Nagarjuna Fertilizers & Chemicals Ltd Merged Management Discussions

Indian economy review

The Indian economy grew 6.9% in 2011-12 compared with 8.4% in 2010-11 primarily due to weak growth in its industrial sector (3.6% compared with 6.8% in 2010-11), which was influenced by an economic crisis in the United States and the European Union, inflation, interest rate increase, depreciating rupee and rising fuel prices.

Agricultural sector

India’s agricultural sector sustains 58% of the country’s population. The sector grew 2.5% in 2011-12 whereas the government targets to achieve average agricultural growth of 4.2% during the 12th Five-Year Plan (2012-17). This gap is required to be plugged through enhanced farm yield arising from an enhanced use of fertilizers and micro-irrigation facilities. The country’s food grain yield increased from 1,734 kg/ha in 2001-02 to 1,996 kg/ha in 2011-12 even though it is well below the global average of about 3,000 kg/ha. India’s investment in the agriculture and allied sector as a percentage of GDP increased from 13.5% in 2004-05 to 20.1% in 2010-11, even as its contribution to GDP declined from 16.8% in 2007-08 to 13.9% in 2011-12.

Fertilizer sector

The size of India’s fertilizer industry is estimated at Rs. 1,30,000 cr based on the ratio of sales to subsidy of 1:1 and the estimation of subsidy for FY 2010-11. India has 141 fertilizer plants (29 manufacturing urea, 19 DAP and NP/NPK complex, 82 single super phosphate, 10 ammonium sulphate and one calcium ammonium nitrate). Fertilizers improve crop productivity by 40%. The non-plan subsidy to the fertilizer sector alone accounted for Rs. 60,974 cr, making it imperative to grow domestic fertilizer capacity as imports are costlier than domestic production. Urea accounts for 75% of the nitrogenous fertilizer with a production capacity of 22 million tonnes against a demand of 28 million tonnes. The per hectare fertilizer consumption (kiliogram per hectare of arable land) in India is 142.3 kg/ha compared with 331 kg/ha in China and 524 kg/ha in Israel. India’s fertilizer consumption grew from less than 1 kg/ha in 1951-52 to the current level.

Urea is a controlled commodity under Administrative Price Mechanism and subject to distribution control by the government. The government imports about 6 million tonnes of urea to meet the supply-demand gap. As there is no major competition in the Urea sector, the government brought the P&K sector under the Nutrient Based Subsidy Scheme. This sector is exposed to competition with regard to pricing, sales, procurement, among others. The Company also imports and trades P&K fertilizers while competing with other fertilizer companies in this segment.

The key demand drivers of the country’s fertilizer sector comprise the following:

a. Availability of feedstock: The principal input in manufacturing urea is natural gas. Natural gas as feedstock/raw material, accounting for 81% of the country’s urea capacity, which is supplied as per government allocation while the rest is addressed through imported LNG. India’s empowered Group of Ministers (EGOM) prioritized the allocation of natural gas to the country’s fertilizer and power sector. The entire existing available natural gas and KG basin RIL gas has been fully allocated to existing plants based on the policy. One of the reasons for new capacities not being created is due to the non-availability of natural gas.

b. Agro-climatic conditions: The offtake of fertilizers is based on agro-climatic conditions like the timeliness and quantum of rains.

c. Seasonality: Fertilizer consumption peaks during June-August during the kharif season and December-February during the rabi season. Even as fertilizer consumption peaks for six months whereas fertilizer production needs to be continuous, the business requires a warehousing facility during non-peak seasons.

Production: The domestic fertilizer production in India reached 34.6 million tonnes in 2011-12 of which urea production accounted for 21.8 million tonnes, DAP 3.6 million tonnes and NPK 9.2 million tonnes.

Demand: India’s fertilizer demand during 2011-12 was around 58.69 million tonnes (urea demand 30.51 million tonnes, DAP 12.61 million tonne and complex nutrients 10.73 million tonnes).

Imports: India’s urea segment is under-serviced, with the country importing 6 million tonnes to meet growing demand. This costs the exchequer USD 410-440 per tonne, resulting in hefty cross-subsidisation.

Outlook: Fertilizer production globally is likely to grow 9% and reach 37.6 million tonnes in 2012-13 (urea production 23.3 million tonnes, DAP 4.3 million tonne and NPK 10 million tonnes). Fertilizer demand in India is likely to be 61.27 million tonnes (urea demand 32 million tonnes, DAP 13.24 million tonne and complex nutrients 11.25 million tonnes).

Micro-irrigation sector

Though the information on the actual market size of the industry is not authentic due to the unorganized industry, it is estimated that the industry size is around Rs.2000 cr. (drip contributes around 70% share and sprinkler 30% share) with annual growth of about 15 to 20%. Fresh water is scarce in India and only 38% of the cultivable land is irrigated. The share of water for the agricultural sector is expected to decline from 85% in 2010 to 71% in 2050. The demand for water in India’s agriculture sector is estimated to increase even as the share of water for agriculture is expected to decline from 85% to 71% by 2050, which makes micro-irrigation critical to the country’s food security. There are about 196 micro irrigation players in India with Nagarjuna commanding a market share of around 9%. It is among the few companies in India with a product range covering the fertilizer range complemented by drips, sprinklers and PVC pipes. Micro-irrigation is a huge opportunity leading to water savings of around 40-80%, energy savings of 30-35%, yield improvement of 50-100%, fertilizer saving of 30% and labour cost saving of 15-20%. India targets about 3.5 mn ha of land under micro-irrigation by 2016. The global drip irrigation systems market is expected to grow with depleting water resources at a CAGR of 19% to USD 96.7 million by 2016; the global sprinkler irrigation system market is projected to grow at a CAGR of 17.4% to USD 2,418 million by 2016.

Agriculture information portal

India loses around 18% of its crop production to pest attacks, which can be reduced through enhanced farmer knowledge and awareness. The government initiated the National Agricultural Innovation Project to undertake various research projects in the agricultural sector. IT-enabled solutions provide information in improving the agriculture scenario in the country, forming part of this project.

Internal controls and risk management

The Company has adequate internal control systems in place. The Company has a well established Internal Audit & Risk Management framework which covers the entire gamut of financial, marketing, plant operations and other service functions.

The Company successfully set-up a structured Legal Compliance Management system entitled nSure. In this system, statutory compliances relating to the corporate office, plants, R&D facilities, MI Division and 30 marketing offices across India were mapped for regular monitoring.

Future strategic directions

The Company can now concentrate on growing its core fertilizer business with the completion of restructuring. Consequently, the Company shall now aggressively embark to create a larger and more profitable fertilizer business through new investments in expanding the fertilizer manufacturing capacity (Primarily Urea) in India and Overseas to address the growing Indian demand / supply gap for fertilizers. This would be achieved through a combination of equity investments (ranging between 26% to 100% participation) in greenfield, brown field and M & A opportunities that would arise from time to time.

Human Resources/Industrial Relations

The Company, during the previous year, continued to have good industrial relations with all its employees at all levels.

The Company’s constantly endeavours to attract, retain and nurture human talent by developing a family culture and human values. The Human Potential Development activities in the Company are directed to enable associates to realise their individual goals which are in consonance with organisational goals. Various initiatives were taken to train associates in various programmes to enable them take up higher responsibilities.