Management Discussion and Analysis: Deepak Fertilisers & Petrochemicals Corporation Ltd.

The overall performance of the Company has been encouraging during the year under review. The total income of the Company during the year under review has gone up by 7% to Rs. 545.97 crores from Rs. 512.27 crores of the previous year. The operating profit has increased by 24% to Rs. 146.03 crores from Rs. 117.94 crores and the profit after tax to Rs. 64.11 crores as compared to Rs. 48.64 crores of the previous year, an improvement by 32%.

During the year under review, the international prices of Methanol remained high, which has resulted in better realisation of indigenously produced Methanol on the import price parity basis, which improved profitability of the Company. The price realisation of Ammonium Nitrate was affected on account of large scale import of fertiliser grade Ammonisum Nitrate by the explosive industry. Fertiliser business was sluggish during the year due to failure of monsoon, limited availability of gas and changes in the Government policies.

Natural Gas is a key raw material for the Company. The Company has been one of the earliest firm allotees of 0.6 MM SM3/day of Bombay High Natural Gas. Further, the Dept. of Chemicals and Dept. of Fertilisers had recommended additional gas supply of 0.67 MM SM3/day which has been awaiting clearance from the Ministry of Petroleum and Natural Gas. Against this, the Company had been receiving barely 0.4 MM SM3/day which is affecting the operations of the Company. The Company has made several representations for a fair and priority restoration of gas supply up to the firm allocation levels and is awaiting a positive response from the Petroleum Ministry.

In the medium term, it is expected that LNG supplies and / or the large gas find in the East will make its way to the West Coast and correct the gaps by 2004-05. The gas price hike is expected to be reasonable during the current year and gradually increase over the next few years to allow the user industry and their final customers to align themselves to the new prices.

The demand for Methanol in the country has been steadily increasing. The total Methanol demand in India is around 6.5 lac MT/annum, out of which normally 50% is being met by domestic players such as GNFC, RCF and your Company and remaining through imports. Though the Company's production capacity is 100,000 MT per annum, it produced only 77,400 MT during the year under review due to inadequate supply of natural gas. In order to retain its market share the Company imported and sold 50,900 MT of Methanol as compared to 43,200 MT of the previous year. The total sale of Methanol during the year was 1,32,600 MT, an increase of 31% over the previous year sale of 1,01,300 MT. The Methanol prices witnessed a positive cyclical upswing in the commodity markets and thus contributed significantly to the Company's bottom-line during the year under review. Methanol finds a growing demand in the pharmaceutical and chemical industries as end user.

The overall production of Nitric Acids registered a growth of 8% over the previous year. The production of CNA has gone up from 55,100 MT to 63,700 MT and that of DNA from 2,12,300 MT to 2,25,600 MT. Similarly there has been growth in the sales of CNA by 16% from 50,300 MT to 58,500 MT and that of DNA from 21,600 MT to 25,500 MT, an increase of 18%. Despite this larger volume, the price realisation of CNA has marginally increased whereas that of DNA has marginally decreased over the previous year. The in-house capacity utilisation of DNA plants remained lower in view of lower fertiliser production. In respect of CNA the growth trend has been fairly steady in the defence sector as well as in the industrial sector. The Company has initiated steps to double the manufacturing capacity of CNA production keeping the future growth trend in view.

The total production of all grades of AN was 78,700 MT as against 70,400 MT of the previous year. The sale for the year under review has been 79,000 MT as compared to 71,100 MT of the previous year, an increase by 11%. However, the net realisation during the year dropped by about 11% on account of dumping of fertiliser grade Ammonium Nitrate from Russia and Iran and its diversion for use by the explosive industry. The Indian Ammonium Nitrate Association have approached the Anti-dumping authority for imposing Anti-dumping duties on the import of AN from Russia and Iran. After a detailed review, the Anti-dumping authorities have recommended interim Anti-dumping duties. In the meantime, the Company was able to commission the new AN plant successfully thereby enhancing the capacity to 90,000 tpa. Technology for the new plant has been supplied by Grande Paroisse, France. The plant has been able to demonstrate achievement of its rated production successfully.

The production of NP fertiliser (23:23:0) was lower by 11% as compared to the previous year. The demand for fertilisers in the primary market has been stagnant due to drought conditions resulting from the monsoon failure last year. However, the Company has been able to maintain its market share in view of its strong brand image in the market place.

The inadequate supply of natural gas continued to be a major constraint during the year hampering production of Ammonia and this in turn affected the availability of Ammonia to the downstream plants. Hence, the Company had to resort to procurement of high cost Ammonia from outside to part supplement the production of downstream products, particularly Nitrophosphate fertiliser.

The ad-hoc price concession (subsidy), announced by the Government of India (GoI) on the basis of Tariff Commission report has been unfavourable to the Company in view of :

1. The GoI picking and choosing different cost components selectively from different companies to ensure lower subsidies.

2. Bunching domestic gas based fertiliser companies into the same group as imported Ammonia based companies despite no logical linkages in the raw material prices.

The above unfair measures are being protested and a sympathetic correction awaited. The Company decided to cut down on its Traded Product business in view of the uncertainity of the subsidy policies as well as the drought conditions.

The Company's efforts to develop the new seed and specialty agro business found a difficult beginning. Considering the special marketing requirements an appropriate re-organisation of efforts is under study.

Full benefits of the Company's successful implementation of 90,000 tpa plant for AN will be available in the current year subject to gas availability. The Company has also decided to enhance the manufacturing capacity of CNA production to 66,000 MT per annum. Besides being used extensively in Defence Sector, CNA is also used in Nitro Aromatics, ACN Fibres, Pesticides, Drugs, Pigment Dyes, Nitrocellulose etc. CNA market has been growing at 7% per year. It is expected that the plant will be commissioned during 2003-04. The expansion will help retain market share and serve the growing market. The enhanced capacity of CNA will also help improving capacity utilisation of DNA plants.

In order to mitigate shortage of Ammonia production due to poor gas availability, the Company is considering setting up storage tank for imports of Ammonia at JNPT Terminal at Nhava-Sheva in the State of Maharashtra. Necessary application has been made to Maharashtra Pollution Control Board. Once the clearance is obtained, the Company would be able to set up the facilities, which will ensure better availability of Ammonia to its plants at Taloja.

The Company has been actively evaluating various PSU disinvestment proposals, especially those which would bring synergy with the existing business. As a part of diversification strategy to broad-base our investment basket the Company has invested Rs. 36 crores in land to move into Value Added Real Estate Business. In this regard M/s. Knight Frank is assisting the Company in evaluating various options and crystallising the preferred business model.

During the year under review, the revenue has gone upto Rs. 545.97 crores from Rs. 512.27 crores of the previous year. The increase in revenue is attributable to higher sales of own manufactured products like Methanol and CNA. The revenue has decreased in respect of fertilisers and AN. There had been drop in the revenue of traded bulk fertilisers, as there has been substantial decline in the sale of imported fertilisers during the year under review. The other income has gone up from Rs. 18.32 crores to Rs. 23.40 crores.

The Company has substantially reduced its debt burden during the year under review. The total amount of debt paid during the year was Rs. 24.87 crores. The debt equity ratio of the Company as on 31st March, 2003 is 0.4. During the year under review, the Company has not utilised any working capital facilities from the banks or raised any funds by way of Commercial Paper or other debt instruments.

The Company's interest burden, therefore, came down from Rs. 21.24 crores of last year to Rs. 16.87 crores in the year under review. Overall, the Company has been able to consolidate its financial position and reduce interest burden substantially.

Presently the Company has non-convertible debentures of Rs. 83.45 crores out of which Rs. 40.45 crores is with a coupon rate of 14.75% p.a. and remaining at 12.50% p.a. maturing over the next few years. The Company is approaching investors for prepayment of these debentures. During the year under review, the Company repurchased and searly-extinguished debentures to the tune of Rs. 15 crores.

The net profit for the year under review was Rs. 64.11 crores as compared to Rs. 48.64 crores of the previous year, an increase of 31.8%. The EPS improved to Rs. 8.6 as against Rs. 6.5 of the previous year. CEPS also improved to Rs. 12.69 from Rs. 10.36 of the previous year. The Company's net profit has been affected due to higher rate of income-tax. However, the Company's investment plans, once underway, would provide for the necessary growth impetus and the resultant tax shelters.

The Short term instruments of the Company have been rated by ICRA as A1+ (pronounced as A one plus) which is the highest rating under this category. The Medium term instruments have been rated MAA (pronounced as M double A) and Long term instruments are rated LAA- (pronounced as L double A minus) by ICRA. State Bank of India have rated the Company's financials as SB-2 which is a high rating as per banking norms.

The Company has adequate internal control systems. The internal audit is conducted by a firm of chartered accountants specialising in internal audit whose observations together with proposed action plan are placed before the audit committee periodically. The audit committee closely reviews the progress made on the observations and helps strengthen overall financial control. The audit committee meeting details are given under the Corporate Governance Section.

Your Company continues to make all efforts to adopt the best systems and methods of doing the business, reduce overheads, improve productivity and establish better customer relations with improved quality and effective distribution network. The Company has taken long strides in using IT services and is currently implementing an integrated ERP system. The Company continues to periodically evaluate the overall business and product portfolio shifting more towards value added businesses by exploring greenfield as well as acquisition opportunities after indepth risk analysis. The Company is making sincere efforts to devise better strategy for growth and improving profitability thereby enhancing shareholders value in the changing market situation.