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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. The production technology for commodity nitrogen fertilizers is readily available. fertilizer industry holds an important place in India s GDP. gas. Joint ventures with foreign entities to ensure adequate and cheap raw material availability and better efficiencies. but the production process is highly capital intensive. requiring an extensive distribution and sales network. Bargaining power of the buyers: This is considered moderate. Competition: The fertilizer market is generally fragmented. Strong regional presence and closeness to customers in the different markets are key success factors. Commonly used organic fertilizers include animal manure. but they are also dependent on security of supply. Since the main feedstock.5 SWOT Analysis: Strengths y India being an agricultural country.1. .1. with limited product differentiation. household wastes. Another key element is access to low cost gas.1. New Market Entrants: Entry barriers are considered moderate to low. Active participation of private entities along with public and cooperatives. Third largest producer of nitrogenous fertilizers. plant materials and compost made from one or more of these sources.4 Porters Five Force M odel: Substitutes: The risk from substitution through organic fertilizers is considered high in the fertilizer industry. Bargaining power of the suppliers : This is considered high. Though the lobby of farmers is large. y y y y Large domestic market. have alternative uses in industries such as power and petrochemicals. There is also support from government to have access to fertilizer at a reasonable price and at an appropriate time.
Hence any devaluation of the rupee could inflate its imp ort bill. National fertilizer ltd.68 lakh MT/Year of Urea with a capacity utilization of 101. 1. Threats y The spurt in international prices impacts the prices of imported finished fertilizers as well as raw material in India. y Industry relies heavily on imports for its requirement of raw material. Excessive dependence on imports to fill demand-supply gap. Company produced 32. coal gasification. particularly for the production of urea. Kisan Urea is the most trusted brand of urea among farming community. has steadily strengthened its results by cutting costs and improving productivity.Weaknesses y y y Highly government control. which is the most essential ingredient of growth of country s agricultural production. In the year 2007-08.307 lakh MT/per annum. . Opportunities y Favourable policy environment facilitating large investments in the public. 1. which makes it the second largest producer of nitrogenous fertilizers in the country.3 Corporate Strategy Analysis: NFL is a leading producer of Urea.5%.2 Competitive Strategy Analysis: National fertilizer ltd has cost leadership in the industry as they have a market share of 16. help overcome the constraints in the domestic availability of cheap and clean feedstock.a nitrogenous fertilizer. cooperative and private sectors y Using alternative sources like liquefied natural gas.1%. Absence of potash deposits. etc. principally through the Company s overall Urea production capacity is 32. In response to the stiff competition within the fertilizer industry and other market forces..
seasonal farmers training at research stations. 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. soil testing and frontline demonstrations at farmer s fields. Inventories: Raw Materials. such as Nitric acid. whichever is less.The company also produces and markets industrial products. In case of stores and spares not moved for more than five years/identified as . Leasehold land and buildings are amortized over the lease period. 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. 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. In case of stores and spares not moved for more than two years and up to five years. Sodium Nitrite. Liquid Nitrogen. Liquid Oxygen. Buildings constructed over leasehold land are depreciated at the rates specified under Schedule XIV of the Companies Act. provision is made at five percent per annum (on straight line basis) and charged to revenue. 1956. 2. etc. Sodium Nitrate. The Company ensures that product is positioned at right time close to the point of consumption.1 Key Accounting Policies Depreciation: Depreciation on fixed assets is provided at the rates specified under Schedule XIV of the Companies Act.0 Accounting Analysis 2. Sulphur. packing materials and stores & spares. The Company has established single window shops at some places where all agroinputs & farm related services are made available. Methanol. Argon Gas. whichever is less. are valued at lower of weighted average cost and net realizable value. Ammonium Nitrate. NFL provides pre-sales services like seasonal dealers orientation programmes.
Revenue Recognition: Sales include excise duty wherever applicable and are net of rebates. 2. Equated freight subsidy is recognized on quantity despatched from the plants. if any is charged to revenue.000 in each case is charged to revenue in the year in which it is incurred. o The Company has complied with all the mandatory requirements and adopted part of the non-mandatory requirements. 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.surplus or obsolete. 10. Subsidy is estimated taking into account the guidelines. value is taken as certified by an Engineering Valuer and diminution. Prepaid expenditure up to Rs.50. 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". Subsidy under Fertilizer Pricing Policy is recognized based on quantity sold. 000 in each case is considered as income/expenditure of current year. Sale of scrap/ waste materials is recognized on disposal. 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.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. policies. . instructions and clarifications given by the Government. The plant. pending notification from Fertilizer Industry Coordination Committee (FICC).2 Disclosures o No transaction of a material nature has been entered into by the Company with the Directors.
1 Standardized Income Statement of NFL and CHAMBAL Standard Income Statement Accounts Sales National fertilizer ltd Chambal Sales .3.excise duty Subsidy Revenue Cost of sales Change in stock Purchase of traded products Material consumed Direct labour cost Power and fuel Material consumed Manufacturing Expenses Personnel expenses SG&A Freight and handling depreciation Selling expenses Administrative expenses Depreciation Other Operating Expenses Repairs and maintenance Repairs and maintenance Nonrecurring items Net interest expenses Interest income Interest expenses Investment income Interest earned Interest and finance charges Financial expenses Proposed Dividend Equity dividend Other income Other expenses Other income Other expenses Other income Other expenses Minority interest Tax expenses Provision for taxation Tax charges .0 Recasting of financial statements 3.
Unpaid Dividend Secured loans. Accrued interest.3. Unsecured loans Sundry Creditors Other current liability Inventory Other Current Assets Long term tangible assets Accrued interest Loans and advances Net block. Unsecured loans Net block Deferred taxes long term liability Other long term liabilities Minority interest -------------- Long term intangible assets ------ Deferred taxes-LT Asset Other long Investments term assets Investments Preferred stock Common shareholder s Equity Capital Reserves and Surplus Equity share capital. reserve and surplus . Capital Work inProgress ------- Loans and Advances Long term debt Secured loans.2 Standardized Balance Sheet of NFL and CHAMBAL Standard balance sheet accounts Standard balance sheet accounts Assets(NFL) Assets(Chambal) Liabilities (NFL) Liabilities(Ch ambal) Cash and marketable securities Accounts Receivable Cash and Bank balance Sundry Debtors Inventories Cash and Bank balance Short -term debt ------ ------- Accounts receivable Inventory Accounts payable Other Current liabilities Sundry Creditors Customer advances.
89% Net Profit ratio(CHAMBAL) 5. 2007-08. 2006-07 NFL s net profit has a fluctuating trend from 2006-07 to 2008-09.02 7. .74% 3. Net Profit Ratio can be calculated in the following manner: Net Profit Ratio = Net Profit/Net Sales x 100 Where Net Profit = Gross Profit Administration Expenses Operating Incomes.0 Financial Analysis 4.1 Net Profit Ratio Net Profit Ratio shows the relationship between Net Profit of the concern and Its Net Sales.4. CHAMBAL enjoys a strong position which indicates that the company is able to manage its Selling and Distribution Expenses. It indicates that how much of each value of sales is left over after all expenses.66% 1.1 DUPONT Analysis: ROE =Net income/Shareholder s Equity = Net income/Sales * Sales /Assets * Assets/Equity = Net Profit * Assets Turnover ratio * Financial Leverage 4. Comparative analysis: Net profit margin is the ratio of net income (net profit) to sales. y Indirect expenses have increased.41 4. Year 2006-07 2007-08 2008-09 Net Profit ratio(NFL) 6. Office and Administration Expenses Financial Expenses and Non Operating Expenses. Among the competitors.1.89 Selling and Distribution Expenses Office and Financial Expenses Non Operating Expenses + Non Source: annual report 2008 -09.
80 Source: annual report 2008-09. 2006-07 Comparative analysis: This ratio measures how efficiently assets are employed.84 1. 2007-08. Quick ratio =current assets-inventory\ current liabilities Year 2006-07 2007-08 2008-09 Quick ratio(NFL) 1. establishes a relationship between quick or liquid assets and current liabilities.1.81 2.85 0.28 2. overall.43 Assets Turnover Ratio(CHAMBAL) 0. 2006-07 NFL'S quick ratio has a declining trend from 2007 due to following reasons: y 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. This ratio measures the utilization of the assets which resulted in the sales.90 1. 4. This ratio measures the utilization of the assets which resulted in the sales. Among the competitors.17 Source: annual report 2008-09.13 0.2 Short and long term Solvency Ratio 4.4.29 1. Year 2006-07 2007-08 2008-09 Assets Turnover Ratio(NFL) 2.24 1. y Quick ratio slightly increases in 2008-09 due to decrease in inventory of raw materials and stores and spares at year end. .2 Assets turnover ratio: This ratio measures how efficiently assets are employed.1 Quick Ratio Also called as acid test ratio. overall.32 Quick ratio(CHAMBAL) 1. 2007-08. National fertilizer ltd. is showing efficient utilization of its assets.2.
01 Source: annual report 2008-09. 2007-08. y In 2009.2 Debt-Equity Ratio It is the ratio of Debt / Equity Capital of the business enterprise. Higher is the ratio more is likely to have finance cost and less of profits. 4. 2006-07 y In 2008.01 which is near to ideal ratio of 2:1 which indicates that the company is efficiently using cheaper source of finance.99 1. NFL has taken fewer loans so its debt equity ratio has declined. The debt-equity ratio of Chambal is 2. Preference Share Capital and Reserves and Surplus. On the basis of quick ratio. NFL short term liquidity position is strong as compared to Chambal.37 0. the ratio has increased due to more utilization of loans rather than its shareholders fund.66 2.24 0. Generally lower the debt-equity ratio the higher the protection enjoyed by the creditors. This ratio shows the ratio or number of times the interest obligation is covered b y the regular income of . Debt here means the total debt (both secured and unsecured) and Equity Capital means to include Equity Share Capital.Comparative analysis: Over the past three years the quick ratio of NFL is greater than CHAMBAL.2.3 Interest coverage Ratio It is the ratio of Income before interest and taxes/ Interest expenses.2. Year 2006-07 2007-08 2008-09 Debt / Equity(NFL) 0. This ratio shows the balance of debt and equity in the business enterprise. 4.18 Debt / Equity(CHAMBAL) 1. Comparative analysis: It is the ratio of Debt / Equity Capital of the business enterprise.
1 Inventory Turnover Ratio Inventory turnover indicates the efficiency of the firm in producing and selling its product. is in better position.38 4.01 Interest coverage ratio(CHAMBAL) 3. 2007-08.71 2008-09 4. Inventory Turnover = Cost of goods sold / Average Value of Inventory. . Comparative analysis: This ratio shows the ratio or number of times the interest obligation is covered by the regular income of the business enterprise.3.52 Source: annual report 2008-09. Higher ratio indicates that the firm can easily meet its interest burden which is in 2006-07 but it declined thereafter. Generally.the business enterprise. The measure can be computed for any type of inventory materials and supplies used in manufacturing or service delivery. Higher is the ratio more secured is the loan given to the business enterprise Year 2006-07 2007-08 Interest coverage ratio(NFL) 18.43 11. since inventory that remains in place produces no revenue and increases the cost associated with maintaining those inventories. 2006-07 y y NFL s interest coverage ratio has fluctuating trend from 2006-07 to 2008-09. 4.3 Working Capital Management Ratio 4. work in progress (WIP). or all inventory combined. a higher inventory turnover ratio is considered a positive indicator of operating efficiency. finished products. 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 .26 3. It indicates the speed with which the stock is turned into sales during the year.
Year 2006-07 2007-08 2008-09 Debtors turnover ratio(times)(NFL) 3.2 Debtors Turnover Ratio Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. 2007-08.96 12.44 18. . low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. CHAMBAL is showing efficient management of inventories.15 7.40 11. 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. The higher ratio indicates efficient management of inventory because more frequently the stocks are sold. Comparative analysis: Inventory turnover indicates the efficiency of the firm in producing and selling its product.27 Source: annual report 2008-09. increase in the recoverable from FICC.Year 2006-07 2007-08 2008-09 Inventory turnover ratio(times)(NFL) 8.e. which shows a good sign of inventory management. 2006-07 The ratio has increased in 2009. In simple words it indicates the number of times average debtors (receivable) are turned over during a year.92 11.18 y In 2007.45 Inventory turnover ratio(CHAMBAL) 7. the lesser amount of money is required to finance the inventory. 4. a higher inventory turnover ratio is considered a positive indicator of operating efficiency. Generally.90 4. Among the competitors. Similarly.3. it decreased due to increase in debtors i.01 Debtors turnover ratio(times)(CHAMBAL) 6.07 6.78 10.
In 2009.e. 4.86 6.3Working 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 Rat io = Sales / Net Working Capital The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. 3. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise.86 in 2007 and maximum 8. there is an increase in credit sales which has resulted in the increase in debtors. So. it decreased due to receipt of bonds in lieu of cash subsidy from FICC. Ideal ratio of National Fertilizer Limited is 4. 2007-08.02 .y y In 2008. Comparative analysis: Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. financial position of company is satisfactory. Among the competitors.60 8. Working capital turnover ratio(times) 3. But a very high working capital turnover ratio may also mean lack of sufficient working capital. Year 2006-07 2007-08 2008-09 Source: annual report 2008-09. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are.02 in 2009 y In 2007 sales is approximately four times the working capital.4. Chambal is showing greater efficiency of credit management. which is not a good situation. 2006-07 y It is seen from the above that working capital turnover ratio of company is minimum i.
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%. Sales in 2008-09 increases by 25% . Sales increase every year but at a diminishing rate of 25%. 2. Non operating expenses and non operating income to be the same amount as in the year 2008-09.0 Forecasting 4. 3. Fiscal year Income Statement Sales Expenses = Net operating profit Non operating expenses Tax Charges + Non operating income Net income 2007-08(A) 2008-09(A) 2009-10(F) 2010-11(F) 4241 5127 6511 8139 4053 188 5011 116 6185 326 7732 407 64 100 100 100 65 207 89 105 89 315 89 396 . Expenses are almost 95% of net sales.4.1 Forecasted Income Statement Assumptions 1.
We are assuming Working capital to sales ratio to be same as it was in the year 2008-09. Net Working capital + Beg. Fiscal year Beg.For next 2 years we assume it to be 24% 2. i.Net Long Term Assets =Net Operating Assets Net Debt + Shareholder s Equity =Net Capital 2007-08(A) 627 2008-09(A) 639 2009-10(F) 811 2010-11(F) 1014 1454 1212 1539 1923 2081 1851 2350 2937 675 1407 381 1470 484 1866 587 2350 2081 1852 2350 2937 . Net long term Assets to sales ratio in 2007 was 30%.2 Forecasted Balance Sheet Assumptions 1.46% 3.4. in the year 2008 it came out to be 25% .12. In 2007 Net Debt to capital ratio was 30% and in 2008 by 20%.e. In our forecasts we assume Net Debt to capital ratio to remain at 20% and adjust equity accordingly.
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