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Indo Gulf: Decontrol to power growth

Dec 12, 2003

Indo Gulf Fertilizers (IGF) came into existence on 12th Feb '03 as a resultant company, pursuant to the buyout of Indo Gulf Corporation Ltd's copper division by Hindalco. Consequently, IGF is now purely focused on the urea business. The company has an installed capacity of 1350 MT/day of Ammonia (captively consumed) and 2200 MT/day of Urea. The company sells its Urea output under the brand name 'Shaktiman'. In this article, we shall evaluate the company's business and its prospects going forward. IGF is one of India's largest and most cost efficient private sector fertilizer companies. The company is a leader in the nitrogenous fertilizer sector. Its location (in the heart of Indo-Gangetic plain) gives it access to Uttar Pradesh, Bihar, Jharkhand and West Bengal, which together account for more than 40% of total urea consumption in the country.

IGF enjoys a very strong brand recall. This apart, it has a vast distribution network of over 350 wholesalers and 2,000 retailers. IGF has also set up 31 Shaktiman Krishi Seva Kendras for educating and training farmers regarding measures to increase productivity and profitability. The above measures are likely to help the company sustain its leadership position in the region. However, IGF has not been able to reap optimum benefits from its strong brand name due to the government's policy of not allowing production in a plant in excess of the assessed capacity.

Earlier, the fortunes of urea manufacturer depended not only upon the vagaries of monsoon but also on the retention price fixed by the government. However, with the implementation of the Long Term Fertilizer Policy (LTFP), the retention price mechanism has been replaced by Group Concession Scheme (GCS). According to the LTFP (to be implemented in three phases starting from 1st April '03), the urea plants have been classified into groups depending upon the raw material used and date on which the plant was commissioned.

As the LTFP envisages decontrol of urea sector, it is a positive for IGF in the long term. Moreover, LTFP encourages low cost manufacturers. IGF's plant is the most energy efficient in the country. With energy costs accounting for almost 50% of the cost of production, IGF is one of the lowest cost urea producers and hence an obvious beneficiary of LTFP. However, in the near term, as IGF's retention price is higher than its group average, the company is likely to receive lower subsidy support which might affect its financial performance.

IGF's plant is natural gas based. The fortunes of gas-based plants depend heavily on the supply of natural gas, which is highly irregular. Although the existing supply contracts suffice the gas requirements, IGF has also incorporated facilities to use Naphtha for captive power generation to bridge the supply gap caused by an exceptional situation.

Performance at a glance...
(Rs m) 1HFY03 1HFY04 Change
Net Sales 2,601 2,570 -1.2%
Operating Profit (EBDIT) 614 601 -2.0%
Operating Profit Margin (%) 23.6% 23.4%
Profit after Tax/(Loss) 310 399 28.6%
Net profit margin (%) 11.9% 15.5%  
Diluted Earnings per share* 13.8 17.7  
P/E Ratio   5.5  

During 1HFY04, despite an increase in volumes, implementation of GCS resulted in lower realizations and a marginal drop in topline. However, lower depreciation provisioning and higher treasury income helped the company register a 29% bottomline growth. (For a detailed review of the quarterly performance, click here).

At Rs 97, IGF is trading at a P/E of 5.5x annualised 1HFY04 earnings. The fertilizer industry has been going through a lean period over the past few years on account of poor rains. However, with the country witnessing good monsoon in the current year and the fact that per hectare consumption of nutrients is lower than even other developing countries, the prospects of the company could improve in the future.

On the negative side, the smaller shareholders were not too enthused by the terms of the copper business demerger, which raises questions about the company's shareholder friendliness. Moreover, although in the long term, deregulation of urea prices and marketing initiatives undertaken by IGF augur well for the company, investors need to remember that the performance in the near term continue to depend upon the vagaries of monsoon and the fertilizer policy.

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