It gives me immense pleasure to share with you our performance for the year 2017-18 andperspectives on the way forward. Your Company has time and again proved that no challengeis greater than their employees' dedication and commitment which brings the Company togreater heights with every passage of time. Simultaneously your Company has incessantlycontinued its efforts in reducing costs by improvising on efficiencies. Throughout thetime our Company has constantly evolved to stay relevant to meet the needs of customersand deliver value to all its stakeholders.
Overview of the Economy
India has emerged as the fastest growing major economy in the world as per the CentralStatistics Organisation (CSO) and International Monetary Fund (IMF) and it is expected tobe one of the top three economic powers of the world over the next 10-15 years backed byits strong democracy and partnerships. India's GDP growth is estimated as 6.7% in 2017-18and is expected to grow at 7.3% in 2018-19. The tax collection figures during FY 2017-18show an increase in net direct taxes by 18% on year-on-year basis. While some of thegrowth in tax collections may be attributed to the growth in economy and risingcompliance it is also as a result of implementation of GST. GST might have played a bigrole in the direct tax collection by putting a check on tax evasion which in turn mighthave boosted the direct tax revenue collections.
The Union Budget for 2018-19 was announced by Union Minister for Finance Government ofIndia in Parliament on February 1 2018. This year's budget focuses on uplifting therural economy and strengthening of the agriculture sector healthcare for the economicallyless privileged infrastructure creation and improvement in the quality of education ofthe country. As per the budget the Government is committed towards doubling the farmers'income by 2022. A total of Rs 14.34 lakh crore (US$ 225.43 billion) will be spent forcreation of livelihood and infrastructure in rural areas. Budgetary allocation forinfrastructure is set at Rs 5.97 lakh crore (US$ 93.85 billion) for 2018-19. All-time highallocations have been made to the rail and road sectors.
Numerous foreign companies are setting up their facilities in India on account ofvarious government initiatives like Make in India and Digital India. India's grossdomestic product (GDP) is expected to reach US$ 6 trillion by FY 2027 and achieveupper-middle income status on the back of digitisation globalisation favourabledemographics and reforms.
Overview of the Fertilizer Industry
Primary fertiliser sales in financial year (FY) 2017-18 witnessed a modest growth of 2%year over year (YoY) owing to healthy off-take by farmers and low inventory stocking bycompanies in view of pan-India implementation of Direct Benefit Transfer (DBT). Urea salesvolume grew 2% yoy to 30.31 MMT in FY 2017-18 from 29.60 MMT in FY 2016-17; indigenousurea sales grew 1% YoY while urea imports grew 9% in the same period. Non-urea fertilisersgrew 2% YoY in FY 2017-18 driven by healthy sales of DAP MOP and complexes with DAP NPKand MOP sales growing 1% 4% and 14% respectively. DAP sales volume grew 1% to 9.0 MMT inFY 2017-18 from 8.9 MMT in FY2017 while sale of NPK complexes grew 4% YoY to 9.0 MMT in FY2017-18 from 8.7 MMT in FY 2016-17. MOP sales volume continued to witness healthy growthof 14% in FY 2017-18 post impressive growth of 15% in FY 2016-17 owing to the price of thefertiliser remaining low.
Domestic urea production has witnessed a decline of ~0.5% yoy to 24.10 MMT in FY2017-18 from 24.20 MMT in FY2016-17. The decline has been majorly due to certain plannedand unplanned shutdowns in various urea plants during the early part of the year. Howeverpost normalisation of operations the production rates have improved in latter half of theyear. Urea imports have risen 9% to 5.9 MMT in FY2017-18 as against 5.5 MMT in FY2016-17.The growth in import comes on the back of lower base of FY2016-17 while imports on anabsolute level remain lower in FY 2017-18 vis-a-vis past years which has also led tosystemic inventory levels declining sharply at the end of FY 2017-18. The Direct BenefitTransfer (DBT) was recently rolled out on a pan India basis from February 1 2018 aftercompletion of the pilot stage that was implemented across 19 districts. The new subsidyframework aims to address several challenges being faced under the existing systemincluding diversion of urea for non-Agricultural use imbalanced use of fertilisers delayin subsidy receipts from the Government of India (Gol) and protection of some of thelegacy and inefficient plants. However owing to the large subsidy backlog inadequatesubsidy provisioning in the Union Budget as well as shifting of subsidy realisation frompoint of dispatch to point of retail sale the implementation of DBT is likely to have anegative impact on the working capital cycle of the fertiliser industry in the near term.During the pilot stage several operational and technological issues such as Aadhaar basedidentity authentication failure weak internet connectivity delay in update of stockposition by wholesalers and stock reconciliation issues among other technical glitcheswere witnessed. However subsequently several steps were taken to reduce the rate ofauthentication failure and lowering of transaction time. Gol has allowed 14 urea unitswhich were unable to carry out energy efficiency capex to continue with existing normswith nominal penalties while norms have been tightened for 11 urea units which hadcompleted capex and were able to meet energy norms under NUP-2015. The units which havebeen unable to meet the target energy norms will face nominal penalties. The CCEA alsoapproved continuation of existing norms for the naphtha-based urea units for another twoyears i.e. FY 2018-19 and FY 2019-20 or till pipeline connectivity is achieved whicheveris earlier. With revision in norm for 11 units at present the savings in subsidy isexpected to be around ~Rs 268 crore per annum according to Gol and once the remainingunits migrate to revised norms the total subsidy saving expected to be ~`1500-1700 croreper annum based on prevailing pooled gas prices. However the tightening of norms willnegatively affect the profitability of the urea units as the energy savings earned woulddecline vis-a-vis the earlier norms. The new norms will remain applicable till March 312025.
Corporate Overview of the Company:
During the year your Company achieved a Turnover of Rs 7318.63 crore as against Rs7223.17 crore in previous year (PY). Profit Before Tax (PBT) during the year stood at Rs128.34 crore as against Rs 248.73 Crore i.e. a reduction by 52% over previous year.Profit After Tax (PAT) stood at Rs 78.80 crore as against Rs 179.26 Crore i.e. reductionby 44% over previous year. Reduction in profits of the Company is mainly on account oflower sales of Urea Suphala & Traded products lower energy efficiencies wagerevision provision etc. Your Company achieved sales volume of 30.64 lakh MT during 2017-18as compared to 31.87 lakh MT during the previous year. The Total sale of manufacturedfertilizers during 2017-18 was 29.81 lakh MT as against 30.44 lakh MT during the previousyear. Sales of manufactured fertilizers registered reduction of 2.07 % over previous yearowing to lower sales of fertilizers and bought out products.
I am happy to announce that your Company is planning to undertake major projects in thedirection of: self-reliance on scarce resources like water;
improving efficiency in use of energy in production operations;
participation in the revival of closed fertilizer units; and
making efforts for increasing consistently availability of raw materials /finished fertilizers through joint ventures in India and Abroad The details of suchprojects are available in the Directors' Report. Your Company is also looking foropportunities for long term off take agreements for procurement of fertilizers to ensuresustained growth. I am confident that with your continuous support encouragement andfaith in us and support from the Government your Company would march ahead successfully.
I am delighted to present the Annual Report for the year 2017-18 and hope to see you on21st September 2018 at the 40th Annual General Meeting of theCompany.
The Government of India is focused on the development of the agricultural sector and onimproving the rural economy. In the union budget for FY2018-19 the GoI announced adownward revision in the subsidy provision for FY2017-18(RE) to Rs 650 billion as againstRs 700 billion estimated earlier while the subsidy allocation for FY2018-19 was increasedto Rs 700 billion. While the subsidy allocation for urea was increased by ~5% to Rs 450billion that for NPK has been increased by 13% to Rs 251 billion. The subsidy backlog forthe industry is expected to remain high at Rs 286 billion towards the end of FY2017-18.While subsidy backlog is lower in comparison to levels seen in the end of FY2015-16 itcontinues to remain at high levels and will continue to impact the profitability of theindustry. Additionally any material uptick in the raw material prices may see the backlogfigure to increase in FY2018-19 from current levels if no additional subsidy allocation ismade during the year. Further the Ministry of Finance has approved a Special BankingArrangement (SBA) amounting to Rs 7000 crore for the Fertiliser Ministry in the form ofinterest subvention as was the case in February 2017. As the SBA is a short-term loanextended at a subsidised interest rate (with the government interest liability limited tothe 10-year G-Sec rate) it will have to be repaid from the budgetary allocation inFY2018-19. Thus the SBA will certainly help in reducing the interest costs being borneby the fertiliser units but the issue of subsidy backlog will continue to plague theindustry.
The outlook for fertiliser sales remains positive for the upcoming Kharif season givenin the expectation of a normal monsoon and prospects for rise in MSP given the budgetpronouncements. Given the forecast of a normal monsoon and assurance by the Gol to ensureMSPs at 150% of the cost of production for farmers the sowing level in the upcomingKharif season is expected to witness healthy growth YoY which should promote healthyfertiliser off-take during the season. The overall fertiliser sales expected to witness2%-4% YoY growth in the upcoming Kharif season. The Government is extremely committed inimproving the quality of soil and in bringing it to its ideal NPK levels. The ideal NPKratio is 4:2:1 whereas Indian soils the ratio is 6.8:2.7:1.
With the sales of fertilizers now being streamlined with the DBT mechanismwhich is linked with soil health cards we can expect improvement in the nutrient usage.The government has distributed 136.5 million soil health cards till date.
We can expect the production non controlled fertilizers like DAP and SSP toincrease given the importance of balanced usage of fertilizers and also with thegovernment increasing the subsidy rate for P grade and S grade fertilizers.
Urea usage to be moderate during FY18-19 due to the effectiveness of neemcoating of urea and with the introduction of 45kg urea bags (earlier 50kg urea bags weresold).
As per our estimates the raw material cost for the fertilizer industry could increaseby 5% due to the increase in gas prices. This could pressure on fiscal spending of thegovernment while disbursing the subsidies. The fertilizer sector faces an inverted dutystructure with the raw materials being taxed at 18% (except phosphoric acid which is taxedat 12%) and the final product being charged at 5%.
Introduction of DBT will help bring relief to manufactures with the subsidies beingtransferred directly to them but since the implementation is still picking up there are afew teething issues which need to be resolved till then this could lead to a short termliquidity crunch with the manufacturers in the collection of subsidies.
Before I conclude I would like to place on record my appreciation to all my colleagueson the Board past and present for their valuable contribution in the growth of thecompany. Finally on behalf of the Board I would like to thank you our valuedshareholders for your unwavering support in our journey to deliver value to all ourstakeholders.
Thank you ladies and gentlemen.
| ||Umesh V. Dhatrak |
| ||Chairman & Managing Director |
|Mumbai || |
|Dated : 8th August 2018 || |