Mangalore Chemicals & Fertilizers Ltd Management Discussions

Industry Structure and Developments

The Company has one major business segment, viz. Fertilizers. It manufactures both Nitrogenous and Phosphatic fertilizers and is the only manufacturer of fertilizers in the state of Karnataka. About 77% of the Companys products are sold in the state of Karnataka, which meets about 10% of the needs of the farmers in the State. The Company maintains a good share of the market in Kerala and a modest share in the neighbouring states of Tamil Nadu, Andhra Pradesh, Telangana and Maharashtra.

Threats and Opportunities

The writ petition filed by the Company before the Honble High Court of Delhi (DHC) seeking remedy against some restrictive & discriminatory conditions imposed by the Notification No.12018/4/2014-FPP dated June 17, 2015, was disposed since the GOI confirmed that the Company would be eligible for the benefits as are available to other manufacturers of Urea who have converted their manufacturing processes to gas based and are now utilizing gas for production of Urea.

The GOI issued Notification No.12012/1/2015-FPP dated March 28, 2018 confirming the availability of benefits to the Company for having converted its manufacturing process to gas based, on receipt & use of gas for production of Urea and continuation of existing policy till March 2020.

The Nutrient Based Subsidy Scheme (NBS) was introduced by the GOI with effect from April 01, 2010 after de-controlling the DAP/ complex fertilizers, where annual/bi-annual concession rates are announced leaving the market realization to reflect the fluctuations in respective commodity prices. However, the GOI is monitoring the market realization.

From January 2018, the GOI has rolled out Direct Benefit Transfer (DBT) for payment of subsidy on sale by the retailers on pan India basis after pilot studies in some selected districts of various States, as against the earlier system of payment of subsidy on receipt basis into the respective districts and sales thereafter. DBT roll out resulted in delayed payment of subsidy which would follow the vagaries of agro climatic conditions, leading to elongated working capital cycle. The delay in payment of subsidy caused by DBT, higher subsidy demand due to higher commodity prices and rupee depreciation would contribute to higher working capital requirement and resultant higher finance cost.

Future Outlook

The demand for both Nitrogenous & Phosphatic fertilizers in India is increasing steadily and expected to grow at a compounded annual rate of about 2%. With the domestic production almost stagnant and the demand increasing, the supply deficit has to be met from imports. The Company has planned to import substantial quantity of fertilizers to meet the growing demand and has also finalized supply arrangements with certain local manufacturers of fertilizers, to augment total fertilizer availability in our marketing territory through our own marketing channel.

Financial and Operational Performance

a) Production Performance

Production of 3,31,690 MTs of Urea, 2,29,826 MTs of Complex fertilizers [DAP/NP] and 11,004 MTs of Ammonium Bi-Carbonate was achieved during the year.

b) Operating Results

The revenue from operations for the year ended March 31, 2023 was INR 3,641.52 crore as compared to INR 2,895.58 crore for the year ended March 31, 2022.

The profit before tax for the year ended March 31, 2023 was INR 176.03 crore as compared to INR 134.66 crore for the year ended March 31, 2022. Total Comprehensive Income stood at INR 134.34 crore for the year ended March 31, 2023 compared to INR 87.66 crore for the previous year.

c) Resource Utilization

The gross fixed assets and capital work-in-progress as at March 31, 2023 were INR 1,398.54 crore as compared to INR 1,154.77 crore in the previous year.

d) Working Capital

Net working capital as on March 31, 2023 was INR 147.30 crore.

Risks and Concerns

Due to any changes in Fertilizer policy, Urea production may get curtailed. Possible non-availability of raw materials & fertilizers and their rising prices for non-urea fertilizers are matters of concern. Roll out of DBT, any under provisioning for fertilizer subsidy in the Union Budget and resultant delay in subsidy payment by Govt. of India would contribute to precarious working capital position which could impact production and increased finance costs. Considering the Companys plans for higher imports, depreciation of Indian rupee against the US dollar can adversely affect profitability. Increase in operating costs, mainly finance costs on working capital may adversely affect profitability.

Internal Financial Control Systems

Adequate internal financial controls are in place across various functions in the Company. The Company has migrated from SAP ECC 6.0 with EHP 8.0 version to the new SAP S/4 HANA (high- performance analytic appliance) version and GRC software, which have higher controls in place.

In addition, Internal Auditor reviews the internal financial control measures on an ongoing basis, whose reports are reviewed by the Audit Committee.

Human Resources and Industrial Relations

The Company continues to focus on employee training and development and had organized several technical and other soft skills training programs across levels. The Company constantly reviews/revises its policies and practices to stay aligned with the best in the industry.

The total strength of regular employees at the end of the year was 605.

Details of Significant Changes in Key Financial Ratios, along with detailed explanations:

Sr. No. Particulars	March 31, 2023	March 31, 2022	Variation %	Reason for Variation
i. Interest Coverage ratio	2.96%	4.27%	(30.65%)	Higher finance cost due to additional term loan for Energy Improvement Project and increase in cost of borrowings.
ii. Return on Net Worth	18.12%	13.62%	33.06%	Higher profits due to improved effeciency after completion of Energy Improvement Project during the year.