertilisers have beencurrently kept out of the purview of the policy. Under NBS, the Government fixes subsidieson the basis of nutrient content in a product rather than a formula based subsidy linkedto a product. The new policy seeks to emphasize the balanced nutrition of the soilconsistent with rational economic principles. This move of the Government is a step in theright direction and will drive producers as well as importers to improve production,procurement and distribution efficiencies. This move is also consistent with focus onmarketing and customer service through competition. The Company sees this development asan opportunity to expand its product range in Potassic and Phosphatic fertilisers throughan active overseas procurement programme. This will further strengthen the Company’sflagship brand ‘Uttam’ under which these products will be sold. It will alsoenable the Company to reach more farmers and dealers and strengthen its leadershipposition in the crucial markets of North India.

Natural Gas Scenario

The year saw a marked reduction in the international prices of oil and gas in the firstquarter on account of the economic slowdown in the developed economies. The markets,however, revived and the oil prices have inched back to USD 75-85 per barrel range. Theinternational oil prices have a direct bearing on the gas prices due to a closecorrelation between the oil and the gas prices.

Your Company has a basket of sources from which natural gas is supplied to its plantsat Gadepan. Re-gasified LNG (RLNG) constitutes a major quantum of gas supplies and theprices under the contracts have been rising due to increase in the international oilprices. Your Company is taking steps for reduction in the overall gas cost and hasrequested the Government of India to replace a part of RLNG volumes with the gas from theKG-D6 basin in line with a mandate from the Empowered Group of Ministers.

III. Opportunities

In view of the supply-demand outlook for Urea, new fertiliser investment policy of theGovernment of India and commencement of supply of gas from KG-D6 basin, there is anopportunity for your Company to expand further in fertiliser business. However, clarityand improvement in some parameters in the Government policy is required for committingfurther investments.

IV. Risks and Concerns

Urea segment of Fertiliser Industry is highly dependent upon Urea pricing policy of theGovernment of India. Delay in formulation of new pricing policy and short term approach onpolicy front may be an area of concern. Further, delays in payment of subsidy and paymentof subsidy through Fertiliser Bonds, if so made, may cause serious financial burden on theindustry. The Company is carrying Fertiliser Bonds of Rs. 367.15 Crore which were issuedin earlier years by the Government of India. These Bonds are trading at a discount ofaround 12% of their face value. However, no fertiliser bonds were issued during the yearand as per the assurance from the Government further bonds are not likely to be issued.

V. Operational and Financial Performance

The performance of Fertiliser Division is summarized below:

Your Company sold 20.14 Lac MT of Urea during the year 2009-10 which was marginallyhigher than the last year’s sale of 19.76 Lac MT. The production and sales of Ureawere higher due to implementation of energy saving cum de-bottlenecking revamp projectsfor Gadepan - I and II. The production is likely to improve further in the currentfinancial year 2010-11.

Your Company is gradually increasing its marketing reach by expanding its marketingnetwork to Bihar and Jharkhand. The Company’s impetus on trading of agri-inputs isbearing fruits. There was substantial increase in the sale of Pesticides during the yearunder review, which increased to Rs. 179.77 Crore from Rs. 132.72 Crore in 2008-09. TheCompany has sold 1.42 Lac MT of Di-ammonium Phosphate - DAP (Previous Year 2.21 Lac MT)and 0.86 Lac MT of Muriate of Potash - MOP (Previous Year 0.45 Lac MT) in the same period.The variation in trading volumes of DAP was mainly due to supply constraints. The Companyhas sold micronutrients worth Rs. 47.16 Crore and seeds worth Rs. 31.90 Crore as againstprevious year sales of Rs. 43.74 Crore and Rs. 42.88 Crore, respectively. The sales ofseeds were lower mainly due to higher subsidy given to the Government channels on sales ofwheat seed.

(i) Training & Development

Your Company makes a continual effort towards training and development needs of itshuman capital for their growth opportunities along with Company’s growth. The Companyhad conducted 75 In-house Training Programs during the year and sponsored the employees tonumber of external training programs conducted by reputed Institutes and Business schoolsin India. Your Company has achieved 2434 training man days during the year.

(ii) BS Degree – Birla Institute of Technology and Science, Pilani

An off-campus partnership program was initiated in association with Birla Institute ofTechnology and Science, Pilani in the year 2005-06. Under this programme, second batch of14 employees successfully completed their 3 year Bachelor of Science degree in ProcessEngineering in June 2009. b) Manpower Status and Recruitment

The Fertiliser Division experienced lower attrition in 2009-10 compared to the previousyear. However, the experienced manpower is in high demand in open market. The Companyrecruits the requisite personnel both from campus as well open market to fill the gaps. Ason March 31, 2010, the total manpower deployed in fertiliser division was 853. Thedivision continues to have very cordial industrial relations.

I. Industry structure

The Shipping Industry plays very vital role in international trade as most of thetransportation across the continents is carried out through sea route. The two majorsegments of the shipping trade are dry bulk and tanker. Your Company operates into tankersegment through its own Aframax tankers as well as in-chartered tankers.

The Shipping Industry world wide has seen their top and bottom lines plunge since 2009.Most charterers/owners have followed a wait and watch policy with few transactions takingplace either with respect to time charters or sale and purchase of ships. The spot marketshave continuously dipped with aframax tanker charter rates moving from almost USD 50,000per day in 2008 to USD 16,000 per day in 2009. Similarly, asset prices in the segmentmoved down from a high of around USD 80 million in 2008 to subpar USD 60 million in 2009.

II. Opportunities and threats

Prolonged economic downturn has resulted in significant dip in spot market rates aswell as time charter rates. Currently, most of our ships are fixed on period charter atmuch higher rates than the current market rates. In such situations, charterers usuallyeither force restructuring of rates or drop the ships all together. Our charterers didapproach us for renegotiation of rates; your Company however has politely turned down suchrequests.

Since the charter rates have been subdued for more than a year, the asset prices havealso come down substantially. Consequently, opportunities are available to pick up assetsat relatively lower prices.

III. Outlook

The Shipping Industry operates as a global trade and is closely linked to the worldeconomic environment. The world economy has been in recession since the last quarter of2008 and year 2009 saw some extremely poor rates in the tanker market. The Industry isstill facing a considerable challenge in the form of massive order book with almost 30% ofthe existing tanker fleet scheduled to be delivered over the next 3 years.

However, International Monetary Fund recently upgraded its world economic growthoutlook to 3.9% this year and 4.3% for 2011. Higher economic activities should stimulateenergy consumption which in turn will help in turning around the fortunes of shippingindustry. Overall, there is an atmosphere of cautious optimism in the shipping industry.

IV. Risks and concerns

The major risks faced by shipping are - counter party risk, environmental risk, andregulatory risk apart from regular risks that business is subjected to.

Once world economy gathers steam, both dry-bulk and tanker segments should witnesssignificant increase in the transportation demand. However, despite phase out of singlehulls, there is substantial new supply coming in 2010 and 2011 which may see the tankerrates staying low in 2011 and 2012.

All of the Company’s shipping revenues are from world class clients and it engagesin charters with strong counter parties. This has enabled the Company to largely mitigateits counter party risk for the time being. The Shipping business has sound environmentpolicy in place and is certified by Det Norske Veritas. The ships are manned by able andcompetent officers and fully insured with Hull Underwriters and P&I Clubs againstrisks of spillage and environmental damage.

The phase out of single hull vessels has been accelerated to 2010. However, India andfew other countries are still allowing operation of single hulls beyond 2010 upto 2015 or25 years of life of the vessel, whichever is earlier. The Company has only one single hulltanker (Ratna Urvi) which is expected to continue up to September 2012. All other 5tankers are modern double hull vessels.

V. Financial and operational performance

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

VI. Human resources development and industrial relations

The relationship between the management and the employees including the employees unionis very cordial and there are no outstanding industrial disputes. The management also haswell laid down HR Policies for its employees. Welfare and health & safety of employeesare high priority areas. The

Company has embarked on several HR initiatives in the form of training, seminars andpsychological testing to enhance the effectiveness of its employees. The Shipping Divisionhad 60 On-Shore employees including marine engineers on office duty and 167 Floating Staffas on March 31, 2010.

I. Industry Structure

India is the second biggest textiles manufacturer worldwide and third largest cottonproducer and consumer after China and USA. Employing around 35 million people, textilesindustry stands as a major foreign currency revenue generator. Almost one fourth of theworld’s spindle activities are hosted in India. The Country is also significanttextiles Fibre and yarn manufacturer on the world scene, taking on its own a 12% share ofthe world’s production volume. India ranks at second place in production of silk andcellulose Fibre and yarn whilst standing on the fifth position when it comes to syntheticFibre and yarn.

II. Opportunities & Threats

In order to seize the opportunities expected to arise out of lifting of quotarestrictions and other trade barriers, Indian Textiles industry is moving towardsmodernization and expansion as encouraged by the Textile Upgradation Fund Scheme (TUFS)set up by the Government of India.

With the removal of quotas and similar trade barriers, the market is expecting newopportunities. China’s impressive production capacity and its growing strengthcompelled Europe and USA markets to impose trade restrictions on Chinese products. Indiacould do well in proposing a valuable alternative to buyers on the international scene.Visible efforts in quality improvement, innovations through R&D programmes, and othervalue-added features bring a whole new dimension to the Indian products. In turn this hasresulted in higher profit as compared to other regional producers.

III. Risk & Concerns

Pakistan and Bangladesh are growing at fast pace, shortening the gap with India inexport market. India is somewhat lagging behind in technology in the garmentsmanufacturing sector and this seriously hinders increase in exportable production.

Labour regulations are a major concern in India causing great harm to the industry atvarious levels. With no clear legislations, strikes and similar issues often bringbusiness to complete halts.

IV. Outlook

Indian textile industry has shown recovery signs in year 2010, following the dismaloperating environment that prevailed for two consecutive years. The recovery should besupported by a pick-up in export demand, government stimulus, improved liquidity and astable-to-growing domestic demand for textile products. Modernization will enable thecompanies in providing quality and volume solutions which is in constant demand byinternational buyers.

Appreciation of the Indian Rupee remains a challenge for Indian exporters since itlowers their competitive advantage against their Asian peers in Vietnam, China andBangladesh. Should the rupee continue to strengthen, textile exports may register a sharpdecline in the short-term, hitting revenues and cash flows of exporters.

V. Operational and Financial Performances

The summarized performance of Birla Textile Mills was as under:

*excluding excise duty

The Yarn sales and average spindle utilization during the year 2009-10 were flat at21324 MT and 95.77%, respectively. The revenue and margins have improved mainly due tofavourable market conditions in the later half of the year.

VI. Material development in human resources/industrial relations front including numberof people employed

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 skill levels and the employeecommitment. The results of the training efforts at the shop floor level have beenexcellent. Presently, the manpower deployments in Textile Division comprises of 1592workers, 253 staff members (including subordinate staff) and 203 trainees.

INTERNAL CONTROL SYSTEM

The Company has an adequate system of internal controls comprising authorizationlevels, supervision, checks and balances and procedures through documented policyguidelines and manuals, which provide that all transactions are authorized, recorded andreported correctly 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 the year, the internal audit was carried out jointly by the internal audit team ofthe Company and a consultancy firm namely M/s. Axis Risk Consulting Pvt. Ltd. based on theinternal audit programme duly approved by the Audit Committee of the Board of Directors.The internal audit programme is aligned to the previous years’ observations,suggestions from the operating managers and statutory auditors, existing systems andprocedures, financial limits of authority and also the risk areas, which are identifiedand 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 thedirection/action plan recommended by the Management Committee. The directions areimplemented by the respective divisions and wherever required Action Taken Report isplaced 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 Ltd. to, government action, economic development, risksinherent in the Company’s growth strategy and other factors that could cause theactual results to differ materially from those contemplated by the relevant forwardlooking statements.