The quest for growth has lead Indo-Gulf Fertilisers & Chemicals to invest in a green-field copper project at least twice the size of its fertiliser unit. It is probably because the risks associated with the new venture have rubbed off on the company as a whole that its scrip currently quotes at a 30 per cent discount to its book value. Had the company stuck to its knitting, it could have enjoyed a far higher discounting even though fertiliser stocks have fallen out of favour with most investors.As a leading FII puts it, "Indo-Gulf trades at a substantial discount to its replacement cost. Even if we discount the replacement cost by 50 per cent, we should arrive at a market price of Rs 60. Therefore, at Rs 36 per share, the scrip appears attractive. However, we still do not recommend a buy as we believe that the company's diversification into an unrelated area exposes it to high risks and the returns that we expect from the new venture do not justify taking on those risks."
Let us forget about the copperdivision for the time being and examine the company's plans for its fertiliser business in isolation. The management has decided that the fertiliser division will be given its due importance--after all that is what constitutes the company's core business today. Only its character will undergo a metamorphosis to reflect the changing economic scenario. Indo Gulf will not be a pure urea company, rather it will become a provider of all agri-inputs.
The company's managing director BN Puranmalka says, "Indo-Gulf's vision is to become the household name amongst the farming community by 2005 AD, providing the best quality fertilisers and agri-inputs at competitive costs." He is confident that Indo-Gulf will emerge as a major player in the agri business in the next century. The thrust, however, will be on trading activities rather than on the manufacture of urea. He explains, "We would like to be seen as a provider of all agri-inputs, not urea alone."
Initially, the company had plans to double its urea capacity to14.5 lakh tonnes per year. However, scarcity of natural gas and fluid government policy with regard to subsidy deterred the company from going ahead with its plans. On hind sight, not having installed fresh capacity appears to have been a sensible move. Had it gone ahead with the expansion plans, Indo-Gulf would have lost its distinction as the most cost-effective urea producer in the private sector.
The company has busied itself with the creation of a strong brand equity in its markets. Its strong fertiliser brands, "Shaktiman" and "Kirtiman", enjoy tremendous dealer and customer loyalty. For a company that has been engaged in the commodity business right from its inception, such brand consciousness is truly commendable. The result is that even in an entirely decontrolled scenario, it will be difficult to upseat Indo-Gulf from its leadership position in its current markets.
It has established a chain of "Shaktiman Krishi Seva Kendras" which render a single window service to farmers, educating them onmodern agricultural techniques and providing them with soil testing facilities, quality seeds and crop protection chemicals. Through these "kendras" Indo-Gulf is creating for itself a brand equity which will stand it in good stead. Not only will this enable the company to realise better prices for its own produce, but will also help it to sell others' products under its brands.
Indo-Gulf has already begun marketing DAP under the "Kirtiman" brand and custom manufactured pesticides. Its trading income as a percentage of total operating income has increased from 8 per cent in 1994-95 to 15 per cent in 1996-97. Even if it were to remain a pure urea company, Indo-Gulf would stand to benefit immensely on decontrol of the nutrient. Its retention price is about Rs 5,700 per tonne and the free market price on urea decontrol is likely to stabilise at around Rs 7,000 per tonne.
As a urea producer, the company enjoys several advantages. It's urea plant is located in the Indo-Gangetic plain, in the midst of the majormarkets of UP, Bihar and West Bengal which account for one-third of urea consumption in India. Moreover, being far from the major urea handling ports of Kandla, Mumbai and Vishakapatnam, it faces little threat from imports. Further, the landed cost of urea even at the low prices prevailing in the international markets is higher than its retention price.
Decontrol of urea is however, possible only in the long run. Nevertheless, there is consensus that the company's fertiliser business will remain a cash cow till the time urea prices are decontrolled. The retention pricing scheme ensures a fixed 12 per cent return on net worth with additional incentives for higher capacity utilisation, so long as it does not exceed 115 per cent. After urea decontrol, Indo-Gulf's fertiliser business will be in a position to yield far greater returns.
Under the circumstances, therefore, the outlook for Indo-Gulf's agri-inputs business appears to be bright. If it is only the risk perception attached to its copper business thatis keeping the value of its stock at low levels, is it not time that Birla Copper be hived off as a separate entity?
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
