nagarjuna oil refinery ltd share price Management discussions

Global Economic Scenario

Prospects for a robust global economic recovery remain dim. Stubborn inflation, rising interest rates and heightened uncertainties are creating obstacles for sustainable growth. The effects of the COVID-19 pandemic, the war in Ukraine, the climate crisis and rapidly shifting macroeconomic conditions, are clouding the economic outlook and challenging efforts to achieve the Sustainable Development Goals (SDGs). Here are 5 things you need to know about the global economy:

Global growth is projected to fall from an estimated 3.5 percent in 2022 to 3.0 percent in both 2023 and 2024. While the forecast for 2023 is modestly higher than predicted, it remains weak by historical standards. The rise in central bank policy rates to fight inflation continues to weigh on economic activity. Global headline inflation is expected to fall from 8.7 percent in 2022 to 6.8 percent in 2023 and 5.2 percent in 2024. Underlying (core) inflation is projected to decline more gradually, and forecasts for inflation in 2024 have been revised upward expecting a relatively subdued economic outlook. Growth is generally strongest in emerging Asian economies, and weakest in Europe and the US.

Inflation remains stubbornly high in many countries. While upward price pressures are expected to slowly ease, inflation in many countries will remain well above the comfort zone of central banks. Amid local supply disruptions, high import costs and market imperfections, food inflation is still high in most developing countries, disproportionately affecting women, children and the poor and exacerbating food insecurity.

Labour markets in many developed economies have continued to show resilience, with low unemployment rates and recurrent worker shortages. Employment rates are at record high levels in many developed economies and gender gaps have recently narrowed, in part due to increased use of telework and flexible work arrangements.

Global monetary tightening has exacerbated fiscal and debt vulnerabilities in developing countries. Rising borrowing costs and a strong dollar have increased debt-servicing burdens and debt default risks. Financing constraints will limit the ability of governments to invest in education, health, sustainable infrastructure, and energy transition to accelerate progress towards sustainable development.

Indian Economic Scenario

Despite external exogenous shocks, Indias economy is relatively insulated from global spillovers compared to other EMEs, partly because of its large domestic market and relatively looser integration in global value chains and trade flows

Despite the global slowdown, Indias economic growth rate continues to be resilient despite signs of moderation in growth and stronger than in many peer economies and reflects relatively robust domestic consumption and lesser dependence on global demand

The Government of Indias strong infrastructure push under the Prime Ministers Gati Shakti (National Master Plan for Multimodal Connectivity) initiative, logistics development, and industrial corridor development will contribute significantly to raising industrial competitiveness and boosting future growth

Improving labor market conditions and consumer confidence will drive growth in private consumption. The central governments commitment to significantly increase capital expenditure in FY2023, despite targeting a lower fiscal deficit of 5.9% of GDP, will also spur demand. Helped by recovery in tourism and other contact services, the services sector will grow strongly in FY2023 and FY2024 as the impact of COVID-19 wanes. However, manufacturing growth in FY2023 is expected to be tamped down by a weak global demand, but it will likely improve in FY2024. Recent announcements to boost agricultural productivity, such as setting up digital services for crop planning and support for agriculture startups will be important in sustaining agriculture growth in the medium term.

Inflation will likely moderate to 5% in FY2023, assuming moderation in oil and food prices, and slow further to 4.5% in FY2024 as inflationary pressures subside. In tandem, monetary policy in FY2023 is expected to be tighter as core inflation persists, while becoming more accommodative in FY2024. The current account deficit is projected to decline to 2.2% of GDP in FY2023 and 1.9% in FY2024. Growth in goods exports is forecast to moderate in FY2023 before improving in 2024, as production-linked incentive schemes and efforts to improve the business environment, such as streamlined labor regulations, improve performance in electronics and other areas of manufacturing growth. Services exports growth has been robust and is expected to continue to strengthen Indias overall balance of payments position.

However, geopolitical tensions and weather-related shocks are key risks to Indias economic outlook.

Agriculture Sector

Agriculture plays a significant role in Indias growing economy. With around 54.6% of the total workforce involved in agriculture and allied sector activities, the sector contributes to 17.8% of the countrys gross value added (GVA). During 2021-22, the country recorded US$ 50.2 billion in total agriculture exports with a 20% increase from US$ 41.3 billion in 2020-21. It is projected that the Indian agriculture sector will grow by 3.5% in FY23.

The continuous technological innovation in the Indian agriculture sector plays a critical role in the growth and development of the Indian agriculture system. It will be crucial for ensuring agricultural production, generating employment, and reducing poverty to promoting equitable and sustainable growth. Constraints include diminishing and degraded land and water resources, drought, flooding, and global warming generating unpredictable weather patterns that present a significant barrier for Indias agriculture to grow sustainably and profitably. The future of agriculture seems to involve much-developed technologies like drones, temperature and moisture sensors, aerial images, and GPS technology. Farms will be able to be more productive, efficient, safe, and environmentally sustainable owing to this cutting-edge equipment, and precision agriculture with emphasis is on “sustainable agriculture” Various factors such as data analysis matrix and technological advancement in the existing agricultural machinery contribute to the production of food grains for consumption and commercial needs. The production of commercial food grain support the economy and improves the GDP.

Hence, the future growth of Indian agriculture appears to be growing with an upward graph which is backed by technological advancements and government initiatives.

Indias agriculture mainly depends on nature, however changing climate and global warming are making farming unpredictable. The need to use modern technologies to increase productivity and profitability led to the emergence of Agriculture 4.0 in India. There have been significant changes in India in the context of agriculture over the decades and many new technologies have been developed. Several new-age farmers are using soil mapping software as well to determine the optimum level of fertilizers used in the farms. These emerging technologies in farming and agriculture pave the way for more opportunities. The aggrotech start-ups and traditional farmers are also using the latest solutions and trends to improve production in the food value chain. It includes the adoption of new technologies such as cloud-based solutions and other relevant advanced agricultural management techniques to increase farmer efficiency and produce more crops.

Fertilizer Sector

The India fertilizer market is expected to grow at a CAGR of 4.7% between 2023 and 2028, reaching a projected value of USD 1160.18 billion by 2028. The market growth is being driven by increasing demand for food production and improvements in agriculture processes.

In the first quarter of 2023-24 i.e. April-June 2023, production of fertilizers registered positive growth over the corresponding period in the previous year. The production of urea, DAP and NP/NPKs at 7.38, 1.18 and 2.45 million MT recorded increase of 10.8%, 7.7% and 26.5%, respectively, during April-June 2023 over April-June 2022. Production of SSP at 1.37 million MT stood at the previous years level. Except urea, import of other fertilizers recorded positive growth during April-June 2023. Import of urea at 1.14 million MT registered a decline of 20.9% during April-June 2023 over April-June 2022. However, import of DAP, MOP and NP/NPKs at 2.09, 1.19 and 0.86 million MT recorded steep increase of 138.4%, 115.9% and 11.4%, respectively, during the same period. The robust growth in fertilizer production, coupled with significant sales growth and a surge in imports, highlights the thriving fertilizer industry in India during the specified period. These positive trends demonstrate the countrys increasing emphasis on agricultural productivity and its commitment to meeting the growing demand for fertilizers in the agricultural sector.

Coupled with good monsoon 2023 and the rising size of the potential consumer base are expected to drive the agriculture product and consequently demand for fertilizer in the region due to increasing consumption of fertilizer The rise in agricultural production and several government initiatives to enhance credit availability along with increasing investments are supporting the India fertilizer market growth during the forecast period.

With the Indias sustainable production of food grains, the consumption of fertilizer is expected to increase over the coming years in the country.

Government Policies

India is second largest consumer of fertilizer. The government is working on a national policy to boost local manufacturing of fertilisers and reduce dependency on imports consist of special incentives to set up fertilizer units and reduced import duty on raw materials with focus on organic fertilizers In accordance with the long term food security strategy, the industry expects an incentive for the promotion of the organic fertilizer industry, since India already has the potential to become a hub of organic fertilizer production.

Government has launched various schemes and policies in the past year, some of these are:

Urea Subsidy Scheme: Presently, Urea is being provided to the farmers at a statutorily notified Maximum Retail Price. Per bag of urea. Under the scheme, the difference between the delivered cost of urea at farm gate and net market realization by the urea units is given as subsidy to the urea manufacturer or importer.

Nutrient Based Subsidy Scheme: Subsidy rates of P&K fertilizers under this scheme were increased on 20th May 2021 and 13th October 2021, and then further increased substantially for Kharif-2022, so that these fertilizers are available at affordable prices to the farmers.

Direct Benefit Transfer (DBT) project for fertilizer subsidy payment: Department of Fertilizers (DoF) has implemented the scheme for fertilizer subsidy payment to improve fertilizer service delivery to farmers. Under the DBT system, 100% subsidy on various fertilizer grades is released to the fertilizer companies on the basis of actual sales made by the retailers to the beneficiaries.

Nano Urea: The Government of India recently notified the specifications of Nano nitrogen under Fertilizer Control Order 1985. Nano fertilizers hold great promise for application in plant nourishment because of the size-dependent qualities, high surface volume ratio and unique optical properties.

One Nation One Fertilizers: The Government decided to implement One Nation One Fertilizers by introducing Single Brand for fertilizers and Logo under fertilizer subsidy scheme namely “Pradhamantri Bharatiya Uravarak Pariyogna”. The single brand name for urea, DAP, MOP and NPKs etc would be Bharat Urea, Bharat DAP, Bharat MOP and Bharat NPK respectively for all fertilizer companies and importers. New Brand name and logo to be used by all fertilizer companies from 30th November, 2022 for imported urea, Indigenous Urea and Imported PNK and from 31st December, 2022 for Indigenous PNK. The release of fertilizer subsidy to companies will be considered only for fertilizer dispatches in the new bags after the above-mentioned cut-off dates.

Pradhanmantri Kisan Samridhi Kendra (PMKSK): The Government decided to convert the existing village, block/ sub-district/taluk and district level fertilizer retail shops into Model Fertilizer Retail Shop or to establish new ones. Model fertilizer retail shop will act as One Stop Shop for all agriculture related inputs and services. The name of the

Model Fertilizer Retail Shop would be Pradhanmantri Kisan Samridhi Kendra (PMKSK). As on date there are 3.3 Lakhs fertilizer retail shops at district, block/sub-district and village levels, all these shops will be converted into model retail shops. The timelines for conversion of these shops have also been prescribed.

Companys Strengths and opportunities

The Companys main strength lies in an excellent track record of project execution, achieving high production levels and good safety record. The company has multiple advantages of having good brand image, nearness to raw material, and the market at its doorstep. The Company is constantly looking for new opportunities to further enhance its revenue streams and increase profitability.

Financial Performance vis a vis Operational Performance Financials

The Company recorded a loss after tax for the year was Rs.900.09 crores against Rs. 669.91 crore for the previous year. The loss before exceptional items for the period increased by Rs 526.94 Crs mainly on account of an impairment loss of Rs 675.19 Crores.

Plant Operations

The Company during the financial year 2022-23 manufactured 11.205 LMT of urea as against 9.142 LMT in the previous year. The production for the year 2022-23 is less compared to the usual level, owing single unit operation from 1st Oct 2022 till end of financial year.

Sales and Marketing

The Company achieved a sale of manufactured urea of 11.20 LMT compared to 9.18 LMT in the previous year. The total urea sales for both manufactured and imported urea was 11.20 LMT compared to 9.18 LMT of previous year.

Details of significant changes in Key Financial Ratios:

S. No Ratio	31.03.2023	31.03.2022
i Debtors Turnover Ratio	10.96	6.54
ii Inventory Turnover Ratio	139.63	91.27
iii Interest Coverage Ratio	-1.85	-4.25
iv Current Ratio	0.15	0.18
v Debt Equity Ratio	-1.37	-2.18
vi Operating Profit	-12%	-10%
vii Net Profit Margin %	-16%	-25%

i. Debtors Turnover Ratio: has improved due to receipt of subsidy from government of India in time compared to the previous year.

ii. Inventory Turnover Ratio: Improved due to increase in sales revenue and inventory being maintained at lower level.

iii. Interest coverage Ratio: Improved due to decrease in cash losses in the current year.

iv. Current Ratio: No significant change in current ratio.

v. Debt Equity Ratio: Debt Equity Ratio is negative due to increase in losses.

vi. Operating Profit Margin: Gross Profit Margin deteriorated due to impairment loss.

vii. Net Profit Margin: Improved due to higher income.

The Company is incurring losses for the last few years therefore Net Worth of the Company became negative from March 31, 2021.

Human Resources and industrial Relations

The Company during the previous year continued to have good industrial relations with all its employees. Various initiatives have been taken to impart training and development activities so that employees are prepared to take up new challenges for their own development and also for the overall well-being of the Company. There are 836 employees on the rolls of the Company as on 31.03.2023.

Internal Control Systems.

The Company has a strong internal control system comprising various levels of authorization, supervision, checks and balances and procedures through documented policy guidelines and manuals. The scope and authority of the Internal Audit function is defined in the Internal Audit Charter. With a view to maintain independence and objectivity in its working, the Internal Audit function reports directly to the Audit Committee.

The internal financial controls within the Company are also commensurate with the size, scale and complexity of its operations. The controls were tested during the year and no reportable material weaknesses either in their design or operations were observed.

Risks, issues and concerns

The major issues and concerns are delay on the part of the Government of India in undertaking comprehensive fertilizer reforms is a matter of concern. DBT scheme which has serious impact on working capital, non-revision urea retail prices, dwindling domestic gas availability and enforcing revised energy norms. In addition to above challenges, the company facing is severe financial crisis, due to losses incurred during non-supply /short supply of gas, post GAIL pipeline accident. Share of domestic natural gas in total supply of gas to urea plants has declined from about 78 per cent in 2012-13 to the tune of 32 per cent during 2021-22. This was further reduced to 23 per cent in April June 2023 period. Pool price of gas has decreased from Rs.1700 MMBTU to Rs.1250 MMBTU in April June 2023 period.

Outlook / Future plans.

The Company is working with banks for early debt resolution and exploring various growth opportunities to enhance its revenue streams to buttress its profitability and is looking at various options.