Chambal Fertilisers & Chemicals Ltd Management Discussions.

1. Industry Structure and Developments

A) Urea

The Company is having three Urea manufacturing plants located at Gadepan, District Kota, Rajasthan with annual production capacity of around 3.4 million MT of Urea. It is largest single location Urea manufacturing facility in the country.

Urea is one of the most important crop nutrients which plays a vital role in ensuring the food security in the country. The Urea industry comprises of manufacturers from public, co- operative and private sectors. The demand of Urea in the country is met through indigenous manufacturing and imports. The subsidised price at which the Urea to be sold to the farmers, is determined by the Government of India and it pays subsidy to the manufacturing units based on the applicable policy parameters. The import of Urea is also canalised by the Government of India through its appointed entities. Natural gas is the main input for manufacture of Urea and the cost of natural gas is pass-through for Urea units up to a pre- determined level of annual production and energy norm under the subsidy policy of the Government of India. In view of this, the fluctuation in prices of natural gas does not have much impact on the Urea manufacturing units.

The Urea manufacturing capacity remained almost stagnant since the year 1999 as no new plants were set up and there was only marginal increase in the capacity through de-bottlenecking of some of the existing plants. In this backdrop, implementation of New Investment Policy - 2012 (“NIP-2012”) by the Government of India gave impetus to the capacity addition in Urea sector. The new Urea plant of the Company (“Gadepan-III Plant”), which commenced commercial production from January 1, 2019, is the first plant operating under NIP-2012. Few more Urea plants are expected to come on stream in next 1-3 years which are likely to make the country self-sufficient in Urea production.

The country continues to import large quantity of Urea to meet the demand-supply gap. Urea production in the country during the financial year 2019-20 was 24.45 million MT against 23.90 million MT during the financial year 2018-19. During the financial year 2019-20, total 9.20 million MT of Urea was imported in the country in comparison to 7.45 million MT of Urea imported during the previous year. The Urea sales in the country during the financial year 2019-20 was 33.57 million MT against the Urea sales of 31.72 million MT during the previous year.

During the financial year 2019-20, the imported Urea was 27% of the total Urea sales in the country as against 23% during the previous year. The price of imported Urea remained in the range of USD 252 per MT to USD 297 per MT during the financial year 2019-20.

B) Other Products

The product basket of other agri-products of the Company comprises of fertilisers like Di- Ammonium Phosphate (DAP), Muriate of Potash (MOP), NPK fertilisers, agrochemicals, sulphur, micro-nutrients and city compost. The brand image of the Company is very strong in its marketing territory and the Company is known for quality of its products apart from marketing and financial discipline. The Company sources its products from reputed domestic and international manufacturers and quality of the products is ensured at all levels.

DAP, MOP and NPK fertilisers are covered under the Nutrient Based Subsidy (“NBS”) policy of the Government of India. The pricing of these products is de-controlled and the Government of India pays fixed amount of subsidy based on the different nutrients in these fertilisers. NBS gives level playing field to all the players by creating a competitive market for the products.

The demand of DAP and NPK fertilisers in the country is met through imports and domestic production whereas the demand of MOP is met solely through imports. The volume of imports of these products vary due to factors such as demand, pipeline inventories, pricing of the products in the international market, cost of raw material as well as indigenous production of DAP and NPK fertilisers, etc. As far as agrochemicals market is concerned, the technical grade agrochemicals are produced by large multinational organisations and domestic producers. The technical grade agrochemicals are used to formulate insecticides, herbicides, fungicides, etc. for agricultural use. These formulations for agriculture use are marketed by the manufacturers themselves as well as by marketers in their own brands. Sulphur and micro-nutrients markets are fragmented with many small manufacturers and suppliers.

DAP sales in the country during the financial year 2019-20 was 10.28 million MT in comparison to 9.50 million MT during the financial year 2018-19. The robust demand and lower farm gate prices resulted into year-on-year increase of 8% in the sales of DAP. The total production of DAP in the country during the financial year 2019-20 was around 4.55 million MT as against 3.90 million MT during the previous year. Further, 5.52 million MT of DAP was imported in the country during the financial year 2019-20 as against 6.60 million MT of DAP imported during the previous year. MOP imports for direct application as fertiliser in the country during the financial year 2019-20 were 2.87 million MT as against 3.03 million MT during the financial year 2018-19. MOP sales during the year 2019-20 were 2.99 million MT against the sale of 2.95 million MT in the previous year.

There was a deep declining trend in the prices of DAP during the financial year 2019-20. The prices of DAP were around USD 410 per MT in April 2019 which came down to as low as USD 295 per MT in January 2020. The prices have started moving up again in February 2020 and went upto USD 320 per MT in March 2020.

The price of MOP was USD 290 per MT up to June 2019 and thereafter marginally reduced to USD 280 per MT.

2. Opportunities and Threats

Financial year 2019-20 was the first full year of operation of Gadepan-III Plant of the Company. With the increased Urea capacity, the Company has strengthened its position in the market place which shall augur well for the business of the Company. It has enabled the Company to achieve economies of scale at all levels and to be more cost efficient thereby increasing its competitive strength. Apart from this, the Company has enhanced and strengthened its reach in the marketing territory by opening up new marketing offices. The Company has an established brand and sizeable market share in the DAP and MOP fertilisers. All these factors offer an opportunity to the Company to enhance its sales volumes and market share.

Few more Urea plants are expected to come on stream during next 1-3 years. The addition of manufacturing capacity of Urea by new players in the coming years will reduce the demand-supply gap in the country. Most of these plants are located in eastern part of India whereas the core marketing territory of the Company is Northern and Central part of India. Further, the Urea manufactured by the Company

is preferred by the customers in its marketing territory due to good product quality and the brand image of the Company is very strong. Accordingly, the capacity addition by new players in Urea sector is not likely to have much impact on the business of the Company. The demand variation due to change in monsoon patterns, volatility in the prices of DAP and MOP in the international market and variation in the foreign exchange rates are few challenges pertaining to DAP and MOP business. The Company continuously evaluates these factors and considers them appropriately while making its marketing strategy.

3. Risks and Concerns

The Fertiliser Industry is subject to Government regulations 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.

The outbreak of Novel Corona Virus ("COVID-19) pandemic is a concern area for the entire industry as it has disrupted the economy at global and national level. The Company is operating its plants with utmost care for health and safety of its work force. The entry in the complex at Gadepan is restricted and all measures are taken to ensure that the operations of the Company are not affected. Despite the challenges caused due to COVID-19 pandemic, the Company has been able to operate its plants at normal levels.

The short provision of funds in the Union Budget for fertiliser subsidy is another concern area. The delay in payment of subsidy by the Government of India affects the liquidity and increases the finance cost of the Company. The interest burden due to delay in payment of subsidy and change in subsidy policy by the Government of India may impact the profitability of the Company. However, falling natural gas prices shall reduce the overall subsidy outgo enabling the Government of India to reduce the backlog of outstanding fertiliser subsidy to some extent.

4. Outlook

After successful implementation of Gadepan-III Plant, the focus of the Company in next 2-3 years will be on strengthening its position in the market and repay the loans availed for Gadepan-III Plant. Subsequently, it may look into avenues for expansion in fertiliser and other related sectors. Considering the Companys brand image and strong marketing network, the outlook in Urea remains positive. The brand strength, reliable supply channels and established network shall also enable the Company to maintain its market share in DAP and MOP business.

5. Operational and Financial Performance

The operational and financial performance is summarized below:

Particulars

Financial Year

2019-20 2018-19
Urea Production (MT in Lakhs) 32.66 25.04
Urea Sales (MT in Lakhs) 31.57 25.91
SSP Sales (MT in Lakhs) NIL 0.05
Sales including other Agri-inputs (Rs. in Crore) 12204.66 10094.24
Profit before Interest, Depreciation, Exceptional Items and Tax (Rs. in Crore) 2081.77 1354.39

Financial year 2019-20 being the first full year of operation of Gadepan- III Plant, the Company has achieved highest ever production and sales of Urea. Single Super Phosphate plant was under shutdown since September 2017 due to adverse market conditions. The Company has provided for Rs. 62.02 Crore towards impairment loss in respect of Single Super Phosphate plant, write off of certain plant & machinery items and re-measurement of fair value of its investments.

The revenue from branded marketed products was Rs. 4059.46 Crore during the financial year 2019-20 in comparison to Rs. 3847.22 Crore in the previous year. The sales of various marketed products were as under:

Product

Financial Year

2019-20 2018-19
DAP (MT in Lakhs) 9.58 7.99
MOP (MT in Lakhs) 2.06 2.16
Other Fertilisers (MT in Lakhs) 0.39 0.42
Agrochemicals (Net) - (Rs. in Crore) 170.82 204.48
Seeds (Net) - (Rs. in Crore) NIL 47.00

The increase in revenue from branded marketed products was contributed mainly by DAP due to increase in sales volumes of DAP. There was marginal decrease in sales volumes of MOP mainly due to increased competition and lower margins. The performance of agrochemicals and other fertilisers remained subdued.

Gadepan-III Plant has contributed significantly to the overall performance of the Company during the financial year 2019-20. In addition to this, the higher sales volumes of DAP with better margins has also improved the profitability of the Company in comparison to previous year. However, the reduction in margins with lower volumes of MOP, agrochemicals and other products have impacted the profitability of the Company to some extent.

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 2019-20 Financial Year 2018-19
1. Debtors Turnover 2.35 2.75
2. Inventory Turnover 8.37 8.36
3. Interest Coverage Ratio 3.57 5.03
4. Current Ratio 1.10 1.12
5. Debt Equity Ratio 2.46 2.64
6. Operating Profit Margin (%)* 14.49 12.07
7. Net Profit Margin (%)* 9.71 6.58

* Calculated without considering the impact of Exceptional Items.

There was significant change in Interest Coverage Ratio (29.03%) and Net Profit Margin (47.57%) in comparison to the previous financial year. The reasons for such changes are as under:

(i) Change in Interest Coverage Ratio

Gadepan-III Plant of the Company had commenced commercial production from January 1, 2019 and financial year 2019-20 was first full year of operation of Gadepan-III Plant. The higher profit from Gadepan-III Plant coupled with better performance of branded traded products mainly improved the profitability of the Company.

However, the interest on term loans availed for Gadepan-III Plant for full year is part of the interest cost of the Company for the financial year 2019-20 whereas it was part of the interest cost only for the last quarter of the financial year 2018-19. Further, the profit contribution from the two existing Urea plants during the financial year 2019-20 was lower in comparison to previous year mainly due to factors such as lower production, higher energy consumptions, higher repair & maintenance costs and lower contribution on production beyond 100% of the re-assessed capacity of the plants. The Company has also provided for Rs. 62.02 Crore towards impairment loss in respect of Single Super Phosphate Plant, write off of certain plant & machinery items and fair value loss on investments during the financial year 2019-20. Apart from this, the subsidy on Urea payable by the Government of India has also increased due to increase in production after implementation of Gadepan-III Plant. This has resulted into higher outstanding subsidy during the financial year 2019-20 in comparison to the financial year 2018-19. These factors have impacted the Interest Coverage Ratio of the Company.

(ii) Change in Net Profit Margin

Financial year 2019-20 was first full year of operation of Gadepan - III Plant and net profit margin on Urea manufactured from Gadepan- III Plant is higher than the Urea produced from the existing two plants. The higher profit margin from Gadepan-III Plant coupled with better margins and higher volumes of DAP and reduction in deferred tax in pursuance of the provisions of the Taxation Laws (Amendment) Act, 2019 has significantly improved the net profit margin of the Company.

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 financial year by average net worth during the financial year. The Return on Net Worth during the financial year 2019-20 was 34.22% in comparison to 17.76% during the financial year 2018-19.

The profitability of the Company has improved substantially during the financial year 2019-20 in comparison to the financial year 201819, which has resulted into substantial improvement in the Return on Net Worth as mentioned above. This was mainly attributable to the following factors:

(i) During the financial year 2019-20, Gadepan-III Plant operated for full year in comparison to 3 months operation during the financial year 2018-19, as it commenced commercial production from January 1, 2019. This has resulted into higher production and sales of Urea and increase in profitability of the Company.

(ii) The Company has achieved higher volumes with better margins in DAP.

(iii) The reversal of the provision made during the financial year 2018-19 on account of uncertainty on some aspects of the Modified New Pricing Scheme - Stage - III of the Government of India.

(iv) Reduction in deferred tax in pursuance of the provisions of the Taxation Laws (Amendment) Act, 2019.

8. Material Developments in Human Resources/ Industrial Relations

The Company is having three hi-tech Urea plants. The efficient and safe operation of these plants is of highest importance to the Company. The Company also gives due importance to logistics, marketing and support functions as efficiency thereof plays a vital role in the sustainability of the Company.

The recruitment and retention of qualified and experienced workforce is critical for maintaining the talent pool in the Company. The Company has a team of highly qualified and experienced personnel most of whom are having long association with the Company. The appropriate recruitment, retention and training plans are in place to maintain the Companys talent pool.

The Company selects technical personnel from premier institutes in addition to lateral hiring wherever required. The Company has an appropriate system for training of employees. The technical training is imparted to new employees in the plants, which includes classroom sessions, training through simulator and on the job training. In case of existing employees, the training and development needs are identified as part of the appraisal process and appropriate training programmes are designed. The Company had organized various training programs during the year involving internal and external faculties to update the skill sets of the employees and keep them abreast with the changing work environment.

The permanent employee strength of the Company was 1034 as on March 31, 2020. 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 reasonabe 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, 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 statementsthat 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

Anil Kapoor Gaurav Mathur
Place : New Delhi Managing Director Joint Managing Director
Date : May 23, 2020