A STUDY ON WORKING CAPITAL OF NAGARJUNA FERTILIZERS AND CHEMICALS Ltd.,HYDERABAD.

Project report submitted in partial fulfillment of the requirements for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION

Submitted by

J.RAVI PRAKASH MBA

Regd.No
[06611E0013]
(2006-2008)

Under The Guidance Of

M.RAMESH MBA
Assistant Professor

Department Of Business Administration

PRRM ENGG COLLEGE

SHABAD-509217
R.R.DIST,AP.

Affiliated to
JAWAHARLAL NEHRU TECHNOLOGICAL UNIVERSITY
HYDERABAD-72.

A PROJECT REPORT

ON

A Study of
Working Capital Management
At
Nagarjuna Fertilizers & Chemicals Ltd.

By
J.RAVI PRAKASH
06611E0013
2006-2008
A report submitted in partial fulfillment of the requirements of
MBA program of
PRRM ENGINEERING COOLEGE
SHABAD R.R DIST
Faculty Guide: Company Guide:

M.Ramesh Mr. Y.JanardhanaReddy Asst. Professor Sr. Manager -Accounts PRRM ENGG COLLEGE
NFCL
SHABAD

ACKNOWLEDGEMENT

As part of the curriculum at PRRM Engineering College, Shabad the Summer Internship Project
enables us to enhance our skills, expand our knowledge by applying various theories, concepts and
laws to real life scenario which would further prepare us to face the extremely ‘Competitive
Corporate World’ in the near future.

I respectfully express my gratitude to Mr. K Krishnamurthy, General Manager (Finance), Nagarjuna

Fertilizers and Chemicals Limited for giving me an opportunity to undertake this project work.

I would like to personally thank Mr. Y Janardhana Reddy, Sr. Manager-Accounts, Nagarjuna
Fertilizers and Chemicals Ltd., for his selfless support and encouragement during my entire
training program.

I express my gratitude to my faculty guide Asst. Prof M. Ramesh, PRRM Engineering College,
Shabad for his unparallel support throughout my internship.

I have tried my level best to put my experience and analysis in writing this report. I am grateful to
Nagarjuna Fertilizers and Chemicals Limited as an organization and its various employees for
helping me to learn and explore many fields.

CERTIFICATE

This is to certify that this project entitled “A STUDY ON WORKING CAPITAL” with reference to
NAGARJUNA FERTILIZERS LTD., which Mr.J.RAVI PRAKASH has submitted in partial fulfillment of
the requirement for the degree of MASTER OF BUSINESS ADMINISTRATION to JNTU-HYDERABAD,
has been carried out under my supervision and guidance.

DECLARATION

I RAVI PRAKASH here by declare that the project entitled “A STUDY ON WORKING CAPITAL” with
reference to NAGARJUNA FERTILIZERS AND CHEMICALS LTD., submitted by me department of
management studies, P.R.RM ENIGINEERING COLLEGE SHABAD, (affiliated to JNTU) is of my own
and has not been submitted by another University or published any time before.

CHAPTER CONTENTS PAGE NO

01 INTRODUCTION 06-11
ABSTRACT
MEANING
PURPOSE OF THE STUDY
OBJECTIVES OF THE STUDY
LIMITATIONS OF THE STUDY
SOURCES AND METHODS USED

02 INDUSTRY OVERVIEW 12-18

MAJOR INDIAN PLAYERS
DEMAND SUPPLY SCENARIO
03 COMPANY OVERVIEW 19-31
HISTORY AND BACKGROUND
PLANT LAYOUT
FUNCTIONS AT NFCL

04 THEORITICAL FRAME WORK 32-54

05 INDUSTRIAL ANALYSIS 55-73

06 SUMMARY & SUGGESTION 74-79

CONCLUSIONS
SUGGESTIONS
REFERENCES

ABSTRACT

There are a number of functions that have assumed significance in the Corporate Finance. With
rapid globalization, this complexity is likely to accelerate in the future. Hence the relentless pace of
liberalization and integration of the Indian financial markets with the global markets has lead to
study of WORKING CAPITAL MANAGEMENT and has made it quite significant in the modern world.
The primary objective of the project is to study and understand WORKING CAPITAL MANAGEMENT
with reference to NFCL. The other objectives were to understand the fertilizer industry, various
Government and RBI policies governing the sector, position of NFCL in the industry and analyze
the performance of the company using ratio analysis.
The business concerned here is the Urea manufacturing (fertilizer Industry) which plays a major
role in the company’s organization. The company’s plants are located at Kakinada, East Godavari
District, A.P.
The significance and need for the study will help the company to analyze the factors that affect the
working capital of the business the most, and subsequently find out what should be the
composition of these factors in order to have a sound working capital. The project involved
collecting of both primary data provided by the company as well as secondary data through
various sources.
The findings include that the various components of Working Capital Management require
differentiated treatment and hence it is recommended that each component should be treated
according to its merit and peculiarities.

INTRODUCTION

The fertilizer sector is very crucial for Indian economy because it provides a very important input
to agriculture. There are several state-of-the-art fertilizer plants operating in India. Over the
years, the fertilizer industry has improved its performance significantly in terms of specific energy
consumption and capacity utilization. India is the third largest producer and consumer of fertilizers
in the world with close to 60 large size plants in the country manufacturing a range of fertilizers.
The most widely used fertilizers include nitrogenous (N), phosphatic (P) and potassic (K). Potassic
fertilizer is not manufactured in India and is imported. The installed capacity of fertilizer industry in
the country is about 12 m MT of nitrogen and 5.1 MT of phosphatic nutrients. Urea (85% of N
fertilizer consumption) constitutes 58% of the total fertilizer consumption in the country. Di-
ammonium phosphate (DAP) accounts for approximately 66% of India's consumption of
phosphatic fertilizers.

NFCL is engaged in the business of manufacture and marketing of urea and marketing of other
fertilizers. Urea contributes more than 95% of the annual turnover of the company.

PURPOSE OF THE STUDY

The project is related to the “Working Capital Management” of the company. As working capital is
considered to be the bloodline of any organization, the study is on the fertilizer industry in depth
and NFCL in particular will help a great deal to understand finer nuances of every aspect of
Working Capital Management at NFCL.

OBJECTIVES OF THE STUDY

The objectives of the project are as follows:

• To understand the fertilizers industry on the whole.
• To understand various government and RBI guidelines governing the fertilizer industry in our
country.
• To understand the position of the NFCL in the industry.
• To analyze the key ratios indicating the performance of the company.
• To analyze and understand present management and future requirement of Working Capital of
the organization.
• To analyze and understand present management and future requirements of Cash of the
organization.
• To analyze and give comments and suggestions on how to manage cash.

LIMITATIONS OF THE STUDY

The success of the project under discussion depends on a few factors, which may limit the scope of
the study. The various possible limitations in the way of completing the project could be:

• Dependency and reliability of secondary data sources.

• Unavailability of the current up-to-date data.
• Company’s policies against sharing of Private and Confidential data.

SOURCES AND METHODS USED:

Data collection: primary data collected from the company records and one to one interaction with
employees of the company.

Secondary data: through literary (books, journals, annual report of the company) and web based
resources.

Data analysis: mainly analytical (qualitative), however quantitative tools will be employed as and
when required.

Inferences and observations: drawn on the basis of the analysis done.

Conclusion/recommendations: to conclude the project.

INDUSTRY OVERVIEW

Urea comes under the purview of essential commodity act and so its production, pricing and
distribution is controlled by the Department of Agriculture & Cooperation, government of India
under the Fertilizer (Control) Order, 1985(FCO), issued under the Essential Commodities Act,
1955.
The fertilizer industry in India consists players from three different categories:
1. The Government owned Public Sector undertakings, like (National Fertilizers Limited), RCF
(Rashtriya Chemicals and Fertilizers Limited)
2. Cooperative sector players like IFFCO (Indian Farmers Fertiliser Cooperative Limited) and
KRIBHCO (Krishak Bharti Cooperaitve Limited).
3. Private sector players like NFCL (Nagarjuna Fertilizers And Chemicals Limited), Chambal
Fertilizers, Indo Gulf etc.
MAJOR INDIAN PLAYERS:

IFFCO- this is one of the major players in the Indian fertilizer industry belonging to cooperative
sector. The company was established in 1967. It has now diversified into insurance and power. It
is also involved into joint ventures in Oman, Senegal and Egypt.
Various products offered are urea , DAP, NP, Bio fertilizer and NPK.
Its various production units are located at-

Kalol – It is located at Gandhi Nagar, Gujrat. It was commissioned in 1975.

Production capacity:
Ammonia -0.36 million TPA
Urea – 0.55 million TPA

Kandla – situated strategically at Kandla port, Gandhidham (Kuchh), Gujarat, this unit was
commissioned in 1975.
Production capacity -
NPK/DAP : 2.19 million MTPA
In P2O5 terms : 0.825 million MTPA

Phulpur – this unit is located Phulpur, Ghiyanagar,Allahabad in UP. This unit was commissioned inn
1981
Production capacity is-
Ammonia – 0.824 million TPA
Urea – 1.\416 million TPA

Aonla -this unit is located at IFFCO Township , Bareilly(Uttar Pradesh),

it unit was commissioned in 1988
Production capacity is
Ammonia – 1.003 million TPA
Urea – 1.730 million TPA

Paradeep- IFFCO has acquired the fertilizer unit of Oswals at Paradeep in Orissa. The Oswal
Chemicals and Fertilisers plant, commissioned in April 2000 is the world’s largest grassroots Di-
ammonium phosphate (DAP) plant, can produce 2 million tonnes of the fertiliser a year.

Production capacity:
P2O5 - 0.8 million tonnes
N - 0.325 million tonnes per annum.
It had sales of Rs 409,760.12 lakhs in 2004-05.

KRIBHCO(Krishak Bharti Cooperative Limited):- is premier cooperative society indulged into

manufacturing of urea , bio fertilizers and seeds. The company made a sale of Rs 924.22 crores
and a net profit of Rs 186 crores in the 2004-05.
It has its manufacturing unit at Hazira , Gujrat and has diversified into power. Hazira Fertiliser
Complex has 2 Streams of Ammonia Plant and 4 Streams of Urea Plant. Annual re-assessed
capacity for Urea and Ammonia is 1.729 million MT and 1.003 million MT respectively. The
commercial production commenced from March 01, 1986. Bio fertilizer plant of 100 MT per year
capacity was commissioned at Hazira in August, 1995. Also, there are 10 seed processing plants in
various states.

National fertilizers : it is public sector undertaking functioning under the department of fertilizers ,
Government of India. NFL was incorporated in 1974 with production unit at Bhatinda and Panipat.
Subsequently, production units at Nangal and Vijapur were established. The capacity utilization for
the year 2004-05 was 106.2%. The sales turnover of the company was 3474 crores in the year
2004-05. Major brand of the company are Kisan khad and Kisan urea. The Company also
manufactures and markets Bio fertilizers and a wide range of industrial products like Methanol,
Nitric Acid, Sulfur, Liquid Oxygen, Liquid Nitrogen etc. The Company has developed Neem coated
urea which in demonstration has improved the crop yield by 4-5%.

Chambal fertlisers : it was promoted by Zuari industries ltd in 1985. Its production units are
located at Gadepan in Rajasthan. They are:
Gadepan I : was commissioned in December 1993 and its commercial production
commenced in January 1994. It is capable of ammonia production of 1350 MT per day and was
installed in technical collaboration with Haldor Topsoe. The plant also produces 2,348 MT per day
urea based on Snamprogetti, Italy process. It uses natural gas as feed stock.
Gadepan II : it started its operations in October 1999. Its Ammonia plant is based on Kellog (USA)
technology and the Urea Plant is based on ACES process of TEC, Japan. The Ammonia Plant has a
capacity of 1,350 MTammonia per day. It uses both naptha and natural gas as feedstock.
Its brand is known as “uttam veer” and caters to 9 northern and north western states of India
In 2004 – 05 the company made a sales (including subsidy from the government) of 225953.09
lakhs and PAT of 22062.52 lakhs
Indo gulf: the company was a joint venture of e AV Birla , PICUP (Pradeshiya Industrial and
Investment Corporation of UP Ltd) and GCSI (Gulf Consolidated Company for Services and
Industries) and established its urea manufacturing unit in Uttar Pradesh in 1983. The promoters
hold 51% and Aditya Birla group through its various companies hold 26% of the equity.
The plant, located at Jagdishpur, has a capacity of 750,000 tpa .

DEMAND-SUPPLY SCENARIO:

Supply: High dependence on imports. Government regulations restrict the production and disallow
exports.
Demand: Seasonal, depends heavily on monsoon.
Barriers to entry: Highly capital intensive and uncertain, government regulations. However
undifferentiated products allow new entrants relatively easy entry.
Bargaining power of suppliers: High, since the main feedstock, gas, has alternative uses in
industries such as power and petrochemicals.
Bargaining power of customers: High, as industry/farmers lobby is powerful.
Competition: Manufacturers compete on prices.

ANALYSIS OF DEMAND-SUPPLY
Over the years the demand in fertilizer industry has fallen short of the supply, this shows that the
resources are not utilized at the optimum level.

The reasons for this shortage can be attributed to the control exerted by the government and the
strict policies followed. Highly politicization of the agriculture and fertilizer industry by various
governments is one of the reasons for lack of enormous growth in the sector. Along with that low
quality of equipment used added to the gap between demand and supply. With the advent of
globalization the sector opened up but still there is a long way to go.

India is an agrarian economy highly dependent on monsoons; various measures should be taken
to tackle the destruction by various natural calamities like rain water, channelizing of the water
sources properly, wide spread use of drip irrigation. India is highly dependent on imports to bridge
the gap in demand and supply which can be reduced if higher incentives are given to the
manufacturing companies for producing more and rules be made lenient. Moreover newer
technological equipments must be used for better production. The economy is opening up in all the
sectors this may be a ray of hope for the fertilizer industry. The implementation of various projects
should be made fast and feedstock must be utilized optimally and wastage should be reduced to
the minimum level.

COMPANY OVERVIEW:

Nagarjuna Fertilizers & Chemicals Ltd.

MISSION AND VISION STATEMENT

MISSION Servicing Society Through Industry

VISION To creatively search for and participate in opportunities for value added, end to end
solutions in Agriculture, Energy and Life Sciences.
COREVALUES Concern, commitment, quality and integrity

BACKGROUND
ABOUT NFCL

The flagship company of the Nagarjuna Group, Nagarjuna Fertilizers and Chemicals Limited is a
leading manufacturer and supplier of plant nutrients in India. Commencing operations in 1985,
today its asset base is around Rs. 21 billion. It has the distinction of being the single largest
private sector investment in Southern India. An ISO 9001:2000 certified company; its operational
profits are one of the highest in the industry.
PRODUCTS:
The broad portfolio of products and services include:
* Nutrition solutions:
Macro and Micro fertilizers and Farm Management services
* Micro Irrigation solutions
NFCL offers expertise for the management of chemical process plants, which include Specialist
Services and Total Project Management.
The operations and offerings have been aligned into three strategic business units:
* Straight Nutrition Business
* Nutrition Solutions Business
* Nagarjuna Management Services
The most important aspects of the organization are:
Strategy – Having a long term vision for the company
Structure – To facilitate achieve our strategy
People – Aligning related policies with Strategy and Structure. In turn to build the right capability,
attitude and behaviour in employees.
Process – To enable employees to work more efficiently and effectively, to have the best in class
internal business processes.
The key action areas in their road map are:
• Facilitating redefinition of organization structure to support NFCL’s business direction, goals and
priorities.
• Evolving a people management philosophy and institutionalizing systems and policies that reflect
uniformity, fairness and transparency.
• Establishing Best in Class HR systems and processes, in line with organisational requirements.
• Facilitating creation of a performance based culture with clear linkages to rewards and careers.
• Defining the organization capability framework and assessing organizational people capability to
support NFCL’s vision.
PLANT LAYOUT:
• The company has its manufacturing operations at Kakinada, East Godawari District , Andhra
Pradesh. There are two manufacturing units. The gas based plant was established with the help of
technical expertise of Snamprogetti, Italy and Haldor Topsoe, Denmark.

Plant 1 Plant 2

Gas based 40% gas 60% naptha

urea: 1500 mt/day urea: 1500mt/day
ammonia: 900mt/day ammonia:900mt/day

Manufacturing Facility
Urea manufacturing facility - Kakinada

One of the largest Urea complexes in India, the plant is spread over 1130 acres. It is strategically
located at Kakinada, a seaport on the east coast of India in the state of Andhra Pradesh. The
company enjoys close proximity to raw materials and a ready market at its doorstep.
The Natural gas based plants operate with one of the lowest energy consumption rates in the
world.
Charting out an ambitious future, the plant is planning to expand its operating capacity from the
current 1.2 Million Tonnes to about 1.7 Million Tonnes per annum. The expansion is being planned
keeping in mind the availability of additional Natural gas from the recently found huge Natural gas
reserves in the nearby Krishna- Godavari basin.

NFCL strive to adopt the global best practices in all areas of operations. The world class operations
have resulted in long uninterrupted runs of plants for over 365 days with maximum availability of
plant on-stream days. Minimum possible human interference and best maintenance practices keep
equipment and facilities fit for intended use under safe working conditions. Process simulation
software like ASPEN PLUS and drafting software like AUTOCADD is used for plant simulations /
modifications and in turn to minimise energy consumption, maximise production and maximise
asset utilisation.
The plant also has an exhaustive documentation section and technical library with over 1300
Technical books and journals. The library also houses more than 1250 national and international
standards.
Maintenance
Best maintenance practices like predictive / proactive maintenance and reliability centred
maintenance are adopted in the plant to have zero equipment breakdown and zero accidents due
to equipment failure.
Quality Control

Strict adherence to quality in every aspect of production. Laying stress on technology, the plant
maintains strict quality control of products with online product sampling and product quality
monitoring. This has resulted in minimal fines and biuret in the product.

Certifications & Recognitions:

? Golden Peacock National Quality Award for 1995
by Institute of Directors, New Delhi 1996
? ISO 9002 Certification from BVQI, Netherlands 1995
In the year 2004-05 the company produced 13.93 lakh tonnes of urea as against the target of
11.94 tonnes , which was an all time high. The British Safety Council conducted an audit of
company’s plants at Kakinada and awarded Five Star Rating to the Plants. During the year,2004-
05, the company registered cumulative accident free days of 388 days as on March 31,2005.
During the year under review the company’s plant received ISO 9001:2000 upgraded certification
for Quality Management System and ISO 14001:1996 re-certification for Environmental
Management System.

FUNCTIONS AT NFCL
Sales Process at Straight Nutrition Business (SNB)

The company has sales mainly in West Bengal, Orissa, Madhya Pradesh and Karnataka. The main
product which is urea here comes under an essential commodity and other being used for crops, it
is also used for fish farming.
Two types of selling takes place here. First is when the product is stored at the godowns of factory
and at the railway godowns and from there they are picked up by the distributors accordingly. No
subsidy is awarded to the company for using the railway godowns or for the freight and the
company has to bear the cost of maintenance of the godowns. There is almost no impact of
changes in the railway freight charges to the company due to certain subsidies levied to them.
Second way of selling is when a dealer places a demand with the sales officer and a supply is
made to him accordingly.
The sales process begins at the stage when an order is placed with the sales officer. In case of
SNBs, which mostly includes urea, there is already a demand for such products. So there is no
need for the sales person to promote the product to the end users. And due to this very reason
there is a different kind of credit policy followed by the company. The company doesn’t allow any
kind of benefits to the dealers due to the heavy demand of the product. The sales officer forwards
the demand to the company and the delivery is made accordingly.
The payment for these products can be made by the following instruments.
• Local cheques
• Outstation cheques
• Demand drafts

Specialty Fertilizers Division

It is better known as the nutrition Solution Business (NSB) at NFCL. This involves the production of
specialty fertilizers which are in fact the water soluble fertilizers meant for some special kind of
crops. These water soluble fertilizers are used in micro-irrigation projects. Micro irrigation projects
are the one involving drips and sprinklers and are used where there is scarcity of water. So in
order to make optimum use of water pipelines and certain setups are created which provide water
to the specific location, i.e. close to the plant and not waste it elsewhere. And specialty fertilizers
when mixed with the water flow there can be easily and efficiently distributed to the crops.

These fertilizers are imported at Chennai and Mumbai and packed in bags of 25 kgs from there
itself. But there also is a requirement in less quantity, so for that some of the fertilizer comes to
the Hyderabad from where they are packed into bags of ½ kg and 1 kg. This kind of fertilizers is
not very popular. And moreover the basic infrastructure of micro irrigation required 40% of the
consumption takes place in Pune due to more usage of sprinklers and drips mainly for growing
banana, grapes, vegetables etc. This causes the sales of the fertilizer to remain low at about
50,000 tonnes in a year.
Bills
The generation of bills takes place centrally through a system termed as CMS.
The three types of bills generated at NFCL are:
1. Transport and handling and storage
2. Business development bills
3. General bills
The transport bills include the bills for primary and secondary transport. Primary transport is the
transport from factory to the buffer warehouses whereas the secondary transport included the
transport from buffer warehouse to the dealers.
The business development bills include the expenses made for promotional purposes such as
advertisements on radio, T.V., print ads in the newspaper, etc. and the general bills include other
sundry expenses.
Invoicing
As per the Government orders the trade margin of Rs. 180 per tonne of urea exists for NFCL. In
this process, first of all, Sale Note Delivery Order (SNDO) by the area offices to the warehouses
has been issued and then a delivery challan has been issued by the warehouse to the area offices
and after that accordingly the goods has been issued to the dealers.
Payroll
The payroll department at NFCL, Hyderabad is responsible for the payroll of only 43 personnel
having a designation of and above DGM. Payroll of other employees are taken care at the Kakinada
plant itself. Two types of departments exist in here at the payroll department. One is the Human
Production System (HPD) that takes care of the details regarding loans, canteen facility, and clubs
etc. which are to be recovered by the payroll department whereas the Confidential Payroll Cell
(CPC) is responsible for the payroll of employees. For calculation of the components of the salary,
the data has to be entered as per the master data through the application system here at NFCL.
An Oracle based system is used here for payroll processing and is named as Group Integrated
Payroll System (GRIPS).

CORPORATE DEBT RESTRUCTURING (CDR)

CDR is promoted as an appropriate mechanism for corporate debt restructuring in a timely and
transparent manner. The mechanism is meant to help restructure the debts of viable corporate
facing problems, outside the purview of BIFR, DRT and other legal proceedings. It is a voluntary
non-statutory mechanism for restructuring debts of corporates affected by internal or external
factors.

All standard and sub-standard accounts subjected to CDR process would continue to be eligible for
fresh financing of funding requirement, by lenders as per their normal policy parameters and
eligible criteria.

The program is initiated by RBI and substantially managed by IDBI, ICICI as the Lead.

CDR PACKAGE FOR NFCL

The Corporate Debt Restructuring (CDR) Cell at IDBI has approved a major restructuring of the
debt profile of Nagarjuna Fertilisers and Chemicals Ltd (NFCL), involving a substantial reduction of
interest and rescheduling of loans. Apart from stipulating creation of first pari passu charge on all
the fixed assets of NFCL subsidiaries and group companies - Jaiprakash Engineering and Steel
Company and Nagarjuna Power Corporation - for additionally securing the loans, the CDR package
stipulates additional security by irrevocable and unconditional personal guarantee of NFCL's core
promoter, Mr K.S. Raju.

For the sacrifice of interest agreed by the lenders on account of differential interest rates, NFCL
would be required to issue 37.2 lakh preference shares of Rs 100 each, aggregating Rs 37.2 crore.
The interest differential between the contracted rate and CDR-approved rate relating to financial
year 2003-04 alone amounts to Rs 70.75 crore. On a total debt burden of Rs 1,664.11 crore, the
company had incurred interest and finance charges of Rs 255.73 crore during the last fiscal.

The preference shares on conversion into equity would enable the lenders to significantly enhance
their equity holding in NFCL to 22.01 per cent on the expanded equity base from the existing level
of 15.06 per cent on the current equity of Rs 416.6 crore. Accordingly, the holding of promoters
and associates would come down to 33.08 per cent on the expanded equity from the existing
36.69 per cent. IDBI recently approved the debt restructuring package with effect from April 1,
2003. The CDR package envisages issue of 0.01 per cent coupon optionally cumulative convertible
redeemable preference shares and debentures on a private placement basis in favour of financial
institutions and banks.

The conversion of preference shares into equity would be carried out only after the entire debt
liabilities are fully repaid, anytime after 2016. The lenders have reserved the right to convert 20
per cent of their outstanding debt after 2010-11 into equity. According to NFCL, though IDBI, IFCI
and LIC have approved the debt restructuring package, UTI has not accepted it.

DETAILS OF THE CDR PACKAGE

The company was sanctioned a Debt Restructuring Package (including working capital) under
Corporate Debt Restructuring (CDR) Scheme on 20.02.2004 effective from 1st April 2003. All the
lenders have approved and implemented the Package, except UTI AMC Pvt. Ltd. The benefits
accrued under the package have been given effect in the Accounts except in the case of UTI AMC
Pvt. Ltd.

The Restructuring inter-alia envisages:

? Reduction of interest from 1st April 2004.

? Issue of 0.01% Coupon Optionally Cumulative Convertible Redeemable Preference Shares
(OCCRPS) / Zero Coupon Debentures (ZCD) to compensate the differential interest for the year
2003-04.
? Deferment / Rescheduling in repayment of principal.
? The company to divest its equity investments / loans and advances lent to subsidiary / group
companies to the extent and in the manner envisaged.
? Remission of principal amount outstanding in certain cases.

The Accounts for the year ended 31st March 2005, have been drawn up after giving effect to the
CDR Package, except in respect of outstandings of UTI AMC Pvt. Ltd.

The lenders reserve the right to recompense the sacrifices being made in case the profitability and
cash flow position of the Company so warrants in future.The lenders have the right to reset the
interest rates after every three years.

The lenders shall have the right to convert 20% of their outstanding debt after financial year
31.03.2011 into equity and, in the event of any default in servicing the debt, the lenders shall also
have the right to convert the defaulted amounts into equity (at par) or any other instruments. The
promoters shall be given the first right of refusal, if the converted shares/instruments are decided
to be sold by the lenders.
WORKING CAPITAL MANAGEMENT

INTRODUCTION:

The term working capital refers to the amount of capital which is readily available to an
organisation. That is, working capital is the difference between resources in cash or readily
convertible into cash (Current Assets) and organizational commitments for which cash will soon be
required (Current Liabilities).
Current Assets are resources which are in cash or will soon be converted into cash in "the ordinary
course of business".
Current Liabilities are commitments which will soon require cash settlement in "the ordinary course
of business".
Thus:
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES
In a department's Statement of Financial Position, these components of working capital are
reported under the following headings:
Current Assets
• Liquid Assets (cash and bank deposits)
• Inventory
• Debtors and Receivables
Current Liabilities
• Bank Overdraft
• Creditors and Payables
• Other Short Term Liabilities
Working capital is the money you will need to keep your business going until you can cover your
operating costs out of revenue. As a small business owner, it will be wise to have enough working
capital on hand to cover items such as the following during the first few months that you are in
business:
• Replacing inventory and raw materials: you will need to fund the purchase of inventory out of
working capital until you start to see cash from sales, which could take months.
• Paying employees: even the most loyal worker wants to get paid on time, regardless of how
much or how little cash your firm earns during its first months.
• Paying yourself: unless you have made other arrangements, you will need to withdraw some
money to support yourself.
• Debt payments: if you have borrowed money to get started, you probably have to begin
repaying it right away. Missing your first loan payments will not do your credit rating any good.
• An emergency fund: you need some cash on hand to cover unforeseen shortfalls that may result
from any number of factors such as delays in getting your space ready, a slow paying client, or
slow business.

The five most common sources of short-term working capital financing are:
• Equity: If your business is in its first year of operation and has not yet become profitable, then
you might have to rely on equity funds for short-term working capital needs. These funds might be
injected from your own personal resources or from a family member, friend or third-party investor.
• Trade Creditors: If you have a particularly good relationship established with your trade
creditors, you might be able to solicit their help in providing short-term working capital. If you
have paid on time in the past, a trade creditor may be willing to extend terms to enable you to
meet a big order. For instance, if you receive a big order that you can fulfill, ship out and collect in
60 days, you could obtain 60-day terms from your supplier if 30-day terms are normally given.
The trade creditor will want proof of the order and may want to file a lien on it as security, but if it
enables you to proceed, that should not be a problem.
• Factoring: Factoring is another resource for short-term working capital financing. Once you have
filled an order, a factoring company buys your account receivable and then handles the collection.
This type of financing is more expensive than conventional bank financing but is often used by new
businesses.
• Line of credit: Lines of credit are not often given by banks to new businesses. However, if your
new business is well-capitalized by equity and you have good collateral, your business might
qualify for one. A line of credit allows you to borrow funds for short-term needs when they arise.
The funds are repaid once you collect the accounts receivable that resulted from the short-term
sales peak. Lines of credit typically are made for one year at a time and are expected to be paid
off for 30 to 60 consecutive days sometime during the year to ensure that the funds are used for
short-term needs only.
• Short-term loan: While your new business may not qualify for a line of credit from a bank, you
might have success in obtaining a one-time short-term loan (less than a year) to finance your
temporary working capital needs. If you have established a good banking relationship with a
banker, he or she might be willing to provide a short-term note for one order or for a seasonal
inventory and/or accounts receivable buildup.

The two most common sources for long-term working capital financing are:
• Bonds: These debt securities are promises made by the issuing company to pay the principal
when due and to make timely interest payments on the unpaid balance.
• Long-term loan: Commercial banks make loans to borrowers who can repay the principal with
interest, and they will often require collateral for upwards of 85 - 90 percent of the loan value. You
will need to demonstrate a track record of sales revenues to justify your ability to make periodic
installments. Unfortunately, as a small business or start up, your fledgling business idea probably
doesn't have either the sufficient assets or customer base to warrant serious consideration for a
bank loan.

Debt vs. Equity Assessments

It is essential that you assess the relative merits of each form of funding for your specific business.
DEBT EQUITY
Take on Creditors Take on Partners
Low Expected Return High Expected Return
Smaller Funding Amounts Larger Funding Amount
Periodic Payments No Short-Term Payments
Maturity Date Open-Ended " Exit" Date
More Restrictions Less Restrictions

Partners/creditors
Whoever provides your firm with funding will, to some degree, become part of your management
team. An equity partner will have direct input into decision making while a lender does not have
this access.
Company returns
Equity partners will likely expect your venture to generate after-tax annual profits of 35 to 45
percent on the equity they invested. Creditors are only concerned with your ability to generate
pre-tax cash flow to cover periodic interest expenses on the debt.

Funding amount
Equity partners can provide your firm with more up-front capital to allow you to fund all the
projects necessary to achieve your growth objective. What a lender can fund is based solely on
your ability to make loan installments, and that will likely be quite small early on in the life of your
business.

Payments
Equity does not get "paid back" each month or each quarter--it represents partners in the firm.
But lenders will expect loan repayment to begin the month after you close escrow on the loan.

Maturity
Equity partners have no guarantees on when they may get their funds plus a (hefty) return out of
your business. It could be after an acquisition, a subsequent round of funding or the IPO.
Creditors, however, are removed from the balance sheet at a set date upon the final payment on
the loan.

Restrictions
Both funding types can require contractual terms that limit your use of funds and the types of
policies implemented, but lenders often have much more restrictive loan provisions than do equity
investors.

ADVANTAGES OF USING DEBT DISADVANTAGES OF USING DEBT

Debt is not an ownership interest in the business. Creditors generally do not have voting power.
Unpaid debt is a liability of the business. If it is not paid then the creditors can legally claim the
assets of the firm. This action can result in liquidation or reorganization.
The payment of interest on debt is considered a cost of doing business and is fully tax deductible.
Your business must earn at least enough money to cover for the interest expense, otherwise you
may not be able to pay you interest which may lead to default (financial distress).

ADVANTAGES OF USING EQUITY DISADVANTAGES OF USING EQUITY

Unlike obligation of debt, your business will not have any contractual obligation to pay for equity
dividend. Equity is an ownership of the business. So an equity partner will have a direct say about
your business.
Equity financing also allows your business to obtain funds without incurring debt, or without having
to repay a specific amount of money at a particular time.

One must examine each of these trade-offs in detail before deciding which is best for your firm.
Then you can establish a set of funding priorities to guide you in your negotiations with potential
equity or debt funding sources.
Working capital has a direct impact on cash flow in a business. Since cash flow is the name of the
game for all business owners, a good understanding of working capital is imperative to make any
venture successful.

Factors Influencing Working Capital Requirements

The working capital requirement of an organization depends upon the following factors :

? Nature of business
The working capital requirement of a firm is closely related to the nature of its business. A service
firm, which has a short operating cycle and sells predominantly on a cash basis, has a modest
working capital requirement. On the other hand, a manufacturing concern, which has a long
operating cycle and which largely sells on credit, has a very substantial working capital
requirement.

? Seasonality of operations
Firms, which have marked seasonality in their operations usually, have high fluctuating working
capital requirements. The working capital need of a firm is likely to increase during the season
when its product is having more demand and decrease significantly when the product is having low
demand.

? Production policy
A firm marked by pronounced seasonal fluctuation in its sales may pursue a production policy,
which may reduce the sharp variations in working capital requirements. For example a firm may
choose to maintain a steady production throughout the year rather than intensifying the
production activity during peak business season.

? Market conditions
The degree of competition prevailing in the market place has an important bearing on working
capital needs. When competition is keen, a larger inventory of finished goods is required and
generous credit terms may have to be offered to attract customers. If the market is strong and
competition is weak, a firm can manage with a smaller finished goods inventory. Also the firm can
insist on cash payment.

? Conditions of supply
The inventory of raw materials, spares and stores depends on the conditions of supply. If the
supply is prompt and adequate, the firm can manage with small inventory. However, if the supply
is unpredictable and scant then the firm would have to acquire stocks as and when they are
available and carry larger inventory on the average.

Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's life blood and every
manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a
business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't
generate surpluses, the business will eventually run out of cash and expire.

The faster a business expands the more cash it will need for working capital and investment. The
cheapest and best sources of cash exist as working capital right within business. Good
management of working capital will generate cash will help improve profits and reduce risks. Bear
in mind that the cost of providing credit to customers and holding stocks can represent a
substantial proportion of a firm's total profits.

There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-
progress) and Receivables (debtors owing you money). The main sources of cash are Payables
(your creditors) and Equity and Loans.

The Working Capital Cycle

Each component of working capital (namely inventory, receivables and payables) has two
dimensions TIME and MONEY. When it comes to managing working capital - TIME IS MONEY. If
you can get money to move faster around the cycle (e.g. collect monies due from debtors more
quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the
business will generate more cash or it will need to borrow less money to fund working capital. As a
consequence, you could reduce the cost of bank interest or you'll have additional free money
available to support additional sales growth or investment. Similarly, if you can negotiate improved
terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free
finance to help fund future sales.

If you ....... Then ......

Collect receivables (debtors) faster You release cash from the cycle
Collect receivables (debtors) slower Your receivables soak up cash
Get better credit (in terms of duration or amount) from suppliers You increase your cash resources
Shift inventory (stocks) faster You free up cash
Move inventory (stocks) slower You consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If
you do pay cash, remember that this is now longer available for working capital. Therefore, if cash
is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly,
if you pay dividends or increase drawings, then the cash outflows and they remove liquidity from
the business.
“More businesses fail for lack of cash than for want of profit.”
The calculation for different steps of the working Capital cycle is being shown in the following
table:

2004 2005 2006

Gross Working capital cycle In Crore 218 128 98
Average Collection Period In Days 121 82 66
Average Payment Period In Days 22 20 29
Net Working Cycle In Days 196 108 69

Net Working Capital Cycle

The working capital cycle has been calculated for NFCL for the financial years 2004, 2005 and
2006. This information shows that there has been significant improvement in the working capital
structure of the organization. The net working capital cycle has been steadily decreasing. These all
indicates good inventory management on raw materials.

Collection Period vs Payment Period

The average collection period has also decreased over the three tears period whereas the average
payment period has increased, thus the gap between the receivable and payable time has reduced
allowing the firm to use their funds more frequently, as the flow of cash improved. This has
resulted in fall in the net working cycle of the firm which is quite good.

Though still the scenario is that NFCL is paying cash early whereas they receive cash late. This
could lead to cash shortage and thus can create in working capital management.

Sources of Additional Working Capital

Sources of additional working capital include the following:
• Existing cash reserves
• Profits (when you secure it as cash!)
• Payables (credit from suppliers)
• New equity or loans from shareholders
• Bank overdrafts or lines of credit
• Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-stretch the
financial resources of the business. This is called overtrading. Early warning signs include:
• Pressure on existing cash
• Exceptional cash generating activities e.g. offering high discounts for early cash payment
• Bank overdraft exceeds authorized limit
• Seeking greater overdrafts or lines of credit
• Part-paying suppliers or other creditors
• Paying bills in cash to secure additional supplies
• Management pre-occupation with surviving rather than managing
• Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a
cheque).

Handling Receivables (Debtors):

Cash flow can be significantly enhanced if the amounts owing to a business are collected faster.
“Late payments erode profits and can lead to bad debts.”
Slow payment has a crippling effect on business, in particular on small businesses who can least
afford it. If you don't manage debtors, they will begin to manage your business as you will
gradually lose control due to reduced cash flow and, of course, you could experience an increased
incidence of bad debt. The following measures will help manage your debtors:
1. Have the right mental attitude to the control of credit and make sure that it gets the priority it
deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank
references, industry sources etc.
6. Establish credit limits for each customer and stick to them.
7. Continuously review these limits when you suspect tough times are coming or if operating in a
volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or
too old.
Recognize that the longer someone owes you, the greater the chance you will never get paid. If
the average age of your debtors is getting longer, or is already very long, you may need to look
for the following possible defects:
• weak credit judgment
• poor collection procedures
• lax enforcement of credit terms
• slow issue of invoices or statements
• errors in invoices or statements
• Customer dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate
attention. Look for the warning signs of a future bad debt. For example
• longer credit terms taken with approval, particularly for smaller orders
• use of post-dated checks by debtors who normally settle within agreed terms
• evidence of customers switching to additional suppliers for the same goods
• new customers who are reluctant to give credit references
• receiving part payments from debtors.

“Profits only come from paid sales”.

The act of collecting money is one which most people dislike for many reasons and therefore put
on the long finger because they convince themselves there is something more urgent or important
that demands their attention now.

There is nothing more important than getting paid for your product or service. A customer who
does not pay is not a customer. Here are a few ideas that may help you in collecting money from
debtors:
• Develop appropriate procedures for handling late payments.
• Track and pursue late payers.
• Get external help if your own efforts fail.
• Don't feel guilty asking for money, its yours and you are entitled to it.
• Make that call now and keep asking until you get some satisfaction.
• When asking for your money, be hard on the issue - but soft on the person.
• Don't give the debtor any excuses for not paying.

Managing Payables (Creditors):

Creditors are a vital part of effective cash management and should be managed carefully to
enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing
function can create liquidity problems. Consider the following:
There is an old adage in business that if you can buy well then you can sell well. Management of
your creditors and suppliers is just as important as the management of your debtors. It is
important to look after your creditors - slow payment by you may create ill-feeling and can signal
that your company is inefficient (or in trouble!).

Remember, a good supplier is someone who will work with you to enhance the future viability and
profitability of your company.
Inventory Management
Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash
resources of a business. Insufficient stocks can result in lost sales, delays for customers etc.
The key is to know how quickly your overall stock is moving or, put another way, how long each
item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be
influenced by the nature of the business.
Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby all the
components to be assembled on a particular today, arrive at the factory early that morning, no
earlier - no later. This helps to minimize manufacturing costs as JIT stocks take up little space,
minimize stock-holding and virtually eliminate the risks of obsolete or damaged stock. Because JIT
manufacturers hold stock for a very short time, they are able to conserve substantial cash. JIT is a
good model to strive for as it embraces all the principles of prudent stock management.
The key issue for a business is to identify the fast and slow stock movers with the objectives of
establishing optimum stock levels for each category and, thereby, minimize the cash tied up in
stocks. Remember that stock sitting on shelves for long periods of time ties up money which is not
working for you. For better stock control, try the following:
• Review the effectiveness of existing purchasing and inventory systems.
• Know the stock turn for all major items of inventory.
• Apply tight controls to the significant few items and simplify controls for the trivial many.
• Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep
it.
• Consider having part of your product outsourced to another manufacturer rather than make it
yourself.
• Review your security procedures to ensure that no stock is going out the back door.
Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs
and interest charges.

Cash flow Management:

In its simplest form, cash flow is the movement of money in and out of your business. It could be
described as the process in which your business uses cash to generate goods or services for the
sale to your customers, collects the cash from the sales, and then completes this cycle all over
again.
Inflows. Inflows are the movement of money into your cash flow. Inflows are most likely proceeds
from the sale of your goods or services to your customers. If you extend credit to your customers
and allow them to charge the sale of the goods or services to their account, then an inflow occurs
as you collect on the customers' accounts. The proceeds from a bank loan is also a cash inflow.
Outflows. Outflows are the movement of money out of your business. Outflows are generally the
result of paying expenses. If your business involves reselling goods, then your largest outflow is
most likely to be for the purchase of retail inventory. A manufacturing business's largest outflows
will mostly likely be for the purchases of raw materials and other components needed for the
manufacturing of the final product. Purchasing fixed assets, paying back loans, and paying
accounts payable are also cash outflows.

What to Do with a Cash Surplus

Managing and improving your cash flow should result in a cash surplus for your business. A cash
surplus is the cash that exceeds the cash required for day-to-day operations. How you handle your
cash surplus is just as important as the management of money into and out of your cash flow
cycle.
Two of the most common uses of extra cash are:
• paying down your debt
• investing the cash surplus
• Paying Down Debt
Paying down any debt you may have is generally the first option considered when deciding what to
do with a cash surplus. Rightfully so because a short-term investment of your cash surplus is not
likely to yield a return equal to or greater than the rate of interest on any of your debt. It doesn't
make any sense to invest a cash surplus at 5 percent when you can pay down a bank loan that is
charging interest at 12 percent.
• Investing the Cash Surplus
When investing a cash surplus, it's only natural to seek the highest rate of return for your
investment. There are many investment opportunities available for your cash surplus. You must
consider the advantages and disadvantages as well as the levels of risk, maturity, liquidity, and
the yields of each of your investment opportunities. The following are just a few of the investment
opportunities you may have:
• checking accounts with interest
• sweep accounts
• treasury bills and notes
• certificates of deposit (CDs) and money market funds

Managing a Cash Flow Deficit

A cash flow deficit arises when payments are due and the cash balance is too low to meet the
obligations. When you do have a cash flow shortage, it's important to remember that there are
some expenses you must pay on time. These include payroll, payroll taxes and insurance.

To manage a cash flow shortage there are several ways:

• Obtain a short-term loan. A number of nonprofit lenders and for-profit banks provide short-term
loans to nonprofit organizations. These institutions provide "working capital loans" intended to help
nonprofits cover operating expenses while they are waiting for a grant or contract disbursement.
Generally, these loans are for a short term (less than 90 days) and you will be expected to repay
them once the funds from the grant or contract are received.

• Speed up collection of accounts receivable. Sometimes, you may be able to speed the collection
of money that is owed to you. For example, if there are government agencies that owe you
money, you could ask for an upfront payment in advance of the scheduled payment. Or, a
foundation may be willing to rearrange its disbursement schedule if you anticipate a cash deficit.
Again, the cash flow statement can help you structure your receivables with your funders to avoid
cash flow deficits.
• Increase fundraising efforts. Because your cash flow projections show when to expect cash flow
surpluses and deficits, you might consider rearranging your fundraising schedule to accommodate
your cash flow needs. For example, you could move a direct-mail appeal to an earlier date if you
know you will need income sooner in the year.
• Liquidate investments. Perhaps there are stocks, bonds or certificate-of-deposit accounts (CDs)
that you can liquidate. If you are investing in CDs, you can structure them so that they mature
when you need the cash. For example, the organization in the example could have opened a CD
during the previous year that matures in the month of January, providing much needed funds and
limiting the organization's reliance on its line of credit.
• Cut expenses. There may be expenses in your budget that could be deferred or cut. It's
important that you keep an eye out for line items that continue to outpace your budget.
• Delay payment to vendors. If you're really in a bind, you may want to consider negotiating with
your vendors. Perhaps you have bills that are due within 30 days that can be extended to 60 or 90
days. Explaining your situation honestly and requesting a revised payment schedule is much better
than simply ignoring the bills.

INDUSTRIAL ANALYSIS

INDUSTRIAL ANALYSIS:

The fertilizer sector is very crucial for Indian economy because it provides a very important input
to agriculture. There are several state-of-the-art fertilizer plants operating in India. Over the
years, the fertilizer industry has improved its performance significantly in terms of specific energy
consumption and capacity utilization.

India is the third largest producer and consumer of fertilizers in the world with close to 60 large
size plants in the country manufacturing a range of fertilizers. The most widely used fertilizers
include nitrogenous (N), phosphatic (P) and potassic (K). Potassic fertilizer is not manufactured in
India and is imported.

The Indian fertilizer industry has succeeded in meeting almost fully the demand of all chemical
fertilizers except for MOP. The industry had a very humble beginning in 1906, when the first
manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai with an
annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin
in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar were the first large sized
-fertilizer plants set up in the forties and fifties with a view to establish an industrial base to
achieve self-sufficiency in foodgrains. Subsequently, green revolution in the late sixties gave an
impetus to the growth of fertilizer industry in India. The seventies and eighties then witnessed a
significant addition to the fertilizer production capacity.

The installed capacity of fertilizer industry in the country now is about 12 m MT of nitrogen and 5.1
MT of phosphatic nutrients. Urea (85% of N fertilizer consumption) constitutes 58% of the total
fertilizer consumption in the country. Di-ammonium phosphate (DAP) accounts for approximately
66% of India's consumption of phosphatic fertilizers.

GOVERNMENT’S ROLE IN THE FERTILIZER INDUSTRY

• The sale price of controlled fertilizers is fixed by the Government of India (Department of
Agriculture & Cooperation) under the Fertilizer (Control) Order, 1985 issued under the Essential
Commodities Act, 1955. At present urea is the only fertilizer which is under statutory' price,
distribution and movement control.
• The nitrogenous fertilizer segment is regulated through price controls. The government fixes two
prices: the price at which the manufacturers should sell to the farmers and the retention price,
which the manufacturer should have received from the farmer. The government reimburses the
difference in the selling price and the retention price in the form of a subsidy.
• In view of the mounting fertilizer subsidy bills, government has finally announced a Long Term
Fertilizer Policy in the form of Group Concession Scheme (GCS). This scheme will come into effect
from FY04 and will be implemented in three phases.
• The retention price is fixed so as to enable the company to earn a 12% post tax return on net
worth. It depends on the feedstock used (whether naphtha, fuel oil, gas or coal) and takes into
account the conversion costs, selling costs, interest on debt, and depreciation and capacity
utilization of the plant itself.
WTO REGULATIONS
The Government of India has clearly expressed its intentions to bring out a new urea policy, which
would remove all distribution control of urea and withdraw all subsidies by 2006. Thus in
September 2000 the Expenditure Reforms Commission (ERC) submitted its report proposing a four
phase program to decontrol urea over a period of six years:
1. Stage I (2001/02) — adaptation of uniform concession for all five groups -pre-1992 gas based
plants, post-1992 gas based plants, naptha based plants, fuel oil/LSHS based plants and mixed
feed plants. Concession rate to be determined taking weighted average RP of plants in each group
as of 1 April 2000.
2. Stage II (2002-2005) — further reduction in concessions on naptha fuel oil/LSHS and mixed
feed plant based on reduction in energy consumption and lowering of capital related charges
(CRC).
3. Stage III (2005/06) — concession on naptha and mixed feed plants on basis of assumed switch
over to LNG.
4. Stage IV (w.e.f. 1.4.2006) — reduction in groupings from five to two namely naptha based
plants being accepted for FDCR of Rs. 1,900 per ton. For all other plants, concession to be NIL.
Selling price of urea to be increased by 7 per cent per annum from
5. 2001 to Rs. 6,900 per ton on 1 April 2006, which would also be the import parity price on urea.

PROSPECTS OF THE FERTILIZER INDUSTRY

• Monsoon holds the key to the future prospects of the fertilizer industry. A good monsoon will
spurt foodgrains production and consequently the demand for fertilizers.
• India has one of the lowest per hectare of arable land consumption of nutrients. Urea demand is
expected to reach 240 lakh tonnes by FY07. At the current capacity levels of 200 lakh tonnes, the
demand supply gap is expected to be around 40 lakh tonnes. Moreover, if new capacities are not
added, the gap is expected to mount to an astronomical 90-lakh tonnes.
• Naphtha and natural gas are the key feedstocks for the fertilizer industry. The prices of natural
gas have not been increased in the past five years. Although a 12% hike in the natural gas prices
has been recommended, the same has not been implemented. Hence, there is a very high
probability of the prices being hiked going forward. This could affect production and profitability of
the companies in this sector.

MAJOR INDIAN PLAYERS

The fertilizer industry in India consists of three major players:

1. The Government owned Public Sector undertakings,
2. Cooperative Societies and
3. Private sector.

Following is the sectorial classification for most of the Indian Fertilizer Companies:

Public Sector Undertakings Cooperative Societies Private Sector

NFL IFFCO GSFC
FCI KRIBHCO CFL
HFC SPIC
FACT MCF
RCF GNFC
MFL TAC
SAIL HLL
NLC NFCL
PPL IGFCC
PPCL CFCL
HCL,etc. TCL
GSFC
SSP UNITS,etc.

Sector wise (Nutrient P) % Share

Sector wise (Nutrient N) % Share

COMPARITIVE ANALYISIS OF THE COMAPANIES IN THE FERTILIZER INDUSTRY:

1. Production capacity:
The annual quantitative potential for manufacturing a specific chemical based on the technological
process actually used or planned to be used at the relevant facility. It gives the maximum amount
of product that can be produced from processing facilities.
2. Capacity utililization ( %):
Capacity utilization is a concept in which refers to the extent to which an enterprise or a n
organization actually uses its installed productive capacity. Thus, it refers to the relationship
between actual output produced and potential output that could be produced with installed
equipment, if capacity was fully used.

UNIT-WISE INSTALLED CAPACITY, PRODUCTION AND CAPACITY UTILIZATION FROM 2003-04 TO

2006-07
Nitrogen
Name of Company/Plant Annual Installed Production (`000' MT) Percentage capacity utilization
Capacity 2003-04 2004-05 2005-06 2006-07 2003-04 2004-05 2005-06 2006-07
(01.04-07)
Private Sector
GSFC:Vadodara 248.1 178.5 223.1 235.4 242.0 71.9 89.9 94.9 97.5
GSFC:Sikka-I 105.8 117.9 81.0 51.5 58.3 111.4 76.6 48.7 55.1
GSFC:Sikka-II 71.3 0.0 9.5 50.3 58.0 0.0 13.3 70.5 81.3
TOTAL(GSFC-Sikka): 177.1 117.9 90.5 101.8 116.3 66.6 51.1 57.5 65.7
CFL:Vizag 124.0 111.9 133.8 164.9 209.8 90.2 107.9 133.0 169.2
SFC:Kota 174.3 181.1 167.4 174.3 174.2 103.9 96.0 100.0 99.9
DIL:Kanpur 332.1 0.0 0.0 0.0 17.1 0.0 0.0 0.0 5.1
ZIL:Goa 288.7 264.2 278.1 307.6 301.1 91.5 96.3 106.5 104.3
SPIC:Tuticorin 370.7 324.3 344.3 385.7 357.9 87.5 92.9 104.0 96.5
MCF:Mangalore 207.2 199.0 170.9 192.5 219.5 96.0 82.5 92.9 105.9
CFL:Ennore 41.2 30.8 34.0 44.9 43.0 74.8 82.5 109.0 104.4
GNFC:Bharuch 356.7 357.9 336.5 371.9 379.7 100.3 94.3 104.3 106.4
TAC:Tuticorin 16.0 19.7 20.5 18.8 20.0 123.1 128.1 117.5 125.0
TCL:Haldia 121.5 111.7 91.1 78.1 99.0 91.9 75.0 64.3 81.5
PNF:Nangal 16.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
GFCL:Kakinada 120.6 134.7 142.8 144.9 164.9 111.7 118.4 120.1 136.7
IGCL:Jagdishpur 397.7 397.7 396.6 453.2 457.6 100.0 99.7 114.0 115.1
Hindalco Inds.Ltd.:Dahej 72.0 54.2 40.9 51.5 38.0 75.3 56.8 71.5 52.8
DFPCL:Taloja 52.9 38.7 34.6 20.6 12.5 73.2 65.4 38.9 23.6
NFCL:Kakinada-I 274.8 258.4 275.3 302.2 323.7 94.0 100.2 110.0 117.8
NFCL:Kakinada-II 274.8 287.7 273.9 338.2 310.8 104.7 99.7 123.1 113.1
TOTAL(NFCL): 549.6 546.1 549.2 640.4 634.5 99.4 99.9 116.5 115.4
CFCL:Gadepan-I 397.7 397.9 417.6 442.2 446.2 100.1 105.0 111.2 112.2
CFCL:Gadepan-II 397.

7 397.8 393.1 411.4 428.4 100.0 98.8 103.4 107.7

TOTAL(CFCL): 795.4 795.7 810.7 853.6 874.6 100.0 101.9 107.3 110.0
TCL:Babrala 397.7 397.8 397.7 445.4 441.6 100.0 100.0 112.0 111.0
KSFL:Shahjahanpur 397.7 374.7 394.5 396.1 412.8 94.2 99.2 99.6 103.8
IFFCO:Paradeep 325.2 132.2 65.1 114.6 48.0 40.7 20.0 35.2 14.8
PPL:Paradeep 129.6 134.5 164.9 184.3 221.0 103.8 127.2 142.2 170.5
By Product 7.1 3.6 3.7 0.6 3.5 50.7 52.1 8.5 49.3
Total (Private Sector): 5719.1 4906.9 4890.9 5381.1 5488.6 85.8 85.5 94.1 96.0

3.Market share:
It is the percentage or proportion of the total available market or market segment that
Is being serviced by a company. It can be expressed as a company's sales revenue (from
that market) divided by the total sales revenue available in that market. It can also be
expressed as a company's unit sales volume (in a market) divided by the total volume of
units sold in that market.

4.Marketing and publicity strategies

a. NFCL:
Unlike other Farms NFCL has a huge Promotional as well as marketing strategy
in store.
Programs undertaken:
Customer Education Programme:
Objective : NFCL understands that there is wide gap between the best practices in
agriculture to the actual practices, proliferation of education at all level is necessary to
reduce the existing gap.
Activity: Keeping the above in view, NFCL has designed customer training programmes
for farmers, agri input sellers, o Zinc 21%, Zinc 33%, Monohydrate, Zinc 12% EDTA
chilated o Micronutrient formulations
On-campus Training: On-campus training programmes are conducted at KVK Raju
Krishi Vignana Kendram - NFCL situated at Kakinada. The objective of KVK is to
transfer technology to farmers and improve their farm productivity by imparting best
package of practices/IPM/ INM.

Women empowerment
During 2005-06, exclusive training programme was conducted for 40 women farmers
from various districts in Andhra Pradesh.
Off-campus Training : This programme is conducted during the season where resource /
scientist visit the farmer fields for crop inspection and addresses the village farmers in
meeting on the basis of observations/specimens the resource / scientist made during
crop inspection.
This programme is done in selected progressive villages with active participation of
NFCL executives. them in adopting the same in their farm. The same farmers also
transmit the learning to their co-cultivators thus spreading the learning. That,agri input sellers are
the highest point of contact to resolve crop and farming related issues. Keeping in view the above
facts, NFCL educates agri input dealers and retailers on best farming practices, fertilizers and
agrochemicals, water management products, specialty fertilizers etc, so that information can be
disseminated to farmers at the point of purchase. All the above and many other such programs are
appreciated by NFCL.

Summary of ongoing promotional activities:

No. Programmes/activities 2003-04 2004-05 2005-06 (est)
1. Farmers meetings (No. of farmers) 30256 34969 34000
2. Farmers trainings (No. of farmers) 14135 16632 1838
On-campus (No. of farmers) 550 656 86
Off-campus (No. of farmers) 13585 15976 17520
3. Demonstrations (No. of plots) 356 530 840
4. Growers meetings/crop seminars 1785 1872 2416
5. Exhibitions / sandy counters (No. of events) 250 275 305
6. Scientist visit (No. of farmers) 3256 4526 5215
7. Dealers/sub-dealers meetings (No. of dealers) 2100 3170 3850
8. Soil samples (No. of samples) 776 1071 7500
9. Hired jeeps (No. of villages) 450 525 1650
10. A V van - shown films (No. of film shows) 825 1071 1286
11. Tech assts / field assts (No. of man months) 475 640 560
12. IFCP (No. of farmers) 25620 48228 48500
13. Dealers training programmes - FCO related 125 175 215
14. Expenditure (Rs. in lakh) 266 272 275

b. NFL:
The complete farmer satisfaction through best services is the drawing force of NFL’s marketing,
strategy. The Company has expanded its programme from improving the crop productivity at farm
level to the over all development of the farming community. To provide to the farmers high quality
products in the right time, NFL has an extensive and integrated marketing network.
The Company provides a comprehensive capsules of various fertilizer promotion activities, which
includes agronomical programmers, use of extension media, publicity and farmer development
programmes.

c. IFFCO:
IFFCO distributes its fertilizer material through more than 33000 cooperative societies. To have an
effective coordination with these cooperative societies and the farmers, IFFCO has a wide
marketing network spread throughout the country. The illustration depicts the field structure of the
IFFCO. IFFCO's Marketing activities are coordinated through five Zonal Offices. Each zonal office
oversees the activities of State Offices which in turn coordinate the various activities of the Area
Offices. Area Offices conduct IFFCO's marketing operations in few districts through field officers. At
present, about 450 field officers undertake distribution of fertilisers and various other promotional
activities. IFFCO undertakes a large number of these programmes to educate the farmers on latest
facets of modest agricultural practices.

d. KRIBHCO:
KRIBHCO is marketing fertiliser through cooperative/institutional agencies.
• Cooperatives:
(A) Apex Federations
(B) District/Taluka Marketing Societies
(C) PACS/Other Village Level Societies
• Institutional Agencies
(A) Agro Industries Corporation
(B) Other Corporations such as Land Reclamation Corporation
• Own Outlets
Krishak Bharati Sewa Kendras (KBSKs)

5. Subsidy enjoyed by the Fertilizer Industry:

Chemical fertilizers have played a vital role in the success of India's green revolution and
consequent self - reliance in food grain production. The increase in fertilizer consumption has
contributed significantly to sustainable production of food grains in the country. Government of
India has been consistently pursuing policies conductive to increased availability and consumption
of fertilizers in the country. The Retention Price Cum Subsidy Scheme (RPS) for indigenous
nitrogenous fertilizer units was introduced by the Government of India in November 1977 to
ensure a reasonable return on investment and to facilitate healthy development and growth of
fertilizer industry. The Scheme was later extended to phosphatic and other complex fertilizers in
February 1979 and Single Super Phosphate (SSP) in 1982. However, from August 1992, the
Government has progressively decontrolled the prices and distribution of phosphatic and other
complex fertilizers. At present, farmgate price of Urea is controlled by the Government whereas its
distribution has been partially decontrolled from 1 April 2003.
The Retention Price Scheme stimulated indigenous production and consumption of fertilizers in the
country. However, for attaining greater internal efficiencies and global competitiveness, unit
specific approach of RPS has been replaced by a group based concession scheme based on greater
normative approach called the New Pricing Scheme 9NPS) from 1 April 2003. The Fertilizer
Industry Coordination Committee (FICC) constituted on 1 December 1977 to administer and
operate the Retention Price Scheme continues under the New Pricing Scheme for administration of
the scheme for urea.
6. Technology used in the fertilizer industry:

With the fast moving world the fertilizer industry is also moving at a very fast rate. The potential
of Information Technology is yet to be fully tapped in the major segment of the fertilizer industry
in the field of marketing, sales and distribution. The following section describes the role of
Information technology in imparting efficiency and effectiveness into marketing and distribution.
Implementation of IT related initiatives in the fertilizer industry and especially Nagarjuna Fertilizers
and Chemicals Limited for achieving efficiency, productivity and customer relationship has been
explained. And Information technology has its contribution to make in this race. Let’s start with:

Applicability of IT in Marketing & Distribution of Fertilizer Industry

Information technology is capable of contributing in many ways in the fertilizer industry. IT would
help in bringing down costs, increasing efficiency and improving productivity thereby contributing
to the bottom line of the organization. IT can play a major role in logistics, efficient sales
operations, checking the marketing costs, safeguarding market share and providing efficient
customer services. In addition to the above it helps the management in taking right decisions for
success. Thus, a well conceived IT Organization can endow decision-makers at different levels to
effectively respond to market conditions. Marketers perform under a competitive environment
characterized by changing consumer preference, distribution related impediments, inadequate
infrastructure and regulatory limitations. In order to overcome the above problems and to impart
efficiency in process, IT has been adopted as a strategic area of focus.

Applicability of IT in Fertilizer Marketing & Distribution

Applicability of IT varies from industry to industry. In the context of fertilizer industry, it can be
categorized under five major heads as follows:

a) Marketing and Sales Planning

Product planning, Inventory planning, Branding, Promotion/Communication

b) Business Application
Enterprise Resources Planning (ERP), Advanced Planning Optimizer (APO), Sales Management
(Dispatch information, Logistics, Warehouse Management, Dealer Management, Invoicing,
Receivable Management etc.), Customer Relationship Management (CRM)
c) Productivity Enhancement Applications
Efficiency and productivity of the field personnel.
Usage of PCs, PDAs, spread sheets, web, e-mails, VOIP, Video Conferencing

d) Development service
Extension services – By use of modern multimedia
Information services – website/Information portals/call centers/GIS

Among the other technological advancement in the industry would be as follows:

To meet the demand of fertilizers in the country through indigenous production, self-reliance in
design engineering and execution of fertilizer projects is very crucial. This requires a strong
indigenous technological base in planning, development of process know-how, detailed engineering
and expertise in project management and execution of projects. With the continuing support of the
Government for research and development as well as for design engineering activities over the
years, Indian consultancy organisations in the filed of fertilizers, Project and Development India
Ltd. (PDIL) & FACT Engineering and Design Organisation (FEDO) have grown steadily in tandem
with the fertilizer industry. These consultancy organisations are today in a position to undertake
execution of fertilizer projects starting from concept/designing to commissioning of fertilizer plants
in India and abroad.

A concept has been developed to carry out research and development / basic research work by
mutual understanding between industry and academic institutions, and the Department of
Fertilizers has sponsored research and development projects through the Indian Institutes of
Technology, Delhi and Kharagpur under the Science and Technology activity for the development
of research / basic research in the filed of fertilizer Industry. Action to widen the sphere of
research and development to encompass areas of fertilizer usage etc is also under consideration.
The fertilizer plant operators have now fully absorbed and assimilated the latest technological
developments, incorporating environmental friendly process technologies, and are in a position to
operate and maintain the plants at their optimum levels without any foreign assistance and on
international standards in terms of capacity utilization, specific energy consumption & pollution
standards. The average performance of gas-based plants in the country today is amongst the best
in the world.

The fertilizer industry is also carrying out de-bottlenecking and energy saving schemes in their
existing plants and to enhance the capacity and reduce the specific energy consumption per tonn
of product. Companies are also planning to convert their existing Naptha- based fertilizer plants to
Liquefied Natural Gas (LNG).

The country has also developed expertise for fabrication and supply of major and critical
equipment such as high-pressure vessels, static and rotating equipment, Distributed Control
System (DCS), heat exchangers and hydrolyser for fertilizer projects. The indigenous vendors are
now in a position to compete and secure orders for such equipment both in India & abroad under
International Competitive Bidding (ICB) procedure. Presently, about 70% of the equipment
required for a major domestic fertilizer plant are designed and manufactured indigenously.

A significant development/advancement has also been made in the country in the field of
manufacturing of catalysts of various ranges by our catalyst-manufacturing Organisation like PDIL.
PDIL is implementing the schemes for enhancement of capacity and technological upgradation in
their existing catalyst plant and other utilities at Sindri to compete in the International market

7. Development and Growth of the Fertilizer Industry ( for present and future )

Capacity Build-Up
At present, there are 57 large sized fertilizer plants in the country manufacturing a wide range of
nitrogenous, phosphatic and complex fertilizers. Of these, 29 units produce urea, 20 units are of
DAP and complex fertilizers, 7 units produce low analysis straight nitrogenous fertilizers and
remaining 9 manufacture ammonium sulphate as a by-product.
Besides, there are about 64 small and medium scale plants in operation producing single super
phosphate (SSP). The total installed capacity of fertilizer production, which was 119.60 lakh MT of
nitrogen and 53.60 lakh MT of phosphate as on 31.03.2004. This has marginally increased to
120.61 lakh MT of nitrogen and 56.20 lakh of phosphate as on 31.10.2005.

Production capacity and capacity utilization

The production of fertilizers during 2004-05 was 113.38 lakh MT of nitrogen and that of phosphatic
fertilizers was 40.67 lakh MT of phosphate. The production target for 2005-06 has been fixed at
118.07 lakh MT of nitrogen and 47.02 lakh MT of phosphate, representing a growth rate of 4.4 per
cent in nitrogen and 15.6 per cent in phosphate, as compared to the actual production in 2004
-05.
The domestic fertilizer industry has by and large attained the level of capacity utilization
comparable with others in the world. The capacity utilization during 2004-05 was 94 per cent for
nitrogen and 72.2 per cent for phosphate. The estimated capacity utilization during 2005-06 is
94.9 per cent of nitrogen and 73.2 per cent of phosphate. Within this gross capacity utilization ,
the capacity utilization in terms of urea plants was 104.2 per cent in 2004-05 and is estimated to
be 103.7 per cent in 2005-06. As for phosphate fertilizers apart from the constraints mentioned
earlier, the actual production capacity utilization has also been influenced by demand trends.

Strategy for Growth

The fertilizer industry has adopted the following strategy to increase fertilizer production;
Expansion and capacity addition / efficiency enhancement through retrofitting/revamping of
existing fertilizer plants. Setting up joint venture projects in countries having abundant and
cheaper raw material resources. Working out the possibility of adopting alternative sources like
liquefied natural gas, coal gasification, etc to overcome the constraints in the domestic availability
of cheap and clean feedstock, particularly for the production of urea. Looking at the possibilities of
revival of some of the closed units by setting up Brownfield units subject to the availability of gas

8. Quality and grade of the product:

In order to maintain the fertiliser product on grade, speedy control analysis is required for timely
corrective action by the plant personnel. This requirement is met by the Installation and operation
of the Auto Analyser system which is operated on a continuous basis. The Auto Analyser performs
rapid and reliable analysis of all the analytical parameters. It is a train of interconnected modules
that automates step by step procedure of wet chemical analysis. It consists of a sampler, pump,
mixing, chamber, photometer, flame photometer and P.C./Printer. Continues flow brings samples
and reagents together for analysis under carefully controlled conditions. Chemical reaction takes
place in continuously flowing air segments streams. Every step of analysis is automatic from
aspiration of the sample to deduction & print out in the printer.Switching over to the automated
analysis system using the auto analyser has resulted in optimisation of the plant operating hours,
effective nutrient control, avoidance of excess over gradation of nutrients etc. Also Automation of
the analytical technique has helped in reduction of man power for quality control work .

9. New pricing policy and cost reduction measures of the ferlizer industry

1. Given the importance of fertilizer pricing and subsidisation in the overall policy environment
impinging on the growth and development of the fertilizer industry as well as well of agriculture,
the need for streamlining these policies has been felt for a long time. A High Powered Fertilizer
Pricing Policy Review Committee (HPC) was constituted to review the existing system of
subsidization of urea, suggest an alternative broad-based, scientific and transparent methodology,
and recommend measures for greater cohesiveness in the policies applicable to different segments
of the industry. The HPC, which submitted its report to the Government on 3rd April 1998 has,
inter-alia, recommended that unit-wise RPS for urea may be discontinued. It has recommended
that instead of unit-wise RPS, a uniform Normative Referral Price (NRP) be fixed for existing gas
based urea units and also for DAP. A Feedstock Differential Cost Reimbursement (FDCR) be given
for a period of five years for urea units.

2. Expenditure Reforms Commission (ERC) headed by Shri K.P. Geethakrishnan had also examined
the issue of rationalizing fertilizer subsidies. The Commission submitted its report on 20th
September 2000. ERC has recommended inter-alia, dismantling of existing RPS and in its place
introduction of a Concession Scheme for urea units based on feedstock used and the vintage of
plants in respect of gas based units.

3. The Department of Fertilizers has examined the recommendations of ERC in consultation with
the concerned Ministries/Departments. The Department has also obtained the views of the
fertilizer industry and the State Governments/Union territories, Ministry of Agriculture and
economists/research institutes on the ERC report.
A new pricing policy keeping in view the recommendations of Expenditure Reforms Commission for
replacing the existing RPS has been approved by the Government on 19.12.2002. The new pricing
scheme will come into existence w.e.f 1.4.2003. A letter giving the salient features and modalities
for implementation of new scheme has also been issued to all urea units on 30.1.2003. The new
policy aims at greater transparency, uniformity and efficiency in disbursements of subsidy
payments to urea units and will induce them to take cost reduction measures on their own and be
competitive

CONCLUSION

We can conclude from the above Working Capital Ratios that NFCL when compared to other
companies is in a better liquidity position. The company has enough funds to meet its current
liabilities. But at the same time, the company has a huge amount of cash blocked in Sundry
Debtors. This calls for a change in the company’s policies as these debts could turn into bad debts
which in turn would take away the competitive advantage from NFCL due to sudden cash crunch.
Thus the company must try to improve its Average Collection Period and increase Average
Payment Period to improve its Working Capital Management efficiency.

SUGGESTIONS

GENERAL ACTION

• The process of taking subsidies from the Government should be fastened.

• The company should set planning standards for stock days, debtor days and creditor days.
• The company should ensure that the staff abides to these standards and that these targets are
just as important as operating budgets and standard costs.
• The company should educate its employees that Working Capital Management does produce
profits.

ACTION ON INVENTORIES
• The company should ensure stock levels as low as possible, consistent with not running out of
stock and not ordering stock in uneconomically small quantities.
• "Just-in-Time" stock management is fine, as long as it is "Just-in-Time" and never fails to deliver
on time.
• The company should consider keeping stock in suppliers' warehouses, drawing on it as needed
and saving warehousing cost.

ACTION ON DEBTORS
• The company should develop an optimum credit policy.
• The credit period should be extended from 30 dys currently to 45 dys.
• The company should assess all significant new customers for their ability to pay by taking
references and examine accounts. It is advisable to the company not to take on new customers
who would be poor payers.
• The company should re-assess all significant customers periodically. It should stop supplying
existing customers who are poor payers – the company may lose sales. Sometimes poor-paying
customers suddenly find cash to settle invoices if their supplies are being cut off.
• The company should consider factoring sales invoices - the extra cost may be worth in terms of
quick payment of sales revenue, less debtor administration and more time to carry out ones
business.
• The company should consider offering discounts for prompt settlement of invoices, but only if the
discounts are lower than the costs of borrowing the money owed from other sources.

ACTION ON CREDITORS
• The company shouldn’t pay invoices too early i.e. take advantage of credit offered by suppliers.
• The company should pay early if the supplier is offering a discount only if the company is not
getting a better return by using working capital to settle the invoice.
• The company should establish a register of creditors to ensure that creditors are paid on the
correct date - not earlier and not later.