1.

0 Strategy Analysis
1.1 Industry Analysis

1.1.1 Overview:
India is primarily an agriculture based economy. The agricultural sector and its other
associated spheres provide employment to a large section of the country's population
and contribute about 25% to the GDP. The Indian Fertilizer Industry is one of the allied
sectors of the agricultural sphere. India has emerged as the third largest producer of
nitrogenous fertilizers. The adoption of back to back Five Year plans has paved the way
for self sufficiency in the production of food grains. In fact production has gone up to an
extent that there is scope for the export of food grains. This surplus has been facilitated
by the use of chemical fertilizers.

Indian Fertilizer industry is one of the vital industries for the Indian economy, since it
manufacturers a very critical raw material for agriculture. The fertilizer industry
especially the ammonia urea plants are energy demanding in their operation.

1.1.2 Growth Trends:

Chemical fertilizers have played a significant role in the development of the agricultural
sector. The installed capacity as on 31.03.2009 has reached a level of 120.61 lakh MT of
nitrogen (inclusive of an installed capacity of 207.52 lakh MT of urea after reassessment
of capacity of which the non functional capacity is estimated of 10.52 lakh MT) and
56.59 lakh MT of phosphatic nutrient, making India the 3rd largest fertilizer producer in
the world. The rapid build-up of fertilizer production capacity in the country has been
achieved as a result of a favourable policy environment facilitating large investments in
the public, co-operative and private sectors. The per hectare consumption of fertilizers
in nutrients terms increased from 105.5 kg in 2005-06 to 128.6 kg in 2008-09.

1.1.3 Performance:
The domestic production of urea in the year 2008-09 was 199.22 lakh tonnes as
compared to 187.27 lakh tonnes in 2002-03 whereas that of DAP declined in 2008-09 to
29.33 lakh tonnes after reaching a peak of 52.36 lakh tonnes in 2002-03, mainly because
of shift from DAP production to complex fertilizer production.
1.1.4 Porters Five Force Model:
Substitutes: The risk from substitution through organic fertilizers is considered high in
the fertilizer industry. Commonly used organic fertilizers include animal manure,
household wastes, plant materials and compost made from one or more of these
sources.

Competition: The fertilizer market is generally fragmented, with limited product

differentiation. Strong regional presence and closeness to customers in the different
markets are key success factors, requiring an extensive distribution and sales network.

New Market Entrants: Entry barriers are considered moderate to low. The production
technology for commodity nitrogen fertilizers is readily available, but the production
process is highly capital intensive. Another key element is access to low cost gas.

Bargaining power of the buyers: This is considered moderate. Though the lobby of
farmers is large, but they are also dependent on security of supply. There is also support
from government to have access to fertilizer at a reasonable price and at an appropriate
time.

Bargaining power of the suppliers: This is considered high. Since the main feedstock,
gas, have alternative uses in industries such as power and petrochemicals.

1.1.5 SWOT Analysis:

Strengths

 India being an agricultural country, fertilizer industry holds an important place

in India’s GDP.
 Large domestic market.
 Third largest producer of nitrogenous fertilizers.
 Active participation of private entities along with public and cooperatives.
 Joint ventures with foreign entities to ensure adequate and cheap raw material
availability and better efficiencies.
Weaknesses

 Highly government control.

 Excessive dependence on imports to fill demand-supply gap.
 Absence of potash deposits.
Opportunities

 Favourable policy environment facilitating large investments in the public, co-

operative and private sectors
 Using alternative sources like liquefied natural gas, coal gasification, etc., help
overcome the constraints in the domestic availability of cheap and clean
feedstock, particularly for the production of urea.
Threats

 The spurt in international prices impacts the prices of imported finished

fertilizers as well as raw material in India.
 Industry relies heavily on imports for its requirement of raw material. Hence any
devaluation of the rupee could inflate its import bill.

1.2 Competitive Strategy Analysis:

National fertilizer ltd has cost leadership in the industry as they have a market share of
16.5%, which makes it the second largest producer of nitrogenous fertilizers in the
country.

In response to the stiff competition within the fertilizer industry and other market
forces, National fertilizer ltd. has steadily strengthened its results by cutting costs and
improving productivity, principally through the Company’s overall Urea production
capacity is 32.307 lakh MT/per annum. In the year 2007-08, Company produced 32.68
lakh MT/Year of Urea with a capacity utilization of 101.1%.

1.3 Corporate Strategy Analysis:

NFL is a leading producer of Urea- a nitrogenous fertilizer, which is the most essential
ingredient of growth of country’s agricultural production. ‘Kisan Urea’ is the most
trusted brand of urea among farming community.
The company also produces and markets industrial products; such as Nitric acid,
Ammonium Nitrate, Sulphur, Sodium Nitrite, Sodium Nitrate, Methanol, Liquid Nitrogen,
Liquid Oxygen, Argon Gas, etc.

The Company has established single window shops at some places where all agro-
inputs & farm related services are made available. NFL provides pre-sales services like
seasonal dealers orientation programmes, seasonal farmers training at research
stations, soil testing and frontline demonstrations at farmer’s fields. The Company
ensures that product is positioned at right time close to the point of consumption.

2.0 Accounting Analysis

2.1 Key Accounting Policies

Depreciation: Depreciation on fixed assets is provided at the rates specified under

Schedule XIV of the Companies Act, 1956 on straight line method retaining residual
value of five percent in respect of plant and machinery and computer systems and rupee
one in respect of capital spares and other fixed assets.
Leasehold land and buildings are amortized over the lease period. Buildings constructed
over leasehold land are depreciated at the rates specified under Schedule XIV of the
Companies Act, 1956.
License and process know-how fee having future economic benefits is amortized on
straight line method over a period of ten years or licence period, whichever is less.
Software which is not integral part of related hardware is treated as intangible asset
and amortized over a period of five years (on straight line basis) or its licence period,
whichever is less.

Inventories: Raw Materials, packing materials and stores & spares, are valued at lower
of weighted average cost and net realizable value.
In case of stores and spares not moved for more than two years and up to five years,
provision is made at five percent per annum (on straight line basis) and charged to
revenue. In case of stores and spares not moved for more than five years/identified as
surplus or obsolete, value is taken as certified by an Engineering Valuer and diminution,
if any is charged to revenue.
Finished and semi-finished goods are valued at lower of weighted average cost and net
realizable value based on the applicable Retention Price/Sale Price. The plant- wise
finished stocks lying at warehouses are determined on first-in-first-out basis.

Adjustments pertaining to earlier years and prepaid expenses: Income/Expenditure

relating to prior period up to Rs.50, 000 in each case is considered as
income/expenditure of current year. Prepaid expenditure up to Rs. 10,000 in each case
is charged to revenue in the year in which it is incurred.

Revenue Recognition: Sales include excise duty wherever applicable and are net of
rebates. Subsidy under Fertilizer Pricing Policy is recognized based on quantity sold.
Equated freight subsidy is recognized on quantity despatched from the plants.
Subsidy is estimated taking into account the guidelines, policies, instructions and
clarifications given by the Government, pending notification from Fertilizer Industry
Coordination Committee (FICC).
Sale of scrap/ waste materials is recognized on disposal.

2.2 Disclosures

o No transaction of a material nature has been entered into by the Company with
the Directors, senior management personnel and their relatives that may have a
potential conflict with the interest of the Company except as disclosed under the
related party transactions as per AS-18 "Related Party Disclosures", which are
set out in the Annual Report.

o The Company has complied with the requirements of regulatory authorities on

matters related to capital markets and no penalties/strictures have been
imposed against the Company during the last three years.

o The Company has complied with all the mandatory requirements and adopted
part of the non-mandatory requirements.
3.0 Recasting of financial statements
3.1 Standardized Income Statement of NFL and CHAMBAL

Standard Income National fertilizer ltd Chambal

Statement Accounts

Sales Sales - excise duty Revenue

Subsidy
Cost of sales Change in stock Material consumed
Purchase of traded products Manufacturing Expenses
Material consumed Personnel expenses
Direct labour cost
Power and fuel

SG&A Freight and handling Selling expenses

depreciation Administrative expenses
Depreciation
Other Operating Expenses Repairs and maintenance Repairs and maintenance
Nonrecurring items

Net interest expenses Interest earned Financial expenses

Interest income Interest and finance charges
Interest expenses

Investment income Proposed Dividend Equity dividend

Other income Other income Other income

Other expenses Other expenses Other expenses

Minority interest

Tax expenses Provision for taxation Tax charges 

3.2 Standardized Balance Sheet of NFL and CHAMBAL

Standard Standard
balance Assets(NF Assets(Chamba balance Liabilities Liabilities(C
sheet L) l) sheet (NFL) hambal)
accounts accounts

Cash and Cash and Cash and Bank Short -term ------ -------
marketabl Bank balance debt
e balance
securities

Accounts Sundry Accounts Accounts Sundry Sundry

Receivabl Debtors receivable payable Creditors Creditors
e

Inventories Inventory Other Customer Other

Inventory Current advances, current
liabilities Accrued liability
interest,
Unpaid
Dividend
Other Accrued Loans and Long term Secured Secured
Current interest Advances debt loans, loans,
Assets Loans and Unsecured Unsecured
advances loans loans
Long term Net block; Net block Deferred
tangible Capital taxes –long
assets Work –in- term
Progress liability

Long term ------- ------ Other long ------- --------

intangible term
assets liabilities

Deferred Minority
taxes-LT interest
Asset
Other Investment Investments Preferred
long term s stock
assets
Common Capital Equity share
shareholde capital;
rs’ Reserves reserve and
Equity and surplus
 Surplus

4.0 Financial Analysis

4.1 DUPONT Analysis:

ROE =Net income/Shareholder’s Equity

= Net income/Sales * Sales /Assets * Assets/Equity

= Net Profit * Assets Turnover ratio * Financial Leverage

4.1.1 Net Profit Ratio

Net Profit Ratio shows the relationship between Net Profit of the concern and Its Net
Sales. Net Profit Ratio can be calculated in the following manner: -

Net Profit Ratio = Net Profit/Net Sales x 100

Where Net Profit = Gross Profit – Selling and Distribution Expenses – Office and
Administration Expenses – Financial Expenses – Non Operating Expenses + Non
Operating Incomes.

Year Net Profit ratio(NFL) Net Profit

ratio(CHAMBAL)
2006-07 6.74% 5.02
2007-08 3.66% 7.41
2008-09 1.89% 4.89
Source: annual report 2008-09, 2007-08, 2006-07

NFL’s net profit has a fluctuating trend from 2006-07 to 2008-09.

 Indirect expenses have increased.

Comparative analysis:
Net profit margin is the ratio of net income (net profit) to sales. It indicates that how
much of each value of sales is left over after all expenses. Among the competitors,
CHAMBAL enjoys a strong position which indicates that the company is able to manage
its Selling and Distribution Expenses, Office and Administration Expenses Financial
Expenses and Non Operating Expenses.
4.1.2 Assets turnover ratio:

This ratio measures how efficiently assets are employed, overall. This ratio measures
the utilization of the assets which resulted in the sales.
Year Assets Turnover Assets Turnover
Ratio(NFL) Ratio(CHAMBAL)
2006-07 2.81 0.85
2007-08 2.28 0.84
2008-09 2.43 1.17
Source: annual report 2008-09, 2007-08, 2006-07

Comparative analysis:

This ratio measures how efficiently assets are employed, overall. This ratio measures
the utilization of the assets which resulted in the sales. Among the competitors, National
fertilizer ltd. is showing efficient utilization of its assets.

4.2 Short and long term Solvency Ratio

4.2.1 Quick Ratio

Also called as acid test ratio, establishes a relationship between quick or liquid assets
and current liabilities. Quick ratio =current assets-inventory\ current liabilities

Year Quick ratio(NFL) Quick ratio(CHAMBAL)

2006-07 1.90 1.24
2007-08 1.29 1.13
2008-09 1.32 0.80
Source: annual report 2008-09, 2007-08, 2006-07

NFL'S quick ratio has a declining trend from 2007 due to following reasons:

 Quick ratio has in 2007-08 due to increase in the semi finished/finished inventory
mainly on account of maintenance of buffer stock as per guidelines of
Government of India.
  Quick ratio slightly increases in 2008-09 due to decrease in inventory of raw
materials and stores and spares at year end.

Comparative analysis:
Over the past three years the quick ratio of NFL is greater than CHAMBAL. On the basis
of quick ratio, NFL short term liquidity position is strong as compared to Chambal.

4.2.2 Debt-Equity Ratio

It is the ratio of Debt / Equity Capital of the business enterprise.

Debt here means the total debt (both secured and unsecured) and Equity Capital means
to include Equity Share Capital, Preference Share Capital and Reserves and Surplus. This
ratio shows the balance of debt and equity in the business enterprise. Higher is the ratio
more is likely to have finance cost and less of profits.

Year Debt / Equity(NFL) Debt / Equity(CHAMBAL)

2006-07 0.24 1.99

2007-08 0.37 1.66

2008-09 0.18 2.01

Source: annual report 2008-09, 2007-08, 2006-07

 In 2008, the ratio has increased due to more utilization of loans rather than
its shareholders fund.
 In 2009, NFL has taken fewer loans so its debt equity ratio has declined.

Comparative analysis:
It is the ratio of Debt / Equity Capital of the business enterprise. Generally lower the
debt-equity ratio the higher the protection enjoyed by the creditors. The debt-equity
ratio of Chambal is 2.01 which is near to ideal ratio of 2:1 which indicates that the
company is efficiently using cheaper source of finance.

4.2.3 Interest coverage Ratio

It is the ratio of Income before interest and taxes/ Interest expenses. This ratio shows
the ratio or number of times the interest obligation is covered by the regular income of
the business enterprise. Higher is the ratio more secured is the loan given to the
business enterprise

Year Interest coverage ratio(NFL) Interest coverage

ratio(CHAMBAL)
2006-07 18.43 3.26
2007-08 11.01 3.38
2008-09 4.52 4.71
Source: annual report 2008-09, 2007-08, 2006-07

 NFL’s interest coverage ratio has fluctuating trend from 2006-07 to 2008-09.
 Higher ratio indicates that the firm can easily meet its interest burden which
is in 2006-07 but it declined thereafter.

Comparative analysis:
This ratio shows the ratio or number of times the interest obligation is covered by the
regular income of the business enterprise. Among the competitor NFL covers its interest
obligations maximum times therefore the loan given to the company is secured but
since its debt is also in small amount therefore Chambal whose debt equity ratio is near
to the standard ratio , is in better position.

4.3 Working Capital Management Ratio

4.3.1 Inventory Turnover Ratio

Inventory turnover indicates the efficiency of the firm in producing and selling its
product. It indicates the speed with which the stock is turned into sales during the year.
The measure can be computed for any type of inventory materials and supplies used in
manufacturing or service delivery, work in progress (WIP), finished products, or all
inventory combined.

Inventory Turnover = Cost of goods sold / Average Value of Inventory.

Generally, a higher inventory turnover ratio is considered a positive indicator of

operating efficiency, since inventory that remains in place produces no revenue and
increases the cost associated with maintaining those inventories.
 Year Inventory turnover Inventory turnover
ratio(times)(NFL) ratio(CHAMBAL)
2006-07 8.78 7.40
2007-08 10.96 11.44
2008-09 12.45 18.27
Source: annual report 2008-09, 2007-08, 2006-07

The ratio has increased in 2009, which shows a good sign of inventory management.
The higher ratio indicates efficient management of inventory because more frequently
the stocks are sold, the lesser amount of money is required to finance the inventory.

Comparative analysis:
Inventory turnover indicates the efficiency of the firm in producing and selling its
product. Generally, a higher inventory turnover ratio is considered a positive indicator
of operating efficiency. Among the competitors, CHAMBAL is showing efficient
management of inventories.

4.3.2 Debtors Turnover Ratio

Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of
debt collection of a firm. In simple words it indicates the number of times average
debtors (receivable) are turned over during a year.

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

The higher the value of debtors turnover the more efficient is the management of
debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies
inefficient management of debtors or less liquid debtors.

Year Debtors turnover Debtors turnover

ratio(times)(NFL) ratio(times)(CHAMBAL)
2006-07 3.90 6.15
2007-08 4.07 7.92
2008-09 6.01 11.18

 In 2007, it decreased due to increase in debtors i.e. increase in the recoverable

from FICC.
  In 2008, it decreased due to receipt of bonds in lieu of cash subsidy from FICC.

 In 2009, there is an increase in credit sales which has resulted in the increase in
debtors.

Comparative analysis:

Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of
debt collection of a firm. The higher the value of debtors turnover the more efficient is
the management of debtors or more liquid the debtors are. Among the competitors,
Chambal is showing greater efficiency of credit management.

4.4.3Working Capital Turnover Ratio

Working capital turnover ratio indicates the velocity of the utilization of net working
capital.

This ratio represents the number of times the working capital is turned over in the
course of year and is calculated as follows

Working Capital Turnover Ratio = Sales / Net Working Capital

The working capital turnover ratio measures the efficiency with which the working
capital is being used by a firm. A high ratio indicates efficient utilization of working
capital and a low ratio indicates otherwise. But a very high working capital turnover
ratio may also mean lack of sufficient working capital, which is not a good situation.

Year Working capital turnover ratio(times)

2006-07 3.86
2007-08 6.60
2008-09 8.02
Source: annual report 2008-09, 2007-08, 2006-07

 It is seen from the above that working capital turnover ratio of company is
minimum i.e. 3.86 in 2007 and maximum 8.02 in 2009
 In 2007 sales is approximately four times the working capital. Ideal ratio of
National Fertilizer Limited is 4. So, financial position of company is satisfactory.
4.0 Forecasting
4.1 Forecasted Income Statement

Assumptions
1. Sales increase every year but at a diminishing rate of 25%. Sales in 2008-09
increases by 25% .Here we assume that company maintain its average so
projected sales in Mar’10 should increase by 27% and sales in Mar’11
increase by 25%.
2. Expenses are almost 95% of net sales.
3. Non operating expenses and non operating income to be the same amount as
in the year 2008-09.

Fiscal year 2007-08(A) 2008-09(A) 2009-10(F) 2010-11(F)

Income
Statement
Sales 4241 5127 6511 8139
-

Expenses 4053 5011 6185 7732

= Net operating 188 116 326 407

profit
-
Non operating
expenses 64 100 100 100
Tax Charges
+
Non operating 65 89 89 89
income
Net income 207 105 315 396
4.2 Forecasted Balance Sheet
Assumptions
1. Net long term Assets to sales ratio in 2007 was 30%, in the year 2008 it came
out to be 25% .For next 2 years we assume it to be 24%
2. We are assuming Working capital to sales ratio to be same as it was in the
year 2008-09, i.e.12.46%
3. In 2007 Net Debt to capital ratio was 30% and in 2008 by 20%. In our
forecasts we assume Net Debt to capital ratio to remain at 20% and adjust
equity accordingly.

Fiscal year 2007-08(A) 2008-09(A) 2009-10(F) 2010-11(F)

Beg. Net 627 639 811 1014

Working capital
+

Beg.Net Long 1454 1212 1539 1923

Term Assets

=Net Operating 2081 1851 2350 2937

Assets

Net Debt 675 381 484 587

+ Shareholder’s 1407 1470 1866 2350

Equity

=Net Capital 2081 1852 2350 2937