Appeasing rain Gods

GUEST COLUMN/ TORCH-LIGHT

With Finance Minister P Chidambaram 're-visiting' the contentious transaction tax issue to the satisfaction of traders and stock-market participants, the dark clouds that had enveloped the Indian markets seem to have faded.

The party at the bourses would have been merrier had clouds of a different variety appeared over the Indian subcontinent a little earlier. India is a pre-dominantly agrarian economy and monsoon clouds lift the spirits of a significant section of domestic market players.

With the government making clear its pro-rural stance, players from the fertiliser industry have enough reasons to rub their hands in glee. A prolonged monsoon will further enliven their spirits.

India ranks third among producers and consumers of fertilisers in the world with around 60 large-size plants. Nitrogenous (N), phosphatic (P) and potassic (K) fertilisers are widely used.

Since the industry relies on imports for raw materials, any depreciation of the rupee inflates its import bill. Since forex trends point to the strengthening of the rupee, it is unlikely that key players in the segment are losing too much sleep.

Since N fertilisers are protected by the retention price system, increased costs will affect manufacturers of P and K fertilisers. K fertilisers are not manufactured in India and are imported. The N fertiliser segment is regulated through price controls.

The government fixes two prices: the price at which manufacturers should sell to farmers and the retention price which manufacturers should be receiving from farmers. The deficit is reimbursed by the government in the form of subsidies.

Some time ago, the government announced a fertiliser policy in the form of a group concession scheme (GCS). In the first phase (FY04), the government was to neutralise the cascading impact of subsidies by paying the same on the basis of the group-weighted average retention price as on April 1, 2003, or the retention price, whichever is lower.

Outliers (units with very high retention price) will, however, be given concessions.

In the second phase (FY05 and FY06), group concession rates will be modulated by stipulated energy norms and the special treatment accorded to outliers will be discontinued. In the third phase (FY07 onwards), the urea sector is proposed to be fully decontrolled.

The policy is a big positive for the sector as it enhances operations and low-cost production. Natural gas is used as fuel and feedstock and constitutes about 40 per cent of variable manufacturing costs. With sectors like power and petrochemicals increasing usage of gas, the industry is facing a shortage of gas.

Since farmers form a major part of the vote bank, it is always difficult for the government to take decisions regarding fertilisers, especially their prices. This has been dampening the growth of the fertiliser sector. The non-availability of gas at competitive rates is another challenge which the sector has to face in the future.

As India's per hectare consumption of fertiliser is low compared to global standards, there is a huge potential for the growth for the industry.

However, the monsoon holds the key to demand for fertilisers. While growth prospects are good, controlled pricing and non-availability of gas at competitive rates are issues that need to be attended on a priority basis to ensure long-term growth.

However, disinvestment in the segment is yet to gather momentum. This can be attributed to various factors such as excess capacity and environmental hazards of using chemical fertilisers.

The Rs 20,000 crore Indian fertiliser and chemicals industry accounts for nearly 1.5 per cent of the global chemicals market. Issues such as retention pricing and subsidies are too complex to render any simple solution.

Indo Gulf Fertilizers (IGFL) and Chambal Fertilizers and Chemicals (CFCL) are two prominent players in the segment. IGFL is an Aditya Birla group company and ranks among the largest and most cost-efficient private sector fertiliser companies in India.

Strategically located at the heart of the Indo-Gangetic plain in Uttar Pradesh, IGFL manufactures and markets urea, an N fertiliser.

The company enjoys leadership in the N fertiliser sector with its brand of 'Shaktiman' urea, supported by a reliable distribution and customer service network. It markets its products in states including Uttar Pradesh, Bihar, Jharkhand and West Bengal, which together account for over 40 per cent of the total urea consumption in the country.

The move to demerge the fertiliser business of erstwhile Indo Gulf Corp into an independent entity and amalgamate the remaining copper business with Hindalco Industries was a major strategic initiative aimed at enhancing shareholder value.

As a result of the exercise, Indo Gulf has emerged fully focused on fertilisers, commanding leadership and a strong brand equity.

In its first year as a stand-alone fertiliser player, the company recorded a turnover of Rs 578.53 crore for FY04. The company's production of urea for FY04 stood at 8.62 lakhs mt, reflecting a 100 per cent capacity utilisation.

CFCL is part of the K K Birla-owned Zuari Group. It derives nearly 80 per cent of its revenues from urea production with the balance coming from di-ammonium phosphate (DAP) and other agro chemicals.

The company formed a 50:50 venture - Maroc Phosphate - with Office Cherifien Des Phosphates (OCP) of Morocco. Maroc supplies phosphoric acid to CFCL, a key input in producing DAP. The Zuari-Chambal group in association with OCP has also acquired Paradeep Phosphates. The combine is now the largest player in the Indian DAP market.

CFCL's operations are spread across Madhya Pradesh, Uttar Pradesh, Rajasthan, Haryana and Punjab. It has an extensive distribution network involving over 800 dealers and 15,000 village outlets. The company has its fertiliser manufacturing unit at Gadepan near Kota in Rajasthan.

The shares of both the companies have evoked fair interest in recent times at the bourses, but for that interest to translate into aggressive buying, it must rain heavily.

(The author heads Lotus Knowlwealth, Mumbai, and can be contacted at ceolotus@hotmail.com. Disclosure: He has no outstanding interest in the companies discussed here.)