NAGARJUNA FERTILIZERS & CHEMICALS LIMITED

Long-term Bank Facilities CARE BBB-

Short-term Bank Facilities PR3
Redeemable Preference shares CARE BBB-

Rating the capacity and completion of the CO2 recovery plant

enables the company use as feedstock, the additional
CARE has revised the rating assigned to the long term gas that is being made available as against the less
bank facilities of Nagarjuna Fertilizers & Chemicals Ltd efficient naphtha. The ratings also factor in the
(NFCL) from ‘CARE BB’ [Double B] to ‘CARE BBB-’ company’s long track record in the urea business and
[Triple B Minus]. This rating is applicable for facilities satisfactory operational performance in the last few
having tenure of more than one year. Facilities with years.
‘Triple B’ ratings are considered to offer moderate safety
for timely servicing of debt obligations. Such facilities The ratings are however constrained by the company’s
carry moderate credit risk. large investments in long gestation projects which have
been much delayed. NFCL’s investment in these projects
Further, CARE has revised the rating assigned to the
still accounts for a substantial portion of its tangible
Short term bank facilities of NFCL from ‘PR4’ [PR Four]
networth. The ratings also factor in the regulatory
to ‘PR3’ [PR Three]. This rating is applicable for facilities
environment surrounding the fertilizer sector.
having tenure of upto one year. Facilities with ‘PR Three’
ratings would have moderate capacity for timely payment
Continuation of the satisfactory operation performance,
of short-term debt obligations at the time of rating and
timely receipt of subsidy from the Government alongwith
carry higher credit risk as compared to facilities rated
NFCL’s ability to exit from Jaiprakash Engineering and
higher.
Steel Company Ltd and timely implementation of the
CARE has also revised the rating assigned to the refinery project without any additional exposure would
outstanding Redeemable Preference Shares issue of be key rating sensitivities.
NFCL from ‘CARE BB-’ [Double B Minus] to ‘CARE BBB-
Background
’ [Triple B Minus]. Instruments with ‘Triple B’ ratings are
considered to offer moderate safety for timely servicing
NFCL was promoted by late Shri. K.V.K. Raju and is the
of debt obligations. Such instruments carry moderate
flagship company of the Hyderabad-based Nagarjuna
credit risk. The preference shares are redeemable after
group. NFCL operates two urea plants (1500 T/day
the entire debt liabilities are repaid.
each) at Kakinada, Andhra Pradesh. It also trades in
The above ratings are applicable for an aggregate Pool Urea, other fertilisers and agri-inputs. The main
amount of Rs.1136 cr. markets served are Andhra Pradesh, Orissa and West
Bengal. NFCL was sanctioned a restructuring package
CARE assigns ‘+’ or ‘-’ signs to be shown after the under Corporate Debt Restructuring (CDR) scheme on
assigned rating (wherever necessary) to indicate the Feb.02, 2004 effective from April 1, 2003.
relative position within the band covered by the rating
symbol. Operations

The rating revision factors in the successful completion NFCL’s Plant-I operates entirely on natural gas as
of the de-bottlenecking projects, Carbon Di-oxide (CO 2 feedstock and Plant –II uses both natural gas and
) recovery plant and commencement of gas supplies naphtha, in view of the limited gas availability. The plants
from the KG basin by Reliance Industries Limited(RIL). registered over 100% capacity utilizations for the last
The completion of the de-bottlenecking project enhances five financial years, upto FY09.

CREDIT ANALYSIS & RESEARCH LIMITED 1

FY 2005 2006 2007 2008 2009 commissioned the Carbon di-oxide recovery plant in
Re-assessed Capacity (Lakh MTPA) March, 2009. (completed about 2 months ahead of
Unit-I 5.97 5.97 5.97 5.97 5.97 schedule). The commissioning of these plants has
Unit-II 5.97 5.97 5.97 5.97 5.97 resulted in enhancement of the capacity of the plant from
Total 11.95 11.95 11.95 11.95 11.95 13.5 lakh MT to 15.65 lakh MT per annum. The
completion of these projects helps NFCL utilize the gas
Production (Lakh MT)
being supplied by RIL from the KG basin. Additional
Unit-I 6.57 7.04 7.27 7.57 7.69
production as a result of the de-bottlenecking projects
Unit-II 7.35 6.76 5.97 5.97 6.09
undertaken will also be eligible for subsidy under the
Total 13.93 13.79 13.24 13.55 13.78
new investments policy of the government where
Cap. Utilisation (%)
subsidy is linked to the import parity price.
Unit-I 110 118 122 127 129
Unit-II 123 113 100 100 102 HR Coil Project: - Jaiprakash Engineering and Steel
Total 117 115 111 113 115 Company Ltd. (JESCO).

NFCL had invested Rs.62 cr in JESCO as on March 31,

Plant-I is more energy efficient than Plant-II and the
2002. This project was shelved and the CDR scheme
capacity utilization of Plant-I is also higher. Both the
had envisaged that NFCL would bring back an amount
plants meet the pre-set energy consumption norms as
of Rs.25 cr by FY06 and reduce its exposure to this
per the subsidy calculation methodology prescribed by
extent. Against this, NFCL had brought back only
the Government.
Rs.9.72 cr by December 31, 2007. The company had
NFCL receives natural gas from Gas Authority of India earlier expected to bring the balance amount of Rs.15.28
Ltd. (GAIL), which in turn sources gas from ONGC (KG cr by the end of March, 2008 and during FY08, the
basin) and RAVVA Satellite field. Supply of Natural Gas company entered into an agreement for sale of the equity
from GAIL has been below the agreed quantities of 2.14 shares in JESCO for a total consideration of Rs.22.56
million metric standard cubic meter per day (MMSCMD) cr. Against the said consideration, the investor had
and NFCL was using Naphtha in its Plant-II. To meet the deposited Rs.2 cr by end of March’08 and the balance
shortfall in gas supply, NFCL has entered into an was to be received by November, 2008. This however
agreement with RIL for a contracted quantity of 1.549 did not materialise and hence the agreement was
MMSCMD for a period of 5 years. Supply of natural gas terminated and the deposit forfeited. As on March 31,
has commenced from 9th April, 2009. The availability of 2009 the value of NFCL’s investment in JESCO was
gas has helped NFCL reduce its reliance on the costlier Rs.22.56 cr. The company has not provided for any
naphtha as a feedstock for manufacture of urea. While diminution in value of the investments as it expects the
the feedstock cost is largely pass through in the subsidy realization from sale of assets to be in excess of
mechanism the use of gas gives advantages in terms of investments made.
better efficiency and lower working capital requirement.
Refinery project (Nagarjuna Oil Corporation Ltd).
Apart from the manufacture and sale of Urea, the
company also trades in Urea and other specialty NOCL is setting up a 5.944 million metric ton per annum
fertilizers. Gross trading sales increased from Rs.385 oil refinery in Tamil Nadu. The project has witnessed
cr in FY07 to Rs.669 cr in FY08 but dropped to Rs.518 substantial delays in implementation in the past. The
cr in FY09 mainly due to lesser import of Urea by financial closure for the project was achieved in March,
Government of India. 2008. During FY09, the company received Rs.285 cr
as equity from other investors and Rs.609 cr towards
Projects
term loan disbursement from banks (out of a total debt
Mini Revamp/De-bottlenecking and Co2 Recovery plant. of Rs.3193 cr). NFCL’s contribution of Rs.700 cr as
equity (51% holding) has been infused, in full. The other
NFCL has completed the Mini Revamp/De-bottlenecking investors in NOCL are Tata Petrodyne (30%) on behalf
of Ammonia and Urea plants in September, 2009. It also of Tata Sons Ltd, Cuddalore Port Company Pvt Ltd

2 CAREVIEW
(10%), Uhde GmBH (4%) and TIDCO (5%). The project Financial Results
is expected to be come on stream,36 months from the (Rs.cr)
zero date. Y.E. / as on 31 March, 2007 2008 2009
Working Results
NFCL is also planning an additional revamp of its plant
Net Sales( manufactured Urea) 1415 1498 1811
and plans for this are still in the drawing board stage.
Total Income 1463 1460 2120
Financials PBILDT 280 303 329
Interest 138 163 169
Manufactured Urea sales account for largest portion of Depreciation 113 116 120
NFCL’s revenue, increasing by 21% from Rs.1,498 cr PBT 46 40 50
in FY08 to Rs.1,811 cr in FY09. The sharp increase in PAT (after deferred tax) 32 22 33
sales was primarily because of the increase in the Financial position
subsidy payout on account of higher feedstock prices. Total Fixed Assets* 1379 1326 1373
Manufactured Urea sales sans subsidy component Equity Share Capital 428 435 428
increased from Rs.618 cr in FY08 to Rs.648 cr in FY09. Net Worth 891 876 910
This increase in subsidy component was on account of Total Capital Employed 2546 2563 2443
the increased usage of Naphtha (which is priced much Key Ratios(%)
higher than gas), as well as increase in Naphtha and Growth
gas price. Growth in Total optg income (%) 6.74 -0.23 45.20
Growth in PAT [after D.Tax] (%) -52.57 -30.58 47.73
PBILDT has consistently improved in the last three
Profitability
years, from Rs.280 crore in FY07 to Rs.329 cr in FY09.
PBILDT/Total op. Income 19.13 20.75 15.51
Interest cost in FY09 remained at FY08 levels and NFCL
PAT/Total Income (CHK) 2.17 1.51 1.53
reported a higher PAT of Rs.33 cr in FY09 as compared
Solvency
to Rs.22 cr in FY08.
Long Term Debt Equity ratio(times) 1.27 1.26 1.17
NFCL’s exposure to NOCL and JESCO was Rs.763cr Overall Gearing ratio(times) 1.61 1.70 1.49
as on March 31, 2009 which constitutes a significant Interest Coverage(times) 1.19 1.12 1.22
part of the capital employed. Though the company Term Debt/ GCA 9.53 9.30 7.71
expects to realize the balance amount from the sale of Liquidity
equity in JESCO and is confident of the successful Current Ratio(times) 1.14 1.10 1.03
execution of the NOCL project with no additional funding, Quick Ratio(times) 0.98 0.87 0.93
the successful completion of this much delayed project Turnover
remains to be seen. Adjusting for the exposures to these Average Collection Period (days) 63 51 50
subsidiaries would represent substantial erosion to Average Creditors (days) 28 37 45
NFCL’s tangible networth. Average inventory (days)-Manufactured Urea 22 32 16
* Net Fixed Assets+ capital work in progress
NFCL in October, 2007 allotted 2.25 cr warrants to be
converted into equity within 18 months at a price of
Overall gearing has declined in the last few years and
Rs.29 per warrant, to its core promoters. The company
was 1.49x as on March 31, 2009 while interest coverage
had received Rs.6.52 cr being 10% of the value of the
was 1.22x for FY09.
warrants as advance and the balance was to be received
before 25th April, 2009. As the balance amount was not Current ratio was only marginally above unity as on
received, the warrants were annulled and the upfront March 31, 2009. NFCL’s current assets mainly consist
payment stood forfeited. This amount of Rs.6.52 cr was of subsidy / claim receivable from government. Subsidy
represented as part of equity capital as on March 31, receivable as on March 31, 2009 was Rs.307 cr (P.Y-
2008 and this amount has now been added to the capital Rs.256 cr). The under provision of the subsidy in the
reserve. Union Budget and delays in subsidy disbursement or

CREDIT ANALYSIS & RESEARCH LIMITED 3

issue of subsidy in the form of bonds forces fertilizer return, is given as subsidy to the units. Subsidy polices
companies like NFCL to depend on working capital have evolved over the years and presently the ‘Stage –
borrowings to fund these receivables, which adds to the III’ of the New Pricing Scheme (NPS) is in force.
interest expenses and a strained working capital
position. NFCL had fertilizer bonds worth Rs.65 cr as The Government, with a view to encouraging
on March 31, 2009. The company has liquidated these investments in the sector, came up with a new policy in
bonds during H1FY09 and did not have any fertilizer August, 2008 which, inter-alia promises to pay the
bonds outstanding as on Sept 30, 2009. subsidy for the additional urea produced from the
revamp of existing units at 85% of the import parity price
NFCL reported sales of Rs.862 cr for H1FY10 as with a floor and ceiling of USD 250 per MT and USD
compared to Rs.1289 cr for H1FY09. The sales drop in 425 per MT respectively. The industry has seen a few
H1FY10 is mainly on account of the lower subsidy units taking advantage of this new policy and implement
component. Apart from this the company also lost 26 de-bottlenecking schemes. However, issues with regard
days of production in Q2FY10 on account of the to the under provision of subsidy in the budget and delay
commissioning of the revamp project and annual in disbursal of subsidy continues to affect the working
maintenance. PBIDT was Rs.170 cr for H1FY10, of fertilizer companies.
marginally higher than Rs.166 cr reported for H1FY09.
Lower interest costs during H1FY10 aided the company Overall, while the demand for fertilizers is likely to go
in reporting much higher PAT of Rs.31 cr in H1FY10 as up with the increased thrust on agricultural growth in
against Rs.15 cr for H1FY09. the country, the fortunes of the individual units in the
sector will continue to depend largely on the polices of
Industry and Prospects the Government for the sector.

The Indian Fertiliser industry is highly energy and capital NFCL, in line with the Government policy of utilizing gas
intensive, besides being a highly regulated industry. as a feedstock for the fertilizer units has equipped its
Urea is the main nitrogenous fertiliser produced in the plants to use the additional gas that is being made
country with domestic capacity of around 210 lakh tpa. available from RIL’s KG basin. Gas is a relatively
The last few years have not seen any significant capacity cheaper feedstock as compared to Naphtha and the
addition, while the utilization of capacity has remained availability of gas would ensure higher production levels
high. Demand drivers for fertilisers include the cropping going forward. Continuation of the satisfactory operation
pattern, policy environment, prices, monsoons, use of performance, timely receipt of subsidy from the
high yielding variety of seeds, extent of irrigation etc. Government alongwith NFCL’s ability to exit from
While consumption has been increasing in the last few JESCO and timely implementation of the NOCL project
years, absence of new capacity creation due to the with no additional exposure from NFCL would be key
uncertain policy environment and shortage of gas has rating sensitivities.
led to the country relying on expensive imports.
Note: Dr.N.K.Sengupta, is an Independent Director on the Board
With regard to the policy environment, the industry has of Nagarjuna Agrichem Ltd, an associate company of NFCL and
been for long under the control of the Government. In Independent Director on the Board of CARE. He is also one of the
the case of urea, the government fixes the (farm gate) members of the Rating Committee in CARE. Dr.Sengupta did not
participate in the rating process or in the meeting of the Rating
selling price of urea and the excess of the cost of
Committee when the rating of NFCL was discussed.
production over the selling price, allowing for a suitable

December 2009

Disclaimer
CARE’s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank
facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be
accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not
responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank
facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments.

4 CAREVIEW
CARE is headquartered in Mumbai, with Offices all over India. The office addresses and contact numbers are given below:

HEAD OFFICE: MUMBAI

Mr. D.R. Dogra Mr. Rajesh Mokashi
Managing Director Dy. Managing Director
Cell : +91-98204 16002 Cell : +91-98204 16001
E-mail : [email protected] E-mail: [email protected]

Mr. Ankur Sachdeva

Head - Business Development
Cell : +91-9819698985
E-mail: [email protected]

4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway,
Sion (East), Mumbai 400 022 Tel.: (022) 67543456 Fax: (022) 67543457
Website: www.careratings.com

OFFICES

Mr.Mehul Pandya Mr.Sundara Vathanan

Regional Manager Regional Manager
32 TITANIUM Unit No. 8, 1st Floor, Commander’s
Prahaladnagar Corporate Road, Place No. 6, Rajaram Mohan Roy Road
Satellite, (Opp. PF Office), Richmond Circle,
Ahmedabad - 380 015. Bangalore - 560 025.
Tel - 079 4026 5656 Tel - 080 2211 7140/41
Mobile - 98242 56265 Mobile - 98803 60878
E-mail: [email protected] E-mail: [email protected]

Mr.Ashwini Jani Mr. Rahul Patni

Regional Manager Regional Manager
Unit No. O-509/C, Spencer Plaza, 401, Ashoka Scintilla
5th Floor, No. 769, 3-6-520, Himayat Nagar
Anna Salai, Hyderabad - 500 029
Chennai 600 002 Tel - 040 4010 2030
Tel: 044 2849 7812/2849 0811 Mobile - 91600 04563
Mobile - 91766 47599 E-mail: [email protected]
E-mail :[email protected]

Mr. Sukanta Nag Ms. Swati Agrawal

Regional Manager Regional Manager
3rd Floor, Prasad Chambers 710 Surya Kiran,
(Shagun Mall Building) 19 K.G. Road,
10A, Shakespeare Sarani New Delhi - 110 001.
Kolkata - 700 071. Tel - 011 2331 8701/2371 6199
Tel - 033 2283 1800/1803 Mobile - 98117 45677
Mobile - 98311 70075 E-mail :[email protected]
E- mail: [email protected]

CREDIT ANALYSIS & RESEARCH LIMITED 1