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 31st 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 31st 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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