Bharat Fertilisers

Bharat Fertilisers is engaged in the fertiliser business and construction activities.

Fertiliser is considered a core sector industry in India and management assert that the company has the expertise, knowledge, and infrastructure available to operate in this industry. Due to the troubles facing the industry (see below), management are buying up ‘sick’ Single Super Phosphate (SSP) units in the states of Gujarat, Madhya Pradesh, Karnataka, and Andhra Pradesh.

Its construction and real estate activities are concentrated in Thane, Maharashtra. It expects to let out commercial space within the next two to three years and generate about 5cr in lease fees per annum (before costs).

The company reported erratic/marginal operating profits prior to the year ended 31^st March, 2009 but has shown growth in revenues and operating profits since then except for a minor downturn in the last financial year when it reported over 12cr in operating profits on revenues of about 30cr. It did not operate with any net debt as at 31^st March, 2012.

The primary risk pertaining to this business is total government control on the revenue and cost side through pricing regulation and other mechanisms – making it one of the most heavily regulated industries in the country. This is ostensibly to protect farmers since a large proportion of India’s population is engaged in agricultural activities. However, the pricing regulation has been so inefficient in the past as to threaten the long-term viability of the industry, which could lead to withdrawal of companies and unintended disastrous consequences for farmers.

The company is forced to meet production targets set by the government.

It also faces frequent labour problems/strikes/lockouts, which are endemic to the industry.

It faces severe delays in receiving subsidies for selling at below-market rates to farmers putting significant pressure on its cash flows. Moreover, it incurs punitive interest rates of 24% per annum and additional penalties for delays in refunding subsidies.

It is exposed to lack of availability of raw material in the domestic market forcing it to buy it from the international market to meet production targets (which don’t consider these factors). It is also exposed to increases in crude oil prices and a weakening INR when importing its raw materials.

The inefficiency of government regulation is reflected in non-revision of SSP prices and subsidies (including inadequate freight subsidies for SSP relative to other fertilisers) to reflect relevant economic conditions.

The construction and real-estate business is cyclical and exposed to economic downturns and consequent downturns in demand. In addition, inflationary factors and government regulations (taxes, etc.) increase costs and reduce profit margins.

The real estate business is marked by heavy competition where it is difficult to gain a competitive edge.

Government has not accorded “Industry” status to real estate and hence, it is difficult for businesses to avail term loans from banks for real estate development and construction.

This segment is expected to exhibit subdued performance in the next few years as a result of the release of additional supply into the market under the Government’s ‘Affordable Housing’ initiative under various schemes.

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