MANAGEMENT DISCUSSION & ANALYSIS 1. ECONOMIC SCENARIO According to the latest provisional estimates of national income for the financial year 2014-15 released by the Central Statistics Office (CSO), it is estimated at Rs. 106.44 lac crores registering a growth rate of 7.3% with 2011-12 as constant for GDP. Whilst service sectors registered growth rate of over 7.0%, "Agriculture" accounted for 0.2%. Indian fertilizer industry has been under performing for last few years. As per the ICRA report share prices of fertilizer companies have given up their gains and are back to their year-ago price levels. The poor performance of fertilizer sector in 2014-15 has also contributed to less than expected growth of manufacturing sector and particularly to the poor growth of core sectors. As per IMF projections, during the year 2015 and 2016 India would achieve 6.3% & 6.8% respectively which is much progressive than other developed and developing countries. Agriculture Scenario: The very first Single Super Phosphate (SSP) Industry was set up in Ranipet in Tamilnadu in the year 1906 with meager annual capacity of 6000 MT. This was followed-up with commissioning of the large scale fertilizer complex by The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin in Kerala in the year 1943 and also the Fertilizers Corporation of India (FCI) at Sindri in Bihar with a view to establish an industrial base to achieve self-sufficiency in food grains. Subsequently, green revolution in the late sixties gave an impetus to the growth of fertilizer industry in India and the seventies and eighties then witnessed a significant addition to the fertilizer production capacity. The installed capacity has reached to a level of 13.258 million MT in respect of nitrogen and 7.060 million MT in respect of phosphatic nutrient in the year 2014-15, making India the third largest fertilizer producer in the world. The rapid buildup of fertilizer production capacity in the country has been achieved as a result of favourable policy environment facilitating large investments in the public, co-operative and private sectors in line with "Make in India" policy. At brsent, there are 30 large size Urea plants in the country manufacturing Urea, 21 units manufacturing DAP and complex fertilizers and 2 units manufacturing Ammonium Sulphate as a byproduct. Besides, current total number of SSP plants touched 99 at the end of March 2015 out of which 85 units were in operation in medium and small-scale units producing Single Super Phosphate (SSP). As of now, the country has achieved 80% self-sufficiency in production capacity of Urea. As a result, India could manage its substantial requirement of nitrogenous fertilizers through the indigenous industry. Similarly, 50% indigenous capacity has developed in respect of phosphatic fertilizers to meet domestic requirements. In case of phosphate, the paucity of domestic raw-material has been a constraint in the attainment of self-sufficiency in the country. Indigenous rock phosphate supplies meet about 10% of the total requirement of P2O5. Production of SSP increased significantly after changes in SSP policy during 2008-09 and implementation of NBS policy from 2010-11. During 2009-10, 2010-11, 2011-12 the production of SSP recorded high growth rate of 22%, 20%, 17%, respectively over the brvious years. Subsequently, the momentum of growth in production slowed down in 2012-13 at 2.6% and turned negative in 2013-14 and 2014-15. Production of SSP at 4.175 million tonnes in 2014-15 was marginally lower by 0.6% over the brvious year. The negative growth in SSP production in 2014-15 was due to a variety of factors, including weak monsoon, liquidity problem caused by delay in payment of subsidy and non-payment of balance subsidy since November 2012. Total number of SSP plants touched 99 at the end of the year 2014-15. Four new plants were commissioned during 2014-15 and with the addition in capacity from these plants, total SSP production capacity increased to10.252 million metric tonnes (MMT) at the end of the year 2014-15 from 9.523 MMT a year before. However, out of 99 listed plants, 85 plants were in operation during 2014-15. Hence, all out efforts should be made by the Govt., for promoting SSP consumption in the country in line with "Make in India" campaign and also reduce outflow of foreign currency. From the above statement it is amply clear that there is tremendous increase in import of DAP and MOP by 18% and 30% respectively in the current year. Since the adoption of NBS, which excluded Urea, the differential between the prices of Urea and P&K fertilizers has widened leading to excess use of Urea (N) at the expense of P&K fertilizers. Hence the Commission for Agricultural Costs & Prices have recommended that the price of Urea needs to be increased by at least 15% and the subsidy enhanced on P&K fertilizers to reduce their effective MRPs keeping the fertilizer subsidy constant. 2. OPERATIONS AND DEVELOPMENTS Fertilizer Division: Single Super Phosphate (SSP) fertilizer is mainly used for improving root growth and chlorophyll synthesis and thus improve product quality. At our three manufacturing units, the company manufactures SSP in both Powder and Granulated form along with various grades of NPK mixed fertilizer. At our Udaipur unit, we introduced value-added product Boronated SSP and also soil conditioner (Girnar Gold). Boron is essential for effective cell wall structure, flowering & fruiting of plants. Apart from this, we manufacture Sulphuric, oleum and other industrial chemicals EXPANSION ACTIVITY Udaipur unit : The Environmental Clearance for the proposed expansion of Single Super Phosphate (1,81,000 to 3,15,000 TPA) and NPK (60,000 TPA), and Boronated SSP (25,000TPA), and LABSA (20,000 TPA) has been received and that company would initiate necessary formalities to obtain CTO from the respective authorities. Indore unit : Similarly, Environment Clearance for expansion of SSP capacity from 1.65 lac to 2.50 lac MT has been received. SSP is considered as a poor man's fertilizer as it is cheapest amongst all fertilizers without compromising on nutrients as it contains 16% P2O5, 11% Sulphur, 21% Calcium and Traces of Minerals. Most of Indian soils are Sulphur deficient and that SSP compensates this major anomaly in right way though currently only 16.43% of domestic production of Phosphate (P2O5) is contributed by SSP industry. Consumption of Chemical Fertilizers and Balanced Use of Fertilizers : The SSP share to total production of P2O5 shown declining trend at 44% from 70s onwards from 100 percent way back in 1950s, prior to complex fertilisers entered the field. It plummeted to 23% during 80s and again gained momentum in 90s when it gained to 29%. It further saw downtrend consumption and reduced to new low of 11.2% in 2009-10. Thereafter, the share of SSP to total production of P2O5 came down to 16.9% in 2013-14 and 16.3% in 2014-15. The current use of primary nutrients Nitrogen (N), Phosphorous (P) and Potassium (K) is highly imprudent in favour of excessive use of N compared to use of P&K. The Commission for Agricultural Costs and Prices (CACP) report highlights that as the price of urea has remained fixed, those of P & K have increased faster. The differential has therefore widened between the prices of urea and P & K fertilizers leading to excess use of N at the cost of P&K fertilizers. For instance, the price of urea at Rs. 5360 per tonne is low in relation to about Rs. 24,000 per tonne of DAP and Rs.16,700 per tonne of MoP. There is a huge anomaly in the brsent subsidy level of Urea commanding 70% of its cost of production as compared to 30% of P&K fertilizers. As against recommended doses of N:P:K in the ratio of 4:2:1, the actual consumption is highly skewed, so much so that the N:P:K ratio has become a horrific 62:19:1 in Punjab and in Haryana, the ratio is no better at 61:19:1. As per the consumption pattern of SSP in the country during the year 2014-15, it is noticed that Madhya Pradesh accounted for largest share (24.1%), followed by Maharashtra (19.9%), Rajasthan (9.9%), West Bengal (9.6%), Uttar Pradesh (7.7%), Andhra Pradesh & Telengana (6.4%), Chhattisgarh (4.8%), Gujarat (3.9%), Haryana (2.9%), Karnataka (2.2%), Assam (2.1%), Tamil Nadu (2.1%), Punjab (1.8%) and Bihar (1.5%). The above mentioned 14 states, accounted for about 99% of the total consumption in the country. Balance 1% was accounted for the remaining states during the period. As per the data for international consumption available as of 2012 published by FAO, it is interesting to note that in Egypt, bulk of the quantity, i.e., 94% of P2O5 consumption is sourced through SSP. Among other countries, which have large share of SSP to total P2O5 consumption include New Zealand (73%), Brazil (26%), Australia (17%), China (15%), Indonesia (14%) and Argentina (12%) as against 10% in India. Capacity Stagnation : Fertilizer demand proportionately relates to subsidies available since 50% of 90 million tonnes of fertilizer nutrients globally consumed are subsidized. All major fertilizer consuming countries in Asia, Africa and Gulf region extend subsidies which facilitate access to fertilizers for small and poor farmers. Subsidies serve as corrective measures to address imperfections in agricultural markets, such as poor infrastructure and credit facilities. It is worth to note that 50% of phosphate consumed in the world is subsidized. India is also the second largest consumer of fertilizers and third largest producer of nitrogen and phosphate with a world class domestic fertilizer industry. But at the same time, it has also increased the subsidy burden of the government which is difficult to service resulting in delayed payment and carry forward of subsidy dues. Total SSP production capacity increased to 10.252 million tonnes at the end of 2014-15 from 9.523 million tonnes a year before with operating capacity of 9.230 million tonnes (85 units) at the end of 2014-15. Despite increase in capacity, SSP production declined in 2014-15, all India capacity utilisation of SSP reduced from 48.5% during 2013-14 to 45.2% during 2014-15. Under this scenario, the Management wishes to inform that overall production capacity of the company has been reduced to 70% during the year under review against 80% achieved in the brvious year. As per the FAI data for the year 2014-15, only 7 units achieved capacity utilization of 70% and above out of 85 operating units. India's dependency on import at brsent is to the extent of 25% of our requirement of Urea, 90% in case of Phosphates and 100% in case of Potash. As we are dependent on import of either finished fertilizer or its raw material to a great extent, it is not possible to achieve self-sufficiency in fertilizer sector at brsent. As against production of 4.175 million tonnes of SSP in the country, there was huge consumption of Urea, DAP and Complex fertilizers of 467.18 million tonnes which entails huge subsidy amount. Climate Change : Climate change poses many challenges to agricultural productivity. Crop productivity is sensitive directly to changes in temperature, brcipitation and carbon dioxide concentrations and indirectly to changes in the distribution and frequency of infestation by pests and diseases. Impact of climate change on agriculture will be one of the major factors influencing future food security. Rainfed agriculture is likely to be worst hit by climate change because of the limited options for coping with variability of rainfall and temperature. Soya Oil: Last year we had a poor kharif oilseed crop due to lesser rain at 88% of the normal which affected kharif crop's yield, area and production. Also, the acreage under rabi oilseed crop was down by about 7.7 lac hectare and to compound the difficulty, untimely rains played a havoc on the Rabi crops during middle of March in Northern India and Rajasthan damaging the standing crops including that of mustard. Further, the kharif soybean crop is now estimated at 90 to 95 lac tonnes only. Due to continuous disparity, soybean crushing is very much reduced thereby affecting overall domestic availability of both oils and meals. The export of oilmeals is at a historical low and reduced by 44% compared to the brvious year. The soybean meal export is hardly one fourth of the brvious year and also the domestic demand for oilmeals has reduced adding to the woes of the industry. Capacity utilization is at the lowest and many plants are closed down due to disparity in crushing Indian Metrological Department (IMD) has forecasted that monsoon rains could be below average in 2015 at 93% due to an impact of El Nino weather pattern, which can bring on a dry spell in the region. This is also a cause of serious concern to the country's agriculture scenario and may impact the oilseed production in coming seasons. Taking an overall view, this year looks to be very tough for the industry. On one hand the crushing is down due to disparity while import of edible oil is rising and would not be surprised to see record import of edible oils at around 130.0 lac tonnes during the current oil year ending October 2015. Indian vegetable oil industry consists of 15,000 oil mills, 600 solvent extraction units, 600 vegetable oil refineries and 250 vanaspati units sbrad across the country crushing / processing oilseeds, oilcakes, rice bran & vegetable oils. The per capita consumption growth of edible oil is rising by 4.5 to 5.0% p.a. with trend of 13.8 kg. in 2012-13 to 14.4kg in 2013-14 and 15.0 kg in 2014-15. However, the consumption trends in India are marked, not just by rising overall consumption but by changing the patterns of consumption as well . In the early 1970's, almost all vegetable oils consumed in India comprised of Groundnut, Rapeseed & Cottonseed Oil. Palm, Soybean & Sunflower Oil accounted for just 4% . However, over the years, Palm Oil and Soybean Oil have become the leading Edible Oil consumed because the domestic production of Groundnut, Rapeseed & Cottonseed Oil have not been able to keep pace with the increasing demand. Import of soybean may not be commercially viable due to low oil content in bean and also Government of India's policy on GM soybean is vague. Also, Indian Government is currently considering to raise Import duty on edible oils to safe guard the interest of farmers as local prices discourage farmers to grow more oilseeds. According to the SEA, the Vegetable oil availability from kharif oilseeds crop and the secondary sources is estimated at 54.60 lac tonnes compared to last year's 57.95 lac tonnes i.e down by 3.35 lac tonnes for 2014-15. This indicates that the local prices have ceased to operate as a function of domestic demand-supply scenario and have rather been glued to cues from global markets. A strong inflow of cheap oil from overseas is keeping the local scenario debrssed. This equation is unlikely to change in the near term and setback in rabi oilseeds harvest might not lead to a massive rise in the prices. Domestic oilseeds production is projected to drop 9% in 2014-15. Although global farm commodity prices have eased significantly, any plunge in pulses and oilseed planting raises risks of imported inflation as the country meets around half of its annual requirement of cooking oils and one-fifth of pulse needs through overseas purchases, the CACP has noted. 3. OPPORTUNITIES AND THREATS The industry is at the mercy of rains and any delay in onset of monsoon and / or deficiency would generally pose great threat to the sentiments of farming community. Moreover, monsoon brdiction in the country is not so accurate and leaves more room for improvement. This is the main perennial threat to the industry. This being a seasonal industry, we have to continue manufacturing activity throughout the year and maintain sufficient stock in the factory as well as at strategic places for prompt liquidation and consumption. The railway siding at Pune remained under-utilised. The company intends to optimize the utilization by giving co-use permission to the required users and thus generate revenue. Over the years, we have established our brands in the market. Our Brands, "Girnar" and "Suryaphool" have high recall amongst the farming community and we command due brand value. At Udaipur, we have introduced, Boronated Single Super Phosphate which received good acceptance from the market and the company would increase production in the coming years. As a proactive step in this regard, company will also introduce Boronated SSP from Indore unit shortly. With the onset of good monsoon and encouraging forecast of higher plantation of Soyaseed in the country, the company intends to capitalize on this opportunity and increase seed crushing during this year. In spite of capacity enhancement by the existing players as also entry of new players in the fertilizer segment, it is envisaged that brand value and prompt delivery would put the company's operation in great path of glory. At the same time Government is taking positive steps to boost SSP Production with "Make in India" initiatives and discouraging DAP imports which will revive SSP industry 4. OUTLOOK There is no change in the brvailing NBS policy and that company's operation is well insulated. Environment Clearances for capacity enhancement at Indore and Udaipur units have been received from the Ministry and the company is in the process of obtaining CTO from the respective State Pollution Board authorities. It is reported that area coverage during Kharif 2015 is higher by 67.49 lac hectares compared to corresponding period of Kharif 2014 as on 1st week of July as reported by Solvent Extractors Association of India. This is a very good and encouraging sign for the Soya Division. Company also intends to venture in trading of value-added products in low volume with high margin in non-subsidised segment. We intend to produce Sulphur Dust and Magnesium Sulphate and de-risk the company. On the similar line, the company intends to launch such new products in the coming years. For and on behalf of the Board D. J. RAMSINGHANI (CHAIRMAN & MANAGING DIRECTOR) DIN: 00013633 Date: July 24, 2015 Place: Mumbai |