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 ofMASTER OF BUSINESS ADMINISTRATION

Submitted by

J.RAVI PRAKASH MBARegd.No[06611E0013](2006-2008)

Under The Guidance OfM.RAMESH MBAAssistant Professor

Department Of Business Administration

PRRM ENGG COLLEGESHABAD-509217R.R.DIST,AP.

Affiliated toJAWAHARLAL NEHRU TECHNOLOGICAL UNIVERSITYHYDERABAD-72.

A PROJECT REPORT 

ON

A Study ofWorking Capital ManagementAtNagarjuna Fertilizers & Chemicals Ltd.

ByJ.RAVI PRAKASH06611E00132006-2008A report submitted in partial fulfillment of the requirements of MBA program ofPRRM ENGINEERING COOLEGESHABAD 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 ABSTRACTMEANINGPURPOSE OF THE STUDYOBJECTIVES OF THE STUDYLIMITATIONS OF THE STUDYSOURCES AND METHODS USED

02 INDUSTRY OVERVIEW 12-18MAJOR INDIAN PLAYERSDEMAND SUPPLY SCENARIO03 COMPANY OVERVIEW 19-31HISTORY AND BACKGROUNDPLANT LAYOUTFUNCTIONS AT NFCL

04 THEORITICAL FRAME WORK 32-54

05 INDUSTRIAL ANALYSIS 55-73

06 SUMMARY & SUGGESTION 74-79

CONCLUSIONSSUGGESTIONSREFERENCES

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 TPAUrea – 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 MTPAIn 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 TPAUrea – 1.\416 million TPA

Aonla -this unit is located at IFFCO Township , Bareilly(Uttar Pradesh), it unit was commissioned in 1988 Production capacity isAmmonia – 1.003 million TPAUrea – 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 IndiaIn 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-SUPPLYOver 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 IndustryVISION 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

BACKGROUNDABOUT 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 solutionsNFCL 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 ServicesThe most important aspects of the organization are:Strategy – Having a long term vision for the companyStructure – To facilitate achieve our strategyPeople – 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/dayammonia: 900mt/day ammonia:900mt/day

Manufacturing FacilityUrea 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.MaintenanceBest 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 1995In 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 NFCLSales 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.BillsThe 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 storage2. Business development bills3. General billsThe 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.InvoicingAs 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.PayrollThe 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 LIABILITIESIn 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 EQUITYTake on Creditors Take on Partners Low Expected Return High Expected Return Smaller Funding Amounts Larger Funding Amount Periodic Payments No Short-Term PaymentsMaturity Date Open-Ended " Exit" Date More Restrictions Less Restrictions

Partners/creditorsWhoever 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 returnsEquity 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 amountEquity 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. 

PaymentsEquity 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. 

MaturityEquity 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. 

RestrictionsBoth 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 DEBTDebt 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 EQUITYUnlike 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 businessThe 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 operationsFirms, 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 policyA 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 conditionsThe 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 supplyThe 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 cycleCollect receivables (debtors) slower Your receivables soak up cashGet better credit (in terms of duration or amount) from suppliers You increase your cash resourcesShift inventory (stocks) faster You free up cashMove 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 2006Gross Working capital cycle In Crore 218 128 98Average Collection Period In Days 121 82 66Average Payment Period In Days 22 20 29Net 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 CapitalSources 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 ManagementManaging 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 SurplusManaging 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 DebtPaying 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 SurplusWhen 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 REGULATIONSThe 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 SectorNFL IFFCO GSFCFCI KRIBHCO CFLHFC SPICFACT MCFRCF GNFCMFL TACSAIL HLLNLC NFCLPPL IGFCCPPCL CFCLHCL,etc. TCLGSFCSSP 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 2006-07Nitrogen Name of Company/Plant Annual Installed Production (`000' MT) Percentage capacity utilizationCapacity 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 97.5GSFC:Sikka-I 105.8 117.9 81.0 51.5 58.3 111.4 76.6 48.7 55.1GSFC:Sikka-II 71.3 0.0 9.5 50.3 58.0 0.0 13.3 70.5 81.3TOTAL(GSFC-Sikka): 177.1 117.9 90.5 101.8 116.3 66.6 51.1 57.5 65.7CFL:Vizag 124.0 111.9 133.8 164.9 209.8 90.2 107.9 133.0 169.2SFC:Kota 174.3 181.1 167.4 174.3 174.2 103.9 96.0 100.0 99.9DIL:Kanpur 332.1 0.0 0.0 0.0 17.1 0.0 0.0 0.0 5.1ZIL:Goa 288.7 264.2 278.1 307.6 301.1 91.5 96.3 106.5 104.3SPIC:Tuticorin 370.7 324.3 344.3 385.7 357.9 87.5 92.9 104.0 96.5MCF:Mangalore 207.2 199.0 170.9 192.5 219.5 96.0 82.5 92.9 105.9CFL:Ennore 41.2 30.8 34.0 44.9 43.0 74.8 82.5 109.0 104.4GNFC:Bharuch 356.7 357.9 336.5 371.9 379.7 100.3 94.3 104.3 106.4TAC:Tuticorin 16.0 19.7 20.5 18.8 20.0 123.1 128.1 117.5 125.0TCL:Haldia 121.5 111.7 91.1 78.1 99.0 91.9 75.0 64.3 81.5PNF:Nangal 16.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0GFCL:Kakinada 120.6 134.7 142.8 144.9 164.9 111.7 118.4 120.1 136.7IGCL:Jagdishpur 397.7 397.7 396.6 453.2 457.6 100.0 99.7 114.0 115.1Hindalco Inds.Ltd.:Dahej 72.0 54.2 40.9 51.5 38.0 75.3 56.8 71.5 52.8DFPCL:Taloja 52.9 38.7 34.6 20.6 12.5 73.2 65.4 38.9 23.6NFCL:Kakinada-I 274.8 258.4 275.3 302.2 323.7 94.0 100.2 110.0 117.8NFCL:Kakinada-II 274.8 287.7 273.9 338.2 310.8 104.7 99.7 123.1 113.1TOTAL(NFCL): 549.6 546.1 549.2 640.4 634.5 99.4 99.9 116.5 115.4CFCL:Gadepan-I 397.7 397.9 417.6 442.2 446.2 100.1 105.0 111.2 112.2CFCL:Gadepan-II 397.7 397.8 393.1 411.4 428.4 100.0 98.8 103.4 107.7TOTAL(CFCL): 795.4 795.7 810.7 853.6 874.6 100.0 101.9 107.3 110.0TCL:Babrala 397.7 397.8 397.7 445.4 441.6 100.0 100.0 112.0 111.0KSFL:Shahjahanpur 397.7 374.7 394.5 396.1 412.8 94.2 99.2 99.6 103.8IFFCO:Paradeep 325.2 132.2 65.1 114.6 48.0 40.7 20.0 35.2 14.8PPL:Paradeep 129.6 134.5 164.9 184.3 221.0 103.8 127.2 142.2 170.5By Product 7.1 3.6 3.7 0.6 3.5 50.7 52.1 8.5 49.3Total (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 (fromthat 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 programmesfor farmers, agri input sellers, o Zinc 21%, Zinc 33%, Monohydrate, Zinc 12% EDTA chilated o Micronutrient formulationsOn-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 duringcrop 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 340002. Farmers trainings (No. of farmers) 14135 16632 1838On-campus (No. of farmers) 550 656 86Off-campus (No. of farmers) 13585 15976 175203. Demonstrations (No. of plots) 356 530 8404. Growers meetings/crop seminars 1785 1872 24165. Exhibitions / sandy counters (No. of events) 250 275 3056. Scientist visit (No. of farmers) 3256 4526 52157. Dealers/sub-dealers meetings (No. of dealers) 2100 3170 38508. Soil samples (No. of samples) 776 1071 75009. Hired jeeps (No. of villages) 450 525 165010. A V van - shown films (No. of film shows) 825 1071 128611. Tech assts / field assts (No. of man months) 475 640 56012. IFCP (No. of farmers) 25620 48228 4850013. Dealers training programmes - FCO related 125 175 21514. 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 OutletsKrishak 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 PlanningProduct planning, Inventory planning, Branding, Promotion/Communication

b) Business ApplicationEnterprise 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 ApplicationsEfficiency and productivity of the field personnel.Usage of PCs, PDAs, spread sheets, web, e-mails, VOIP, Video Conferencing

d) Development serviceExtension services – By use of modern multimediaInformation 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-UpAt 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 GrowthThe 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.