khaitan chemicals & fertilizers ltd share price Management discussions


CAUTIONARY STATEMENT

Some of the statements in the report may be forward looking and are stated as required by applicable laws & regulations. Many factors may affect the actual results, which could be different from what the Directors envisage in terms of future performance and outlook The Companys Performance is dependent on several external factors such as performance of monsoons, government policy, fluctuation of prices of raw material and finished products and also their availability.

BUSINESS OVERVIEW:

The Company is mainly engaged in the manufacture of Single Super Phosphate (Fertilizer), Sulphuric Acid and other chemicals; the main business segment is related to agriculture and greatly affected by monsoons.

Segment-wise Business Review and Operational and Financial Performance:

The summarized performance of the Company in terms of production and sales for last 5 years is as under: (Quantity in MT)

Particular

2022-23

2021-22

2020-21

2019-20

2018-19

Production:

Fertilizer (SSP) 4,92,613 5,34,645 4,53,218 4,36,181 3,18,554
Chemicals &
Speciality Chemicals 2,06,377 2,13,969 1,84,234 2,13,493 1,81,450

Sales:

Fertilizer (SSP) 4,73,194 5,33,654 4,66,237 4,00,796 3,03,679
Chemicals &
Speciality Chemicals 1,13,681 1,17,910 1,11,071 1,32,674 1,40,329

The summarized financial performance of the Company for last 2 years is as under:

Particular

2022-23

2021-22

Sales

Fertilizer (SSP) 79,517.34 72,493.65
Chemicals & Speciality Chemicals 9,411.94 9,983.58

Segment Operating Profit/(Loss) {PBIT}:

Fertilizer (SSP) 3,913.75 8,206.91
Chemicals & Speciality Chemicals 3,120.71 3,477.00

EPS(Rs) :

4.29 8.23

Dividend:

30% 30%

Face Value (Per share)

1/- 1/-

The year 2022-23 saw the operations begin in a global uncertainty following the Russia Ukraine War. This war led to an unprecedented rise in prices of all commodities including Rock Phosphate and Sulphur the two major raw materials for the Company. This war also led to closure of several businesses in Europe due to high energy costs and subsequently there was a crash in prices of Sulphuric acid and related chemicals.

The GOI could successfully implement the partial Direct Benefit Transfer system for the Fertilizer Industry. The GOI has recently initiated the pilot project for the final stage of Direct Benefit Transfer to the farmers. Hopefully in a few years this may also be fully implemented. During the current year the turnover of your Company has increased from Rs. 82,503.66 Lakhs for the year 2021-22 to Rs. 88,929.29 Lakhs for the year 2022-23, the operating income has decreased from Rs. 12,284.81 Lakhs in 2021-22 to Rs. 7,940.65 Lakhs in 2022-23, and the cash profit has decreased from Rs. 11,022.39 Lakhs to Rs. 6,009.23 Lakhs in the respective periods, while the net profit after tax has decreased from Rs. 8,016.86 Lakhs to Rs. 3,735.78 Lakhs.

FERTILIZER, CHEMICALS & SPECIALITY CHEMICALS DIVISION:

The Company has one of Indias largest Single Super Phosphate (SSP) Fertilizer production capacity of 11,13,500 MT in the states of Madhya Pradesh, Rajasthan, Uttar Pradesh, Chhattisgarh & Gujarat alongwith Chemicals production capacity of 2,70,600 MT in the States of Madhya

Pradesh, Uttar Pradesh & Chhattisgarh. Sulphuric Acid is also a raw material for production of SSP.

The Company has produced 4,92,613 MT (previous year 5,34,645 MT) of Single Super Phosphate (SSP) Fertilizer and 2,06,377 MT (previous year 2,13,969 MT) of Chemicals & Speciality Chemicals and sold 4,73,194 MT of SSP (previous year 5,33,654 MT) & 1,13,681 MT of Chemicals (previous year 1,17,910 MT) respectively.

The Company is continuously trying to improve its share in the fortified high value added fertilizers segment. The products are picking up well in the market.

The Company is continuing its efforts for optimizing its current assets to leverage sales on the one hand and diversifying into new geographical markets on the other. Focus is being laid on producing more value added fortified fertilizers, to improve the product portfolio.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

Agriculture is the third largest sector of Indian Economy, which contributes around 17% of total GDP of the Country. Fertilizer Industry, with the emerging scenario, plays vital role in the growth of Agriculture Sector. The balanced use of chemical fertilizer is important not only for increasing agricultural productivity but also for sustaining soil fertility. Single Super Phosphate is a multi nutrient fertilizer containing phosphate (16%) and sulphur (11%) as primary nutrients. SSP is applied as a basal fertilizer being rich in secondary nutrients like calcium and magnesium oxide and several micro nutrients. It is an essential Fertilizer for crops likes Oil seeds, Pulses, Sugarcane, Fruits and Vegetables, Tea etc. and for sulphur deficient soils. Main features of SSP Fertilizer Industry are-· Basic need for agriculture and its development.

·

SSP is a multi-nutrient fertilizer containing PO as primary nutrient 2 5

and Sulphur, Calcium & magnesium as secondary nutrients. · SSP fertilizer is the lowest priced fertiizer per kg, and preferred by small & marginal farmers.

· Highly dependent on Imported Raw Material.

· Subsidised by Government of India to control the prices of the input to the farmers.

· Substantial Import of Finished Products other than SSP.

Agronomic Importance of SSP:

· SSP helps in improving root growth and development which is most important for uptake of plant nutrient and water.

· For Leguminous crops like groundnut, use of SSP, ensures a large number of nodules on the roots, which fix atmospheric Nitrogen directly into the soil and also increase Nitrogen uptake.

· SSP improves soil aeration and increase water holding capacity of the soil and increase root growth which increase crop yield.

· Oil content of Groundnut and other oil seeds increases. The quantity and quality of oil seeds crops increases.

· In Sugarcane, the sugar content increases which provide more production and monetary benefit to the farmers · SSP increases resistance power of the plants against attack of pest and disease.

· SSP increases protein content in pulses crop

· SSP helps in leaching excess water from the root zone and prevent yellowing of the crop · SSP improves storage capacity of product · SSP also acts as a soil reclaiming agent.

SSP, which is a poor farmers fertilizer (price wise), is an option to optimize the use of phosphate fertilizers. It also helps to treat sulphur deficiency in soil (about 36% of Indian soil is sulphur deficient) as well as for further enhancement of yields at the least cost. SSP being an indigenously manufactured fertilizer saves on foreign exchange outgo vis a vis imported phosphatic fertilizers.

The Industry, however has been suffering from poor quality supply from some unethical players in the market, mainly from the MSME sector. The Ministry of Fertilizers and the Fertilizer Association of India have now laid special focus on improving the quality in the SSP sector.

Governments continuous thrust to encourage SSP to substitute imports of DAP and NPK is an indicator of upward trend in the Industrys future.

Future Outlook:

The Countrys stress on higher agricultural productivity is expected to lead to a considerably better realization to farmers and increase the demand of fertilizers. The Single Super Phosphate fertilizer is a generic customized fertilizer containing sulphur, calcium & other micro nutrients besides phosphate. The Nutrient Based Subsidy is a long term positive for the Fertilizer Industry, particularly SSP Industry, with free market mechanism encouraging more interaction between producers and farmers for efficient use of fertilizer for better agriculture output. The Company expects healthy growth in the demand for fertilizers, especially SSP due to the Governments focus on promotion of a more balanced nutrient consumption It is expected that the Country will have a sub normal monsoon in 2023, giving stress to Indian agriculture sector and related industries like Fertilizer in the short term.

The Government has floated the idea of replacing the input subsidy with direct income support to farmers and there is a need for "replacing untargeted subsidies (power and fertilizer) by direct income support to address agricultural stress and to achieve doubling farmers income. The government has been spending nearly 30% of its total subsidy on food, fuel and fertilizer to ensure that farmers get the key agriculture inputs at cheaper rates. The year 2018 saw the beginning of DBT (Direct Benefit Transfer), which would transfer money directly to the retailers account. Presently, the companies are being paid only after the actual sale to the farmer. Currently, there are 2.3 lakh retailers across the country, attached to a Point of Sale (PoS) machine, which is in turn linked to Ministry of Fertilizers ‘E-Urvarak DBT channel. The Government also seems keen to implement the last phase of the subsidy reforms by way of direct benefit transfer to the farmers. The GOI has initiated a pilot project for the final phase of DBT and hopefully on conclusion of the pilot project the Subsidy maybe directly transferred to the farmers. It shall be very beneficial for the SSP Industry.

On the agricultural front, the government has continued its focus on augmenting farmer income through various steps. Increased allocation across the schemes to drive irrigation facilities, improve agricultural markets, augment the allied sectors supporting income, setting-up of FPOs, crop insurance scheme and income supplementation scheme is a major positive. With these steps, Industries expects a positive rub-off effect on fertiliser offtake. However, subsidy reduction remains a major negative takeaway for the fertiliser sector.

The raw material Prices of Rock Phosphate and Sulphur remained high throughout the year mainly due to global sentiment following the Russia Ukraine war, constraints in domestic and global situations has led to short availability of material from suppliers leading to prices rise. The Government of India (DoF) increased the Nutrient Based Subsidy rates for all phosphatic and potassic fertilizers following the prices rise excepting SSP for the year 2022-23. For SSP the subsidy has been capped at Rs. 7513/- per MT as prevailing in the previous year 2021-22 thus giving an unfair deal to the SSP Industry. Monsoons have a major impact on the agricultural sector, besides the commodity prices of major raw material inputs. In the current year the predictions till date estimate a sub normal monsoon. Coupled with rise in prices of raw material for SSP fertilizer this is going to be a challenge for the SSP Industry in the coming year 2023-24.

However, in the long term the performance of the Company is expected to be better in coming years considering its basic strengths like high integrated capacity which is already operational, multi-geographical locations and established brands. The well maintained plant and equipments ensure uninterrupted production and distribution of goods.

Opportunity, Threats, Risk & Concerns:

The Company welcomes the Governments plan to introduce DBT subsidy directly to farmers which shall give the farmers unrestricted choice as well as make them understand the real worth of fertilizer used by them.

The Company is in an advantageous position for tapping its already established production capacity with multi- geographical locations; wide spread marketing network and high brand value for its product. NBS policy as envisaged has attracted new entrants in the market, which in fact shall be better for the wider reach of this long neglected product and establishing the SSP Industry in its right place, However, entry of new entrants in overall bad market conditions has created excess supply in the market resulting into changing consumption and stocking patterns necessitating higher inventories.

SSP fertilisers are based on imported raw-materials which can face severe volatility in prices and foreign currency exchange rates, affecting the profitability of the Company. Agro-Climatic conditions also have a large effect on the performance of the Company.

Uncertainty of monsoon, volatile international market of raw material, seasonal consumption of fertilizer mainly in two months each in Kharif and Rabi, lack of awareness of benefits of SSP consumption amongst farmer fraternity, clubbed with logistics availability/cost and higher requirement of working capital shall remain concerns for the Industry & of the Company.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY:

The Company conducts its business with integrity and high standards of ethics, and in compliance with the laws and regulations that govern its business. The Company has a well established system of internal controls in operations, supported by suitable monitoring procedures and self-assessment exercises. The financial and commercial functions at various locations are structured and reviewed timely to provide adequate support and controls for the business of the Company.

In addition to external audit, The Company has appointed M/s O P Bagla

& Co., Chartered Accountants, as an Internal Auditor, who report significant findings to the Audit Committee of the Board. Consequently required steps are taken to improve the operations.

HUMAN RESOURCE AND INDUSTRIAL RELATIONS:

The ability to attract, onboard, develop and engage the right kind of talent is crucial to an organizations long term success. Company strongly believes in continuously taking steps towards talent management, leadership development, and employee engagement. Employees are the back - bone of good organization and to motivate them to achieve greater heights, the Company undertook various HR initiatives towards their development, enhancement and retention. The Company considers its highly motivated and well-maintained team as its most valuable asset. As on 31.03.2023, the Company has employed 697 peoples at various locations in India.

Amidst all the pressures and demands of the growing business, Industrial Relations continued to be reasonably cordial with our Union(s).

ENVIRONMENT AND SAFETY:

The Company has always considered safety and environment one of its key focus area and has always striven to make continuous improvement in these two aspects. At Company, environment concerns have always taken precedence; to address the concerns on Environment Protection, the Company has set up an Online Monitoring System at all the plants and concrete efforts were made towards natural resource conservation by way of Water Harvesting, Sewage Treatment Plant, etc.

CONCLUSION:

The Company dwells on chalking out the best possible future plans and policies so as to avoid the pitfalls and following the best course in the long run. In both the business segments, a focus on assets utilization, earning maximization, continuous growth and relentless strengthening of the internal efficiencies will enable the Company to deliver superior value for its shareholders on a sustained basis in future.