Financial Report Analysis:

Mangalore Chemical & Fertilizers Ltd and

Madras Fertilizers Ltd
Market Analysis - Financial Report Analysis of Mid-Cap companies Mangalore Chemical &
Fertilizers Ltd and Madras Fertilizers Ltd in the Fertilizers Industry. The success of the
agricultural sector in India is mainly dependent on the fertilizer industry, the usage and
demand of fertilizers are seasonal and varies mostly depending on the availability of
irrigation, production and imports, and cropping pattern changes. Due to increased focus by
the government on educating farmers on fair use of fertilizers, the usage of fertilizers is
changing from chemical fertilizers to organic fertilizers. Significant challenges that fertilizer
industry is facing are increasingly volatile International market for fertilizers and raw
materials, steep depreciation in rupee value, increasing prices of NPK fertilizers due to new
NBS (Nutrient Based Subsidy) policy and rise in the working capital requirements of
fertilizer firms in addition to the historical challenges associated with the rural markets.

Current Scenario - One of the primary factor that is affecting the Indian Fertilizer
companies is the continued under-provisioning for fertilizer subsidy in the Union Budget and
higher subsidy demand due to delay in DBT. The GOI had rolled out Direct Benefit Transfer
(DBT) for payment of subsidy on sale by the retailers on pan India basis from January
2018, as against the earlier system of payment of subsidy on receipt basis into the respective
districts and sales thereafter. The delay in payment of subsidy caused by DBT, higher subsidy
demand due to higher commodity prices and rupee depreciation coupled with inadequate
budgetary subsidy allocation contributed to precarious working capital conditions and
increased working capital costs and finance costs.

Trade recievables to the tune of Rs 1564 Crores (For Managalore Fertilizers) are to be
released by the government as part of subsidy payouts.

Future Outlook - The demand for fertilizers in India is increasing steadily and expected to
grow at a compounded annual rate of about 2%. With the domestic production almost
stagnant and the demand increasing, the supply deficit has to be met from imports.

Risk –Major risks for the fertilizer industry is due to increasingly volatile International
market for fertilizers and raw materials, steep depreciation in rupee value, increasing prices
of NPK fertilizers due to new NBS(Nutrient Based Subsidy) policy and rise in the working
capital requirements of fertilizer firms in addition to the historical challenges associated with
the rural markets due to changes in weather conditions dependent agriculture practices
Mangalore Chemical & Fertilizers 2018-2019 (Refered to as MCF in the report)

 Profitability Analysis

Du Pont Analysis –

MCF had a dip in its profits substantially because of the the production of the plant had been
increased substantially after getting the approval for the increased production which required
more raw materials thus increasing the cost of materials consumed. However, the sales did
not go as the per the increased production bringing down the profit margin by half. This is the
reason ROA, ROE both became half of the preceding value. The other components such as
Asset Turnover Ratio and Leverage were almost unchanged.

 Liquidity Analysis

Current Ratio – The industry benchmark of current ratio is 1.5, MCF has a current ratio of
1.06 which can be improved to reach the industry benchmark.

Quick Ratio – The company has maintained a quick ratio of 0.81 for the past two years, this
implies that the inventory is contributing almost 20% to the total assets. The company has has
to work on reducing the holding inventory.
Inventory Turnover Ratio & Holding Period – The Inventory turnover ratio is 6.57 and the
average holding period is 55.5 days, which has increased from the previous years 44.50 days
this can be attributed to the sluggish sales due to bad climate during the sowing season in
Karnataka (the main area of sales for MCF)

Recieveable Turnover Ratio & Holding Period – The Recievables turnover ratio of MCF is
2.24 and the average days for turning receivables into cash is 163.23 days which has reduced
compared to last year’s 164.69 days.

Operating Cycle – MCF has a higher operating cycle of 218.79 days due to higher collection
period which can be attributed to outstanding payments from the government for various
subsidy schemes and the longer period of wait for DBT.

 Solvency Analysis

Debt to equity ratio – MCF has a higher debt to equity ratio of 3.36, because it relies on
debt/loans for ensuring working capital is available and the higher costs of raw materials is
covered

Liabilities to Equity Ratio – MCF has a high liabilities to equity ratio of 4.89, which is due
to huge borrowings to the tune of and deferred tax of Rs.1755 Lakh. Which makes this a
risky investment for the shareholders. Majority of the borrowing was done to finance the
changes Natural Gas Converstion Plan to adhere the governmental norms.

Leverage – Leverage of the company stands at 5.89 because of high valuation of the
property, plant and equipment and trade receivables from the government to the tune of 1500

Interest Coverage Ratio – Interest coverage ratio is at 1.45 because of the huge debt taken
by the company.

 Cash Flow Analysis

In the year , FY 2015-16, the cash equivalent was Rs 9.61 lakhs but this parameter drastically
changed in FY 2016-2017 as the cash flow from operating activities increased around 23000
lakhs as the sales were increased and around 200 lakhs of fixed asset were written off.

In the year 2017-18, the net cash flow from operating activites has decreased by 30456 lakhs
due to decrease in assets and increase in inventories, and due to increase in the trade
payables. Also in this year , there delay in the grant of subsidies due which cash equivalent
for that year reduced. In Investing Activities, the net cash flow decreased by 1255 lakhs.

In the year , FY 2018-2019, the operating profits decreased by around 19000 lakhs , due to
decrease in the trade receivables, investment due intangible assets. The net cash equivalents
has decreased due to decrease in the long term borrowing and increase in the finance cost and
also increase in the repayment of the short term borrowings.

 Trend Analysis

Key Indicators Five Year Trend:

As of

Key indicators Mar-19 Mar-18 Mar-17 Mar-16 Mar-15

Sales/Revenue (in Rs
1,593.00 386.99 297.82 279.75 339.86
crore)
311.64% 29.94% 6.46% -17.69%
Operating expenses 171.19 181.05 181.69 160.95 152.14
-5.45% -0.35% 12.89% 5.79%
Operating Profits -57.86 -22.8 24.9 -171.39 -117.08
153.77% -191.57% -114.53% 46.39%
Interest 100.03 75.39 73.53 82.32 83.97
32.68% 2.53% -10.68% -1.96%
Net profit -80.85 -44.81 3.54 -189.54 -134.69
80.43% -1365.82% -101.87% 40.72%
 1,568.29 1,582.21 1,229.81 1,251.92 1,355.56
Total Assets
-0.88% 28.65% -1.77% -7.65%
Debt 1,651.59 1,506.45 1,253.56 598.09 555.98
9.63% 20.17% 109.59% 7.57%
Equity -575.27 -492.03 -430.07 -532.15 -342.61

16.92% 14.41% -19% 55.32%

Revenue Trend Analysis:

4,000.00
Revenue trends 20.00%

3,000.00 10.00%

2,000.00 0.00%

1,000.00 -10.00%

0.00 -20.00%
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Sales/Revenue (in Rs crore)

Revenue from sales has increased over the past year by Rs 400 Crore, due to increase in
production of Urea and Ammonia Fertilizers. The company has also increased the production
of its newest variant Sulphonated Naphthalene Formaldehyde (SNF) due to increased demand

Operating Profit & Expense Analysis:

Operating profits have decreased over the last year and the operating expenses have
increased, due to increased spending on the raw materials and the spending on changes to the
plant to comply with government environmental laws.

The financial results for the year ended March 31, 2016, were primarily affected due to
restrictive conditions of the fertilizer the policy of the Govt. of India for Naphtha based units
besides unfavorable market conditions and volatile foreign exchange rates. Since the
company has been going strong and had its production capacity increased and reassessed last
year.

Interest Expense Trend:

High Interest Expense due to heavy borrowings to fund higher working capital expenses, the
total outstanding amount from the government subsidy to be received is very high.

Madras Fertilizers 2018-2019 (Refered to as MFL in the report)

 Profitability Analysis

Du Pont Analysis – Madras Fertilizers had a dip in its profits substantially because the plant
had 3 months shut down because of up-gradation and maintenance, hence the company ran
into losses. The losses were more than the last year, almost twice which explains the ROA,
ROE decreasing by the same. All the other parameters such as Asset Turnover Ratio and
Leverage were almost consistent.

 Liquidity Analysis

Current Ratio – The industry benchmark of current ratio is 1.5, MFL has a current ratio of
0.58 due to high borrowings of Rs. 1650 Crores for working capital requirement
Quick Ratio – The company has maintained a quick ratio of 0.4, which is due to the
companies emphasis on maintaining zero inventory while the competitors maintained a 1.28
Lakh MT of inventory.

Inventory Turnover Ratio & Holding Period – The Inventory turnover ratio is 6.36 and the
average holding period is 57.3 days.

Recieveable Turnover Ratio & Holding Period – The Recievables turnover ratio of MFL is
67.4 and the average days for turning receivables into cash is 5.4 days, which is very low
compared to its competitors, it has done this by giving zero credit to buyers and having sales
transactions through RTGS payments only

Operating Cycle – MFL has a lower operating cycle of 62.78 days due to higher emphasis
on zero credit

 Solvency Analysis

Debt to equity ratio – MFL has a higher debt to equity ratio of 3.36, because it relies on
debt/loans for ensuring working capital is available and the higher costs of raw materials is
covered

Liabilities to Equity Ratio – MFL has a high liabilities to equity ratio of 4.89, which is due
to huge borrowings to the tune of and deferred tax of Rs.1755 Lakh. Which makes this a
risky investment for the shareholders. Majority of the borrowing was done to finance the
changes Natural Gas Converstion Plan to adhere the governmental norms.

Leverage – Leverage of the company stands at 5.89 because of high valuation of the
property, plant and equipment and trade receivables from the government to the tune of 1500

Interest Coverage Ratio – Interest coverage ratio is at 0.20 meaning that the company is
unable to pay interest on the huge borrowings. The company though facing huge losses and is
only being sustained because of the bailouts being provided by the GOI.

CONCLUSION:

Mangalore Chemicals and Fertilizers can be bought, because the profits and revenue of the
company have been growing steadily except for the time when new policies or restrictions
have been imposed by the government. It has faired well comparatively than madras
fertilizers which has been in losses since the shutdown of the plant, higher loans to repaid,
internal problems and issues with the environment board.