Fertiliser industry -- Down in the dumps

Anup Menon

THE FERTILISER industry's outlook appears bleak -- so the performance of some leading companies seem to indicate. Other exogenous factors, such as policy changes, have also had a direct impact on the profitability of these companies. In these circumstances, fresh investments in the industry need not be considered.

Part of the Murugappa group of companies, Coromandel Fertilisers Ltd (CFL) is a top player in the complex fertiliser industry. The company's earnings performance in the 2000-01 first quarter is a good indicator of the state of the industry. However, what is important is that the company is able to keep its head above water compared to its peers.

Sales revenues declined 30 per cent to Rs. 85.72 crores on a quarter-to-quarter basis. Post-tax earnings also declined by 31 per cent to Rs. 6.62 crores. On an equity base of Rs. 19.46 crores, the annualised earnings per share works out to Rs. 13.60. At the current market price, the stock is trading at a discount of 3 times its earnings per share.

The company has been restructuring to optimise the use of resources. Realising that the urea division was a drain on the company, CFL decided to shut the plant. The long-term effects are likely to prove beneficial.

What is in CFL's future is a key question? In fiscal 1999-2000, the company came out with a buyback offer and mopped up close to 20 per cent of the floating stock. Low floating stock means limited liquidity. Further, the present shareholding pattern is heavily tilted in favour of EID Parry (the Murugappa group flagship). EID Parry also has considerable presence in the complex fertiliser business. Hence, how CFL's operations will be reorganised to benefit from the synergies of combined operations is not known.

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EID Parry's business interests are wide and include farm inputs, sugar and sanitaryware among others. However, the company's performance in 2000-01 first quarter was not impressive.

Sales revenues stagnated at Rs. 226 crores compared to the corresponding previous period (Rs. 223.54 crores). Operating margins dropped 3 per cent to 13.64 per cent. Post-tax earnings registered a 14 per cent decline to Rs. 7.22 crores (Rs. 8.43 crores). On an equity base of Rs. 17.81 crores, the annualised earnings per share works out to Rs. 16. The stock trades at Rs. 56. The current valuation indicates a PEM of around 3.5 times the earnings.

Though the company's interests are diversified -- mainly complex fertilisers and pesticides -- the main revenue driver is the farm inputs segment. It contributed around 60 per cent of the company's revenues in 1998-99.

The company has been restructuring operations to focus on its core areas such as fertilisers, sugar and sanitaryware. This has led to the spinning off of the ceramic division. As in the case of Coromandel Fertilisers, the key to the future would be the management decision on how the companies would be placed.

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Trading at around Rs. 192, the Hind Lever Chemicals' stock does not seem to possess the drive to outperform the market based on its present fundamentals. HLCL is one of the major players in the complex fertilisers industry in eastern India. It has a significant advantage in terms of access to such high-demand markets as Bihar, Uttar Pradesh and the eastern States. However the company's performance in the 2000-01 first quarter does not lend much support to its image.

HLCL was formed as the result of a restructuring exercise, where the company sold its soaps and detergents business to Hindustan Lever, and bought from it the fertilisers and bulk chemicals business. Its brand is the market leader in eastern India.

HLCL's operating and gross profit margins have been declining since 1996. It recorded a loss in 2000-01 first quarter. Falling margins indicate the deteriorating fundamentals of the fertiliser industry. Compounding the problem is the rupee's recent sharp depreciation. Since January, it has depreciated close to 5 per cent against the dollar. This is likely to impact the company's cost structure, given its sensitivity to imported raw material prices.

The company has invested in DAP capacities. This may work in its favour since volumes are the key to success. However, it may be too early to comment on the future, given the policy aspect. Against this backdrop, fresh investments in the stock can be avoided.

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Southern Petrochemicals Industries Corporation (SPIC), the flagship of the M.A. Chidambaram group, has business interests in shipping, pharmaceuticals and chemicals. SPIC was floated as a joint venture with the Tamil Nadu Industrial Development Corporation (TIDCO) to manufacture nitrogenous and phosphatic fertilisers. For the year ended March 1999, close to 70 per cent of its total revenues came from fertilisers. It has business interests in both complex and nitrogenous fertilisers.

Recently, the company decided to restructure its operations and concentrate on fertilisers. This led to the hiving-off of the heavy chemicals division. However, the company's performance in recent times has not been impressive.