The Hindu Business Line : RCF hopes to do better in second-half

THE Rs 2,300-crore Rashtriya Chemicals and Fertilizers Ltd is considered one of the largest fertiliser and chemical companies in Asia with 20 operating plants producing 11 lakh tonnes of product at its Trombay unit and 5 large plants at Thal near Mumbai, apart from owning large tracts of real estate.

Business Line spoke to Mr M. Sundararaman, Director (Finance) of the company, which was in the news last year after the Union Government decided to sell 51 per cent of its 92.5 per cent stake through the disinvestment process. Excerpts from the interview:

RCF has seen a fall in the second quarter net profit this year. What would be the forecast for the second half of this fiscal?

This half-year ended September 2004 has been very good for RCF. After depreciation, interest and tax, we have a net profit of Rs 50.98 crore, against Rs 70.66 crore last year. Although prima facie this appears less, there is a reason. Last year, since we were under Minimum Alternate Tax (MAT) our tax liability was only Rs 4 crore in that half year. So profit was higher. This year we have come out of MAT because carry-forward losses have been completely wiped out. So we cannot take the cover of MAT and we are under regular tax process as per the Income-Tax Act. This year we hope to cross a before tax profit of Rs 150 crore.

How has this year's monsoon been? What is your performance forecast for next half-year?

Last three years there was a drought situation. RCF was affected in a major way because monsoon was not good in our primary markets which account for 75 to 80 per cent of our sales. West Bengal is our niche market for complex fertilisers, apart from a host of other States, including Tamil Nadu, Gujarat, Chhattisgarh and Uttar Pradesh.

We hope our performance continues to improve in the second half of the rabi season. This year we hope to sell 56 lakh tonnes, against 23 lakh tonnes of urea and complex fertilisers sold last year. In addition, we have also begun trading for FACT, as our CMD is also holding the additional charge there. RCF is selling FACT's ammonium sulphate in markets of Bangladesh (4,600 mt) and West Bengal (1,400mt). We are planning more exports of MOP and ammonium produced by FACT.

How has RCF been affected by the Government's new pricing policy for urea?

RCF's Trombay plant is not operational ever since the retention pricing formula came into force. The Government has taken the weighted average price payable to different groups of companies (depending on the vintage of their plants).

The Government compensates companies the difference between this price and the company's average production cost, whichever is less. Suppose the weighted average price of a group is Rs 5,300 per tonne and if some company's cost is less than that, it will receive the lesser price.

In RCF's case, at Trombay it is Rs 6,800 per tonne. But our cost is higher. So we incur a loss of Rs 800 per tonne. The problem is gas, the main feedstock, is not available.

In the case of Thal, our cost is about Rs 200 less than the group's fixed weighted average price. We are requesting the Government to at least compensate the decided price.

What is RCF's per tonne margin on urea?

RCF earns roughly Rs 800 per tonne. Our cost of production is Rs 7,000 per tonne, while freight and marketing costs are Rs 700 and Rs 400. On that we are getting a margin of only Rs 800 per tonne. When monsoons are not good, it is even worse. Farmers' price is fixed at Rs 4,830 per tonne, minus the dealer's margin. Beyond that no one is supposed to bill the farmer.

The company has been complaining about gas shortages. What is the benefit of using gas as feedstock?

Gas bought from ONGC and GAIL today costs RCF around $2.5 per mbtu, while naphtha costs around $9. Even imported LNG is going to be around 2 times more expensive than that. Other feedstocks such as LSHS, furnace oil are 2.5 to 3 times more expensive while naphtha is at Rs 22,000 per tonne. At Thal, although we have a contract for 3.15 mmscmd gas from GAIL, we are receiving only 1.8 mmscmd.

RCF has requested the Government to work out a price to fertiliser industry users. We believe the Government and particularly oil companies could sell fertiliser companies naphtha at an export parity price instead of import parity. These companies are anyway exporting some naphtha that they are unable to sell in India. They have to take into consideration the need of the whole industry.

What are some of the major investments that RCF plans to undertake in the coming year?

We plan to invest Rs 28 crore for setting up a 6,400 tonne methalamine unit, which will take our total production to 11,400 tonnes. The funds will come from internal resources. The plant is expected to go on stream by March next year.

Also, we plan to invest Rs 249 crore on revamping the Trombay plant to reduce energy costs. Energy savings are important for RCF because each 0.1 million kilo calorie energy savings gives us savings of Rs 5 crore if the feedstock is gas or Rs 11 crore if it is naphtha.

This project will have a debt-equity ratio of 2:1. We will borrow roughly Rs 180 crore, the balance will be met from internal accruals. We have also borrowed Rs 50 crore from ICICI to fund our Rs 85 crore nitric acid plant at Trombay.

The company's proposed Rs 1,870-crore expansion of the Thal unit has been put up for clearance from the public sector investment board.

What have been the major cost cutting policies undertaken by the management?

Three years ago, RCF's interest costs were at Rs 71 crore and the working capital limit was fully operated at Rs 650 crore. But by converting loans to lower interest rates, this was brought down to Rs 25 crore last year. This year in the first quarter we have paid only Rs 2 crore. This year we hope to cut interest on working capital loans to between Rs 3 crore and Rs 4 crore. For our long-term loans the average cost of borrowings is around 4 per cent.

More Stories on : Interview | Fertilisers

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page