Chambal Fertilisers & Chemicals Ltd Management Discussions.

1. Industry Structure and Developments A) Urea

The Company has commenced commercial production of Urea from its new plant at Gadepan ("Gadepan-III Plant") with effect from January 1, 2019. The new plant has a capacity of 1.34 Million MT of Urea per annum. With the new Urea plant coming on stream, the Company now has three Urea manufacturing plants at Gadepan, District Kota, Rajasthan.

Urea plays a vital role in food grain production in India. The Urea Industry is backbone of Indian agriculture with manufacturers from public, co-operative and private sectors. The demand of Urea is met through indigenous manufacturing and imports as the country does not have sufficient manufacturing capacity of Urea. The implementation of New Investment Policy - 2012 ("NIP-2012") for Urea by the Government of India is changing the landscape of Urea manufacturing in India. In addition to Gadepan-III Plant, there are a few more Urea plants under implementation which are expected to come on stream in next 1-3 years. With the commissioning of these plants, the country is likely to be self-sufficient in Urea production. Urea production in the country during the Financial Year 2018-19 was 23.90 million MT against 24.02 million MT during the previous year. The country imported 7.45 million MT of Urea during the Financial Year 2018-19 as against 5.97 million MT of Urea imported during the previous year. The Companys Gadepan-III Plant has produced 0.38 million MT of Urea during the Financial Year 2018-19 resulting into reduction in imports to that extent. The Financial Year 2019-20 will be the first full year of production of Urea from Gadepan-III Plant which shall enable the country to reduce its imports of Urea. The Urea sales in the country during the Financial Year 2018-19 was 31.72 million MT against the Urea sales of 30.31 million MT during the previous year – an increase of 4.65%. The imported Urea was 23.49% of the total Urea sales in the country. The price of imported Urea was around USD 272 per MT in April 2018 which went upto USD 353 per MT in November 2018. The price of imported Urea started declining thereafter and came down to USD 290 per MT in the last quarter of the Financial Year 2018-19.

B) Other Products

In addition to manufacture of Urea, the Company also markets other agri-inputs like Di-ammonium Phosphate (DAP), Muriate of Potash (MOP), NPK Fertilisers, agrochemicals, seeds, sulphur, micro-nutrients, complex fertilisers and city compost. The Company facilitates availability of fertilisers, seeds and agrochemical products to farmers under one roof. In order to ensure that the best quality products are available to the farmers in India, the Company sources the products from reputed domestic and international producers. Over the years, the Company has established reliable supply channels to ensure availability of quality products on a sustainable basis.

DAP, MOP and NPK fertilisers are covered under the Nutrient Based Subsidy ("NBS") policy of the Government of India where subsidy is paid by the Government of India based on the different nutrients in these fertilisers. NBS has created a level playing field by providing freedom in terms of pricing and supply. The Company had utilised its brand and logistic strength to expand its DAP and MOP business and established itself as a force to reckon with in these products.

The demand of DAP in the country is met through imports and domestic production whereas the country is fully dependent upon imports for MOP. The demand of NPK fertilisers is met mostly through indigenous production and some quantity is imported. The agrochemicals market is dominated by some large multinational organisations and domestic technical grade agrochemical producers. The technical grade agrochemicals are then formulated for agricultural use by themselves or by downstream formulators. Seeds, sulphur, complex fertilisers and micro-nutrients markets are dominated by small manufacturers and suppliers.

The total sales of DAP in the country during the Financial Year 2018-19 was 9.50 million MT as against 8.98 million MT during the previous year registering a growth of around 5.79%. The total production of DAP during the financial year 2018-19 was around 3.90 million MT whereas 6.60 million MT of DAP was imported in the country. MOP imports in the country during the Financial Year 2018-19 were 4.21 million MT as against 4.74 million MT during the previous year. The price of DAP has shown an upward trend in international market in the first quarter of the Financial Year 2018-19 and thereafter declined towards the end of the year. The price of DAP was around USD 418 per MT CFR India in April 2018 which went up to USD 435 per MT CFR India in August 2018. The price of DAP started moving downward thereafter and came down to USD 397 per MT CFR India in March 2019.

C) Developments in Government Policies

The Government of India had fully implemented Direct Benefit Transfer ("DBT") for payment of subsidy on fertilisers with effect from April 1, 2018. Under the DBT scheme, the farmers purchase the fertilisers at subsidised rates and the transactions are recorded in Point of Sale ("POS") machines under Fertiliser Monitoring System of the Government of India. The Government of India releases the subsidy to fertiliser companies against weekly subsidy bills generated digitally and submitted online. The subsidy bills are raised based on the sale of fertilisers to the farmers as recorded online through POS machines, thereby linking the subsidy payment to actual sale of fertilisers. The DBT system has now stabilised and more than 2,50,000 outlets are successfully selling subsidized fertilisers through POS machines. DBT system enables continuous monitoring of inventory till the retailers end and has provided a real time stocks and sales visibility. Further, the submission of subsidy claims and processing thereof has also become efficient under the DBT system.

2. Opportunities and Threats

The successful implementation of Gadepan- III Plant shall enable the Company to achieve substantial increase in the top-line and bottom-line. The production capacity of Urea of the Company has increased by around 63% with the addition of Gadepan-III Plant. It has offered an opportunity to the Company to expand its marketing territory and also increase the volumes in the existing territory. Further, increase in production and sales volumes shall make the operations more cost effective by achieving the economies of scale. Over the years, the Company has established its position in the DAP and MOP segment of fertiliser business. With new Urea capacity addition and established brand, the Company has an opportunity to expand its marketing territory to boost the sale of its products. The indigenous Urea capacity addition in the coming years will reduce the demand-supply gap thereby increasing the competition in the market place. However, with continuous focus on cost and customer satisfaction, the Company shall be able to deal with this challenge successfully. The monsoon variations, volatility in the global prices of fertilisers and variation in the foreign exchange rates are few challenges for the DAP and MOP business and the Company takes these factors into consideration while making its marketing strategy.

3. R isks and Concerns

The Fertiliser Industry is highly regulated and dependent upon subsidy policies of the Government of India. Gadepan-III Plant is under NIP-2012 which is effective for 8 years from the start of production. The changes in such policies may sometimes adversely affect the Company. Further, the low prices of Urea in the International market coupled with increase in gas prices due to increase in prices of crude oil in international market may affect the Urea production beyond re-assessed capacity of Urea plants in the country. The short provision of funds in the Union Budget for fertiliser subsidy has become a regular feature. The budget allocation of the Government of India for fertiliser subsidy is normally over by the third quarter of the Financial Year and the fertiliser companies have to wait for subsidy till the next financial year. The delay in payment of subsidy by the Government of India increases the finance cost of the Company. The interest burden due to delay in payment of subsidy and change in subsidy policy may impact the Profitability of the Company.

4. Outlook

The new Urea capacity addition through Gadepan-III Plant shall augur well for the Company as it will Benefit the Company on different counts such as increase in sales volumes, cost efficiency due to optimum resource utilisation and economy of scale. The new capacity additions would narrow the demand-supply gap by replacing imported Urea. However, with the strength of its brand and marketing network with reliable supply channels, the outlook in Urea, DAP and MOP remains positive. As far as other products are concerned, there are challenges in terms of availability of new products, intense competition in the market place and presence of large players in agrochemical segment. The Company continuously reviews its portfolio of products and makes necessary changes in its marketing strategy to align it with the market dynamics. However, the focus of the Company shall be on Urea, DAP and MOP which are major contributors to its top-line and bottom-line.

5. Operational and Financial Performance

The operational and financial performance is summarized below:

Particulars Financial Year
2018-19 2017-18
Urea Production (MT in Lakhs) 25.04* 20.94
Urea Sales (MT in Lakhs) 25.91 20.74
SSP Production (MT in Lakhs) NIL 0.44
SSP Sales (MT in Lakhs) 0.05 0.65
Sales including other Agri-inputs (Rs. in Lakhs) 1009424.25 746601.65
Profit before Interest, Depreciation, Exceptional Items and Tax from Continuing Operations (Rs. in Lakhs) 135438.85 93311.72

*including 3.83 Lakh MT of Urea (which includes 0.47 lakh MT of trial production) manufactured in Gadepan-III Plant.

The production of Urea was higher on account of production from Gadepan – III Plant which has commenced commercial production with effect from January 1, 2019 and better performance of Gadepan –II Plant of the Company. SSP plant was under shutdown since September 2017 due to adverse market conditions and it will be re-started at an appropriate time. The revenue from branded marketed products was Rs. 384722.30 Lakhs during the financial year 2018-19 in comparison to Rs. 346539.53

Lakhs in the previous year. The sales of various products were as under:

Product Financial Year
2018-19 2017-18
DAP (MT in Lakhs) 7.99 8.69
MOP (MT in Lakhs) 2.16 2.56
Other Fertilisers (MT in Lakhs) 0.42 0.71
Agrochemicals (Net) – (Rs. in Lakhs) 20447.85 17413.06
Seeds (Net) – (Rs. in Lakhs) 4700.44 4250.26

The increase in revenue from branded marketed products was contributed mainly by DAP due to higher prices of DAP towards beginning of the year and increase in revenue from agrichemicals and seeds. The volatility in the prices of DAP has affected its sales volumes to some extent. Further, there was substantial increase in the price of MOP in comparison to the previous year which has resulted into some demand destruction. In view of this, there was an overall decline in volumes of MOP in the country in comparison to the previous year which has also impacted MOP sales volumes of the Company. Despite reduction in volumes, the Company has strategically spread its procurements to achieve better margins in these products. The Company has gained some lost ground in the agrochemicals and seeds business and achieved higher turnover in comparison to the previous year. However, the performance of other fertilisers remained subdued. Gadepan-III Plant has contributed to the overall performance of the Company during the Financial Year 2018-19. In addition to this, higher production and sales from Gadepan-II Plant, better margins in some of the products marketed by the Company and higher dividend income has also contributed to the higher Profitability of the Company in comparison to previous year.

6. Key Financial Ratios and details of significant changes therein (i.e. change of 25% or more in comparison to the previous financial year)

Sr. No. Key Financial Ratio Financial Year 2018-19 Financial Year 2017-18
1. Debtors Turnover Ratio 2.75 2.70
2. Inventory Turnover Ratio 8.36 8.02
3. Interest Coverage Ratio 5.03 5.80
4. Current Ratio 1.12 1.25
5. Debt Equity Ratio 2.64 1.94
6. Operating Profit Margin (%)* 12.07 11.42
7. Net Profit Margin (%)* 6.58 6.30

*Calculated without considering the impact of Exceptional Items.

T here was significant change in Debt Equity Ratio (36.08%) in comparison to the previous financial year, which is largely attributable to significant increase in borrowings due to the following reasons:

(a) Natural gas is the main input for production of Urea. There was an increase in price of natural gas and INR-USD exchange rates. This has resulted into higher input cost and higher subsidy outstanding with the Government of India. In view of this, there was an increase in the working capital borrowings of the Company.

(b) The Company has availed additional borrowings during the Financial Year 2018-19 for financing of Gadepan-III Plant.

7. Details of change in Return on Net Worth as compared to the previous financial year and explanation thereof

The Return on Net Worth is calculated by dividing Profit after Tax for the year by average net worth during the year. The Return on Net Worth during the Financial Year 2018-19 was 17.76% in comparison to 17.67% during the Financial Year 2017-18. There was no significant change in the Return on Net Worth in comparison to previous financial year despite increase in Profitability of the Company on account of additional production and sales of Urea from Gadepan-II Plant, production and sales of Urea from Gadepan-III Plant, better margins in some of the products marketed by the Company and higher dividend income as the gains on account of the above factors were largely Off-set by exceptional items of Rs. 19727.24 Lakhs.

8. Material Developments in Human Resources/ Industrial Relations

The efficient operation of its three fertiliser plants with least possible downtime is of utmost importance to the Company. In addition to this, running the allied operations and support functions with efficiency and in cost effective manner plays vital role in the sustainability of the Company. A highly experienced and qualified team of personnel enables the Company in achieving its objectives. The recruitment and retention of qualified and experienced workforce is critical for maintaining the talent pool in the Company. The Company continuously works towards ensuring that appropriate recruitment, retention and training plans are in place to maintain its talent pool. The Company selects technical personnel from premier institutes in addition to lateral hiring wherever required. The training and development of the employees is a continuous process. The training and development needs of the employees are identified as part of the appraisal process and appropriate training programmes are designed. The Company had organized series of training programs during the year to reinforce and strengthen performance driven culture in the organization. The health, safety and well-being of employees are of paramount importance. Therefore, awareness is ensured through regular trainings and engagement activities round the year. The project team comprising of professionals having technical expertise and experience was instrumental in successful commissioning of Gadepan-III Plant. The recruitment for Gadepan-III Plant has already been completed and the personnel in the project team became part of operations team post commissioning of Gadepan-III Plant. The permanent employee strength of Company was 1060 as on March 31, 2019. The Company continues to maintain open and cordial employee relations.

INTERNAL CONTROL SYSTEM

The Company has a strong internal control system comprising various levels of authorization, supervision, checks & balances and procedures through documented policy guidelines and manuals. The Internal Audit Department regularly monitors the efficacy of internal controls and compliances with Standard Operating Procedures and Manuals with an objective of providing to the Audit Committee and the Board of Directors, an independent, objective and reasonable assurance that all transactions are authorized, recorded and reported correctly and compliance with policies and statutes are made. The managers exercise their control over business processes through operational systems, procedure manuals and financial limits of authority manual. These processes are reviewed and updated on regular basis to improve their efficacy and meet the business needs. The Internal audit team develops a risk based annual audit programme which is aligned to the previous years observations and suggestions from the operating managers and statutory auditors. The internal audit programme is approved by the Audit Committee. The audit approach is based on random sample selection and takes into consideration the generally accepted business practices. The internal audit reports are discussed by the Management Committee and subsequently placed before the Audit Committee of the Board of Directors along with the directions/ action plan recommended by the Management Committee. The directions are implemented by the respective departments and Action Taken Report is placed before the Audit Committee.

The Internal Audit Department also assesses opportunities for improvement in business processes, systems and controls, gives recommendations and reviews the implementation of directions issued by the management, Board of Directors or its committees.

CAUTIONARY STATEMENT

The report may contain certain statements that the Company believes are, or may be considered to be "forward looking statements" that describe its objectives, plans or goals. All these forward looking statements are subject to certain risks and uncertainties, including but not limited to Government action, economic developments, risks inherent to the Companys growth strategy and other factors that could cause the actual results to differ materially from those contemplated by the relevant forward looking statements.

For and on behalf of Board of Directors
Place : New Delhi Saroj Kumar Poddar
Date : May 16, 2019 Chairman