Standing apart

Sitting in his sixth floor room of Tiam House facing the Bay of Bengal, Mr. A. Vellayan, director (marketing) of the Chennai-based Rs. 3,700-crore Murugappa group and director of Coromandel Fertilisers Ltd. has decided to go fishing. This time, he is eager to net fertiliser units located on the Coromandel coast.

To start with, he has cast his net over the loss-making Andhra Pradesh-based Godavari Fertilisers. "We have conveyed to the Andhra Pradesh government, which holds 26 per cent equity in the company, about our interest in Godavari Fertilisers. The acquisition will be through a share swap. We have acted from our side and the ball is now in their court," he remarks.

While awaiting the state government's decision, the Murugappa group has plans of restructuring its fertiliser business presently carried on by Coromandel Fertilisers and EID Parry (India) Ltd. Both the units are engaged in the manufacture of phosphatic and complex fertilisers with the former having a capability to produce high and low analysis phosphatic fertilisers. EID Parry holds a 78.3 per cent stake in Rs.19.46-crore equity-based Coromandel Fertilisers, while financial institutions and the public hold 12.3 per cent and 9.4 per cent respectively.

There are other equally compelling reasons for the group to restructure its fertiliser business. For instance, both the companies work in tandem to derive benefit from economies in sourcing common materials and EID Parry takes care of entire fertiliser marketing activity. Mr. R. S. Nanda, president and managing director, Coromandel Fertilisers and a whole-time director in EID Parry, heads the group's fertiliser business.

The group has appointed a consultancy firm to look into the issues and suggest ways and means of restructuring the fertiliser business. Declining to name the consultant, Mr. Nanda says, "The basic plan is to consolidate and exploit our distribution strength."

The options for restructuring are limited. Either Coromandel Fertiliser is merged with EID Parry or the fertiliser business of the later could be hived off in favour of Coromandel Fertilisers. In case of the latter option, the group has to take into account the likely impact on EID Parry's other business lines like sugar, ceramics and bio-products.

Last fiscal, EID Parry's fertiliser and pesticides business accounted for Rs. 356 crore and Rs. 144 crore respectively in the total turnover of Rs. 1,115.67 crore. According to Mr. Vellayan, fertiliser accounts for nearly 4 per cent of the company's profits.

After having headed group company Tube Investments Ltd. for a long time, Mr. Vellayan moved to his current position when the group reorganised its internal management structure thereby giving professional managers more freedom in running the companies.

"The new assignment is interesting and challenging," he remarks. It is challenging because the Murugappa group has decided that fertiliser is one of the core focus areas. Hence, the group is looking not only at Godavari Fertilisers but also at many other ones. If the opportunity arises, Mr. Vellayan is ready to gobble up other companies like the Rs. 1,477-crore turnover Hindustan Lever Chemicals, Paradeep Phosphates, and the phosphatic plant of Madras Fertilisers – all located on the east coast where Murugappa group's fertiliser market is concentrated.

"I wonder whether the Central government will adopt a pragmatic approach while disinvesting its stake in Madras Fertilisers by selling just the phosphatic fertiliser plant as its other plants are mired in problems," he muses.

Interestingly, at a time when many fertiliser units are posting losses or reduced profits (this includes Coromandel Fertilisers and EID Parry) and when no new investment is forthcoming, it is only the Murugappa group that is seriously talking about capacity additions and acquisitions in the fertiliser industry. Why so?

"The answer lies in your question," responds Mr. Nanda, who was instrumental in turning around the Rs. 614 crore turnover Coromandel Fertilisers after taking over its reins. "A greenfield project will cost around Rs.9, 000/ton. Over the years, Coromandel Fertilisers has been increasing its capacity at Rs. 1,800/ton," he adds.

The other benefits of acquisition are the elimination of competition and offering economies of scale. According to Mr. Vellayan, the acquisition plans were chalked out having the post-April 1, 2001 scenario in mind, when quantitative restrictions on fertiliser imports will be removed.

The future is only for companies with a capacity not less than 2 million tons per annum (tpa), predicts Mr. Nanda. On its part, the Murugappa group plans to reach the 2 million tpa capacity by expanding its existing facility to 1.1 million tpa and achieve the balance through acquisitions.

According to him, phosphatic segment is estimated to grow at 4 per cent per annum. "While the demand will go up from current 4.3 million tpa to about 6 million tpa in five years, the production is expected to stagnate around 5 million tpa," says Mr. Nanda.

With no new grass-root plant on the horizon and expansions going to be limited, Mr. Nanda feels the opportunity lies in growth through acquisitions, mergers, trading and alliances with international players.

Standing apart

Comparing the fertiliser companies one finds that phosphatic fertiliser manufacturers are better placed than naphtha-based urea manufacturers like Madras Fertilisers, FACT, Spic, and Zuari, etc. Already, these units are under tremendous pressure. Post-WTO, the opportunity for trading in urea, potash, etc. is more than for manufacturing them.

Even amongst the phosphatic fertiliser manufacturers, Coromandel Fertiliser and EID Parry are better placed than others like Hindustan Lever Chemicals and Pradeep Phosphates.

For instance, Coromandel Fertilisers and EID Parry enjoy an operating profit margin (OPM) of 14.9 per cent and 9.8 per cent respectively, while the OPMs of other east coast players like Hindustan Lever Chemicals, Spic and Godavari Fertilisers stand at 4.7 per cent, 7.7 per cent and 2.9 per cent respectively.

The duo's better margin is due to prudent and bold management decisions. It may be recalled that Coromandel Fertiliser had boldly shut down its urea and ammonia plant sometime back when the input prices shot up unlike other players who are still operating the plant at high costs.

Sound management decisions aside, both Mr. Vellayan and Mr. Nanda are proud to list out infrastructure facilities that the group's fertiliser business posses vis-a-vis the competition. "The entire power needs of Coromandel Fertilisers are taken care by 19 MW captive power plant, thereby saving a substantial outgo," boasts Mr. Vellayan.

That apart, the own phosphoric acid manufacture plant gives the company a cost advantage of Rs.3,000 per ton. Similarly, captive jetty and molten sulphur facility offer Coromandel Fertilisers a cost saving advantage of Rs. 100 per ton and produce Rs. 25 per ton of sulphuric acid.

"We get a contribution of Rs. 25 crore per annum trading in ammonia, phosphoric acid, sulphuric acid, sulphur, sale of by products like gypsum and hydrofluosilicic acid and berth hiring.", he adds.

On the marketing front, the group is expanding its dealer network. As a part of its extension services, Coromandel Fertilisers has tied up with Canadian Potash Institute to teach advanced farming techniques to farmers in 20 villages. "A 15 per cent improvement in yield has been recorded in farms that have adopted the Canadian practice," claims Mr. Vellayan.

But what if his takeover plans do not fructify? "No problem, says Mr. Vellayan, "We can still do business in a co-operative manner, sweating the group companies assets." But will the sweating be done by two different entities – Coromandel Fertilisers and EID Parry – or a single merged outfit is to be seen.