Help! Decontrol on the loose -- Interview with Mr. R. S. Nanda, President and MD, Coromandel Fertilisers

Anup Menon

Ch. Prasanth Reddy

The decontrolled fertiliser industry (phosphatic and complexes) has been through a rough phase over the last few years. Mr. R. S. Nanda, President and Managing Director, Coromandel Fertilisers, shares with Business Line his view on the industry's prospects.

Excerpts from the interview:

What are your views on the near-term outlook?

Kharif is looking good. Generally our market consists of Andhra Pradesh, Orissa and West Bengal. These States have had good rains and we hope to do good business, in volume terms. The current season's outlook is good in the sense that volumes are increasing. However, margins are likely to be hit unless the Government changes the provisional price.

What is your opinion on the structure of the complex fertiliser industry?

Though we are a decontrolled segment, there are controls. Those in the totally decontrolled segments, such as cement, are allowed to fix their own MRP and buy their inputs, thus handling costs and efficiencies. This allows for better margins. In fertilisers, the nitrogenous segment is completely controlled. Therefore, all costs are picked up by the FICC (Fertiliser Industry Co-ordination Committee) and on a cost plus basis the companies are given a 12 per cent return on net worth (post-tax). In addition, if there are cost escalations, such as a rise in naphtha or fuel oil price, these costs are borne by the Government.

However, we get a fixed subsidy from the Government. It also fixes the MRP in a non-transparent manner. We are just told that X is the subsidy and Y the MRP price. We have no say in the matter and do not know what factors have been considered.

However, how the Government does its calculations, or what percentage of the margin is given to the producers is not known. The margins are so low that no company can survive. So, it is worse of the controlled or decontrolled situation. The industry would like to be controlled or totally decontrolled.

If the Government wants to subsidise the farmer, it should find other means, else the industry will not add or expand capacities. In this situation, producers hesitate to invest in the segment because of government control.

What about the recent cut in subsidy?

The impact will be negative, but by how much is not known since these are provisional prices. The Government normally fixes the real prices much later, and we conduct our business while groping in the dark. Neither can we know the final price nor can we control costs or fix margins.

This has been the case for the last two years and every quarter the prices change, for better or worse. We are unable to tell what the final price is.

What about the trends in DAP prices?

At present, the products of indigenous manufacturers, who import phosphoric acid and ammonia, are more expensive than the landed cost of DAP. However, the landed cost is very volatile. India's total requirement of fertilisers -- N, P and K combined -- is more than 20 million tonnes. Even if India goes into the market for an additional million tonnes, prices are likely to shoot up. There have been instances of urea prices rising steeply to $220-230 per tonne when India and China have approached the market for a million tonne or two. DAP prices have shot up to $260. It is essential that the Government recognises the importance of food security for a country such as India. Consequently, fertiliser security is essential for food security.

What is the industry's scope?

Forty years ago India produced 50 million tonnes of foodgrains, and today it produces 200 million tonnes. Productivity has been rising. China has nearly the same extent proportion of arable land as India, but its production is double India's. Fertiliser consumption in China is 330 kg per hectare compared to 88 kg per hectare in India. So there is a lot of scope for fertilisers.

To improve food productivity, inputs such as nutrients need to be replenished. What agriculture needs today is vertical, rather than horizontal, growth. Horizontal growth means that with increasing population, the availability of more arable land will be difficult.

India should strive to increase the existing productivity of 1,800 kg per hectare to the world average of 4,000 kg per hectare. In the Godavari belt (in AP), for instance, the yield is 6,000 kg per hectare, but the overall average is very low. So, vertical growth would ensure that productivity per hectare grows enough to create an exportable surplus. In the past it has been noted that when agriculture does well so does industry leading to an economic boom.

What about the product-mix and cost structure?

The more flexible we are, the better, since production can be converted to suit the Government's policies. Sometimes X product is favoured, or sometimes Y. For instance, we have a basket of products and we try to combine it so as to suit the farmer's requirement. The flexibility works to the company's advantage.

What about the impact of the rupee's depreciation?

The rupee's depreciation has never been favourable. But, according to the Government's so-called subsidy formula, it is supposed to compensate us for any depreciation. If the rupee depreciates, import cost rises, leading to higher production cost. Hence, we are supposed to be compensated for the rupee's depreciation.

What about consumption trends?

Over the last 3-4 years, on average consumption has increased 6-7 per cent, and that trend is likely to continue for the next 2-3 years. Thereafter, the average could come down to 4-5 per cent. Currently, there is a skew in nutrient application. The farmer applies more urea because it is cheaper than phosphatic and potash. Scientists say that almost 30 per cent of the nitrogen applied to the soil is wasted. Hence, the consumption of phosphatic should also accelerate.

What about cost efficiency?

Last year phosphoric acid prices fell by $50-60 per tonne. Since we manufacture from the basics -- that is, rock phosphate and sulphur -- we are more cost-efficient compared to producers using phosphoric acid. We have the inherent advantage of efficiency and cost of production. We try to use innovative methods to save energy and the general energy consumption is much lower than the country's average. Hence, because of our efficiencies we end up with a lower production cost compared to the units that use phosphoric acid.

What about the Government's fertiliser policies?

Mr. Suresh Prabhu recently said that in the next five years the subsidies would be reduced slowly, and after five years the MRP would be freed, and in the next seven years subsidies would be totally removed. This should have been done much earlier.

What is the possibility of your company merging with EID Parry?

At present there is a lot of synergy in our operations. But our statutory boards and finances are separate. There are chances of a merger. When, is not clear. EID Parry is a conglomerate that has diverse interests. Hence, a number of issues have to be sorted out before considering a merger.

What does the future hold for Coromandel Fertilisers?

We have a bright future in the long-term. In the short-term we have spent on capital expenditure, and we are unlikely to get the full benefit of the higher volumes until next year. Our brands are established. We have added a lot of value in the last five years -- plant modernisation, improved efficiencies and expanded portfolio. We have not only been selling fertilisers but also the by-products generated in the manufacturing process. We have also started trading in raw materials, which is why our `other income' is now sizeable.