Looking ahead in changing times An expected hike in natural gas prices by the government will raise costs for gas-based fertilizer companies like Zuari Agro-Chemicals Ltd, assesses Team B&C Two developments will impact Goa’s only fertilizer producing company Zuari Agro-Chemicals Ltd in 2014-15. The first is the proposal to double natural gas price and the second a decision to increase fixed cost compensation for urea according to which there will be an increase in the fixed cost of urea by Rs 350 per ton and a further Rs 150 per ton for plants that are more than 30 years old, for 2014-15. While the first development, viz of natural gas price hike, will increase input cost and jack up cost of production for ZAC. The second will improve profitability and therefore profits for the company. The net impact though of these two contrasting changes on the company’s bottom line will, however, depend on numerous factors such as market demand for fertilizers, international prices of imported raw material like ammonia and phosphoric acid, financial load on the balance sheet through acquisitions, agility in dealing with interest costs, etc. Natural gas prices are going to be hiked any time now are and expected to be raised to US $ 6.775 per mBtu from US $ 4.20 per mBtu now in order to cut down on the import bill. The proposal was supposed to be implemented from April 1, 2014 and is set back for a few months, due to objections raised from user industries of fertilizer and power. But its implementation is inevitable. ZAC recently switched feedstock from naphtha to natural gas. The switch means substantial reduction in the cost of production for urea which constitutes nearly half of the product line. Meanwhile, a look at financial of the company reveals seven per cent decline in 2013-14 net sales to Rs 7,341 crore from Rs 7,889 crore in 20112-13 followed by decrease in PBIDT (profit before interest, depreciation and tax) to Rs 348 crore from Rs 436 crore in 2012-13. The net loss is Rs 44 crore in 2013-14 as against a net profit of Rs 64 crore in the previous year. The all round deterioration in finances is significant since in 2012-13 the company also witnessed substantial drop in net profits in 2012-13. The company had several projects ongoing during the previous financial year such as revamping of its ammonia plant to make it more energy efficient and reduce the energy consumption of the plant. The company manufactures urea, diammonium phosphate and nitrogen-, phosphorus- and potassium-based fertilisers. ZAC is a part of the Advent group which mid-2012 undertook restructuring of all its subsidiaries. The Advent group is in the limelight lately for acquisition bid on a Vijay Mallya owned subsidiary. The group has a 16 per cent stake and wants to acquire 26 per cent more to give it controlling equity holding of Mangalore Chemicals. The demand outlook in 2014-15 is positive for fertilizer industry with a moderate growth in volumes, according to a report prepared by rating agency ICRA. The report also notes that subsidy provisioning for 2014-15 at Rs 68,000 crore (according to interim budget for 2013-14) would be substantially lower than the estimated requirement of about Rs 1.1 lakh crore (including carryover subsidy and increased subsidy for higher gas costs and rise in fixed costs of urea players). As a result, the report says that “subsidy gap will rise from around Rs 37,000 crore at the end of 2013-14 to about Rs 41,000 crore at the end of 2014-15 unless any reform measures are implemented for the industry. With subsidy delays likely to continue to lead to high borrowings and corresponding high interest costs leading to weak profitability and liquidity, the financial performance of the industry is expected to continue to remain subdued in the near to medium term” the report states. For fertilizer companies, about 80 per cent on the cost is on account of raw materials. Other outgo is on account of power, repairs and maintenance, salaries other overheads. Companies also need large capital infusions to tide over the time lag in refund of subsidy. navhindtimes.in/looking-ahead-changing-times/
Posted on: Sun, 06 Jul 2014 18:08:32 +0000
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