MANAGEMENT DISCUSSIONS AND ANALYSIS

Business

Madras Fertilizers Limited (MFL) incorporated in the year 1966 is a PSU under the administrative control of the Department of Fertilizers (DOF), Ministry of Chemicals & Fertilizers, Government of India.

MFL is engaged in the manufacture of Ammonia, Urea and Complex Fertilizers (N:P & N:P:K) at Manali, Chennai. MFL is also engaged in manufacturing Bio-fertilizers and marketing eco-friendly Agro Chemicals under the brand name " VIJAY ".

Introduction

During the year 2014-15, normal rainfall was received in Tamil Nadu, Pondicherry, Karnataka and Kerala states, where as in Andhra Pradesh / Telangana 35% deficient rainfall was received. The crop coverage during the year was normal in all the Southern States of Company's marketing territory except Andhra Pradesh / Telangana wherein 91% of cropped area covered. The consumption of NP / NPK products has improved when compared to last year due to reduction in price of raw materials as well as crude Oil in the International Market.

Fertilizer Sector

The consumption of DAP, NP/NPK and MOP have increased in MFL's marketing territory because of better crop coverage during 2014-15 than 2013-14. However, consumption of Urea is reduced by around 6%, mainly due to non-availability of domestic urea from the 3 Naphtha based Urea units located in MFL's marketing territory.

Due to GOI policy to close down Naphtha based Urea units, three plants including MFL with a combined capacity of 15 lakh MT per annum stopped production during peak Rabi seasonal months of Oct - Dec 2014. During the last quarter of 2014-15, these three units including MFL were permitted to produce Urea for 100 days from Jan 07, 2015 with a rider that average LNG price less VAT should be considered as input price for subsidy calculation and the concerned State Governments should forego VAT on Naphtha supplied to these units. During the same period Naphtha price also has come down consequent to fall of Global Crude Oil prices and the energy equivalent price of Naphtha and LNG were almost equal, which gave relief to MFL to some extent under revised guidelines.

For Complex fertilizers, NBS is applicable from 01.04.2010 where subsidy is fixed by Government on yearly basis and the MRP is allowed to be fixed by manufacturers based on market dynamics. In the current year, for 17-17-17 from 1.4.2015 onwards Government is maintaining brvious year subsidy of Rs. 9,359/MT.

The subsidy element is being regulated by the Department of Fertilizers through Mobile Fertilizer Monitoring System (mFMS). From Nov 2012 onwards, the system is implemented and 100% acknowledgement of first point of sale from dealers were received up to March 31, 2015. All fertilizer manufacturers are suffering on account of non-payment of balance subsidy of 5% for Urea and 15% for NPK since Nov 2012 due to implementation of mFMS linked subsidy payment.

GOI has announced Gas Pooling Arrangement for input pricing of Gas based Urea units from May 2015. Subsequently, GOI has implemented the New Urea Policy-2015, effective June 2015 for 25 gas based units (divided into 3 Groups based on br-set energy norms), wherein the units will be eligible to get the concession rate on the basis of the revised energy norms. The Naphtha based units are covered under a new Policy pronounced on June 17, 2015, wherein the units will be eligible to get the concession rate on the basis of the revised energy norms applicable for naphtha units.

GOI has announced that P & K fertilizers are removed from Movement Control and also the subsidy for rail transportation would be given on lumpsum basis, against the current actual basis, to help companies economise on transport.

Global Scenario

During 2014-15, prilled Urea Arabian Gulf prices were highly fluctuating and during Oct 2014 while the price was USD 315 PMT, it went up to USD 332.5 PMT during mid Jan 2015. Subsequently, the price came down to USD 249 PMT during Apr 2nd week and again risen to USD 307.5 PMT by end of May 2015.

Phosphoric Acid price was USD 715 PMT during mid of May 2014 to Mid Jul 2014 and the price was USD 765 PMT up to 3rd week of Mar 2015, which subsequently increased to USD 805 PMT.

MOP price was USD 322 PMT upto Apr 2015 and from May 2015 increased to USD 332 PMT. Exchange rate fluctuation has greater impact on NPK and Urea manufacturers, Traders and thanks to the softening of price of Crude Oil / Naphtha which helped in managing Ammonia & Urea prices domestically.

The projections of demand for fertilizer products are based on existing product nutrient ratio. However, with Nutrient Based subsidy scheme and programs like soil health management and to promote use of fertilizers nutrients, the demand for complex fertilizers gets rationalized in the coming years.

NUTRIENT BASED SUBSIDY (NBS) POLICY FOR PHOSPHATIC & POTASSIC FERTILIZERS

The Government of India introduced the Nutrient Based Subsidy Phase I with effect from 1.4.2010. This scheme is applicable for DAP, MOP, MAP, SSP, TSP and for other twelve grades of Complex fertilizers.

Under NBS, the subsidy is fixed for the year without any escalation / de-escalation and market price is open. The manufacturers are having freedom to fix the market price based on input prices and they are required to print Maximum Retail Price (MRP) along with applicable NBS per bag on each fertilizer bag

Accordingly, NBS was finalised for different P&K fertilizers and additional subsidy was given for fortified fertilizers with secondary & micro-nutrients like Sulphur, Boron & Zinc. However, the additional compensation for using Naphtha based Captive Ammonia by MFL has not been announced since 1.4.2012, which is under consideration of GOI. For the current year 2015 - 16, subsidy fixed by GOI during 2014 - 15 is being continued.

RISK MANAGEMENT

Major challenges that fertilizer industry facing are increasingly volatile International market for fertilizers and raw materials, steep debrciation in rupee value, increasing prices of NPK fertilizers due to new NBS policy and rise in the working capital requirements of fertilizer firms in addition to the historical challenges associated with the rural markets. The Company has a well laid down Risk Management System with Risk Assessment & Risk Mitigation procedures to evolve suitable strategies for mitigating associated risks through better management practices and achieve corporate objectives.

The identified potential risks such as Operational, Input, Utilities, Project Implementation, Business, Competition, Assets, Internal Control, Environmental, Financial, Human Resources, Legal, Regulatory, MIS and Market Risks and their impact on the Company's performance and Stakeholders' interest is assessed on continual manner. The reporting of Risk Assessment and Risk Mitigations under the policy is reviewed by the Audit Committee and the Board periodically.

INTERNAL CONTROL SYSTEM

The Company has an Internal Control System designed to ensure security of the assets of the Company and efficiency of operations. The Internal Control System includes proper delegation of authority, supervision, Online Integration System (OLIS) and checks and procedures through documented policy guidelines and manuals.

The Company has an Internal Audit function, managed by a team of professionals, which is empowered to examine the adequacy and compliance with the policies, procedures and statutory requirements. Internal Audit conducts regular audit across Company's operations and the management duly considers and takes appropriate action on the recommendations made by the Government Auditors, Statutory Auditors, Internal Auditors and the Audit Committee of the Board of Directors for the improvement of the same.