Déjà vu for Chambal Fertilisers

The government’s urea pricing policy is once again threatening to derail the operations of firms such as Chambal Fertilisers and Chemicals Ltd. Some of its urea production is dependent on import parity-linked pricing. Since global urea prices are weak, the production of domestic urea below a cut-off realization turns unviable. This same phenomenon had forced Chambal to curtail production in the last quarter of the previous fiscal.

A year down the line, it is staring at a repeat of that situation. The government is yet to amend its import parity-linked pricing policy. “The government is still to announce IPP (import parity price)-related policy amendments, which implies that industry is likely to produce lower urea volumes as there is no clarity on production beyond cut-off,” B&K Securities India Pvt. Ltd said in a note.

Production loss at Chambal could be substantial. In a conference call with analysts last year, the company said a favourable policy can ramp up its monthly urea production by around 30,000 tonnes. “If the government does not come out with any change in policy, the company will not be able to produce more than 1.73 million tonnes (mt). Not only Chambal, the entire Indian industry will not be able to make any production over assessed capacity,” Chambal management told analysts in May last year. In 2013-14, it produced 1.94 mt of urea.

To make up for the revenue loss, the company is concentrating on trading. And that strategy is paying to some extent. Despite low manufacturing of its own, thanks to high trading, Chambal was able to grow overall volumes in the first half of the current fiscal.

Further, with regulatory policies delayed, the company plans to continue its focus on trading. “Management highlighted that they have identified trading of complex fertilizers as a viable revenue stream and would continue to indulge in trading as and when the opportunity arises,” B&K Securities said. The strategy can well protect revenue growth but the drawback is it will earn substantially lower margins than selling its own product. That is why analysts expect Ebitda (earnings before interest, taxes, depreciation and amortization) margins to decline in the December quarter.

Chambal’s plan to substitute trading is a worthwhile “Plan B”, but is a temporary one at best. A more lasting solution lies in the hands of the government, and whether it gives a fillip to the domestic production of urea by modifying its import price parity-linked urea policy.