A REPORT ON WORKING CAPITAL MANAGEMENT AT NAGARJUNA FERTILIZERS AND CHEMICALS LIMITED

Abstract

This project was started with a view of understanding working capital management of Nagarjuna Fertilizers and Chemicals limited The first step was the understanding of the fertilizer (urea) industry. It required study of major players of the industry and their market share. Since urea industry is regulated by government and government plays a vital role in the pricing of the urea, pricing of urea was studied for the better understanding of the industry. Bio fertilizer is an upcoming sector of the fertilizer industry, so it was also studied. The intensity of competition was studied using Porters five forces model. Next, NFCL as a company was studied. It included study of various products offered by the company, manufacturing unit and financials of the company that included share holding pattern, market price data and CDR as well. Company was also analyzed using SWOT. Some processes like collections, specialty fertilizer division etc were also studied. Ratio analysis was also done to understand the performance of the company .ratios related to receivables for NFCL was calculated and was compared with the major players of the industry. Last three years trend was also observed. Next, Du Pont analysis was done. Three major international players in nitrogenous fertilizer industry across the globe were studied with respect to receivables and their common practices in receivables management was found out. Factoring can be an option for NFCL to manage its receivables, so this was also studied. Suggestions and recommendations were made to conclude the project.

Introduction

India is poised for another green revolution. With increasing population it needs to correspondingly increase its food production to feed its mammoth population. To be able to do this India is aiming to double its food production by 2010-12. However if this is going to happen then fertilizer industry is going to play a very crucial role and so it needs to increase its urea production. Currently India is the third largest producer and consumer of fertilizers in the world.

Thus a project at a fertilizer company like Nagarjuna Fertilizers and Chemicals limited was interesting and challenging as well as it would not only provide an opportunity to get a picture of fertilizer industry (urea in particular) and working capital management of Nagarjuna Fertilizers and Chemicals Limited (NFCL) but would also provide an opportunity to interact to industry people through NFCL employees.

The project was undertaken with following objectives in mind :-

1) to develop an understanding or fertilizer industry in general and NFCL in particular 2) to understand the overall working of the of the company to understand the nuances of receivables management, keeping NFCL as a reference company for this purpose. 3) to come up with suitable recommendations and suggestions that would be useful to the company

However the project suffers from the following limitations :-

1) Study is based at Hyderabad only, though NFCL has its operations in Orissa , Madhya Pradesh, West Bengal and Karnataka also. 2) Too much dependence on secondary data 3) A lot of relevant data is inaccessible because of the data being confidential. Company overview

NFCL is the flagship company of Nagarjuna group. Based at Hyderabad, the company is mainly into urea industry Products Manufactured products Urea ( 46 % nitrogen) used as fertilizer Anhydrous ammonia used for production of urea and several other products

Marketed products Diammonium phosphate (DAP) used as fertilizer Muriate of potash (MOP) used as fertilizer , water softener and in the manufacturing of KOH Zinc sulphate heptahydrate- used as fertilizer Zinc sulphate monohydrate used as fertilizer

Services offered---KVK Raju krishi vigyan kendram for imparting knowledge, technology and latest agricultural practices to farmers to increase farm output

Trading products speciality fertilizers imported from Israel and China

Nagarjuna management services providing expertise in maintaining and managing chemical plants specially ones manufacturing urea and ammonia

Micro irrigation providing water management services. Company ranks third in providing micro irrigation solutions in the country

Various subsidiary companies are NOCL(Nagarjuna Oil Corporation Limited),Nagarjuna Power Corporation Limited.

Operations (manufacturing) The company has its manufacturing operations at Kakinada, East Godawari District , Andhra Pradesh. There are two manufacturing units. The gas based plant was established with the help of technical expertise of Snamprogetti, Italy and Haldor Topsoe, Denmark.

Plant 1

Plant 2

Gas based urea: 1500 mt/day

40% gas 60% naptha urea: 1500mt/day

ammonia: 900mt/day

ammonia:900mt/day

In the year 2009-10 the company produced 13.93 lakh tonnes of urea as against the target of 11.94 tonnes , which was an all time high. The British Safety Council conducted an audit of companys plants at Kakinada and awarded Five Star Rating to the Plants. During the year,2009-10, the company registered cumulative accident free days of 388 days as on March 31,2009. During the year under review the companys plant received ISO 9001:2000 upgraded certification for Quality Management System and ISO 14001:1996 recertification for Environmental Management System.1 OPERATIONAL PERFORMANCE

The company had to face severe prior to 08-09 due to reasons like investments in various core sector projects, changes in the Government policies on urea, sluggishness in the off-take of financial constraints

3500 3000 n 2500 o i l l i 2000 m . s 1500 R 1000 500 0

Ope tingProfit Ma in(RHS) ra rg

2002 -03
Operating Profit(LHS)

2003 -04

2004 -05
Operating Profit Margin (RHS)

urea, subsequent cap on production. This had a bad impact on the companys performance and later the management decided to go for CDR.

Adopting CDR made a significant and quite visible change on the companys performance and the operating profit rose by 66% and the operating profit margin increased by approximately 40% in FY2009-10 as compared to FY2008-09. But this rise was ephemeral and the following financial
1

annual report , 2009 -10

year saw a fall in the profits. The operating profit margin reduced by 24% and the operating profit fell by 11%. The reason for this fall can be attributed mainly to the bad rainfall during the monsoons.

Operating Profit 3Q Performance -

The analysis of performance of the company during the first three quarters of F2009-10 reveals the pattern shown in the graph. Though the sales have increased 18%, the operating profit saw an increase of 1.6% only. The

12000 10000 ) n o 8000 i l l i m 6000 . s R 4000 ( 2000 0 Apr-Dec 2004 Source: www.bseindia.com Apr-Dec 2005

26.00 25.00 24.00 ) 22.00 % ( Operating Profit 21.00

Sales

23.00

20.00
Operating Profit 19.00 Margin

by

operating profit margin plummeted by 13% owning to the various rules and subsidies levied by the Government.

Marketing The company operates mainly in the states of AP, Orissa, West Bengal and Chattisgarh. During the year 2009-10 company, during the company achieved an all time record sale of 15.63 lakh MTs of urea as compared to the previous years urea sale of 11.94MTs. The company during the year handled 2.01 lakh MTs. of imported Urea on behalf of the Government of India. This helped increase the market share of the company2.

The company during the year, was a leader with increased market share for Urea in Andhra Pradesh, West Bengal and a major market share in Orissa.

Annual report,2009-10

Market share

State

2009

2010

West Bengal AP Orissa

27% 51% 46%

35% 53.5% 46%

Source : annual report 2009-10

Urea is marketed under the brand name of Nagarjuna and is a fairly respected brand in the industry.

Financials

Distribution of shareholding as on March 31,2010:

Category a Promoters holding b Non promoter holding 1. institutional investors a. mutual funds and UTI

No. of shares held 15,08,88,308

Percentage of shareholding 36.18

4,54,350

0.10

b. banks , financial institutions insurance companies(central/ state Govt. institutions/ non-govt institutions)

3,38,63,609

8.12

c Foreign institutional investors II others a) private corporate bodies b) Indian public c) NRIs / OCBs

4,95,098

0.11

4,39,75,890 18,29,14,299 44,29,039

10.55 43.86 1.06

Grand total

41,70,20,593

100.00

Source: annual report (NFCL),2009-10

Company earned a profit of Rs 29.52 crores in the year 2009-010 and paid a preference dividend of 18000 Rs with EPS of 0.70 Rs The last time the company paid any significant dividend was in2005 2006 (10 %). It is also notable that the company was sanctioned a debt restructuring package (including working capital management) under corporate debt restructuring (CDR) scheme with effect from April 2008. All the lenders except UTI AMC private limited agreed for this. Company also underwent business process reengineering (BPR) in 2008 and is also SAP driven. The dividend history of last five years are

YEAR

RATE OF DIVIDEND (%)

2009-10 2008-09 2007-08 2006-07 2005-06

Pref. dividend of 0.18 lakhs NIL NIL NIL 10

Market price data :

Date 1-Mar-0 1-Apr-09 2-May-09 1-Jun-09 1-Jul-09 1-Aug-09 1-Sep-09 3-Oct-09 1-Nov-09 1-Dec-09 2-Jan-10 1-Feb-10 3-Mar-10

Closing price 14.7 13.25 12.7 15.0 14.15 16.3 17.7 15.9 14.4 14.4 15.6 13.95 14.25

Note: drawn from market price of shares taken from NSE

Corporate debt restructuring The company was sanctioned a debt restructuring package (including working capital management ) under corporate debt restructuring(CDR) scheme on 20.02.2008 effective from 1 April 2010. All the lenders, except UTI AMC Pvt. Ltd., approved the package. The main features of the package are a) reduction of interest rates from 1 April 20. b) Issue of 0.01 % coupon optionally convertible cumulative redeemable preference shares(OCCRPS)/Zero Coupon Debentures (ZCD) to compensate the differential interest for the year 2007-08. c) Rescheduling of the payment of principal amount of loan. d) The lenders have the right to reset the interest rates after every three years. e) The lenders shall have the right to convert 20% of their outstanding debt after financial year 31.03.2011 into equity and, in the event of any default in servicing the debt, the lenders shall also have the right to convert the defaulted amounts

into equity (at par) or any other instruments. f) The promoters shall be given the first right of refusal, if the converted shares/instruments are decided to be sold by the lenders. 3 FINANCIAL PERFORMANCE

annual report 2009-10

As a result high debt and interest payments and price related factors net profit during FY2008-03 went negative but implementation CDR allowed it make a quick comeback. Net profit increased by about 114% to Rs 174.4m in FY2003-04 as compared to Rs -1274.7m in FY2002-03. As a result of CDR financial position of the company improved and further increased by 69% in Fy2009-10. Similar kind of growth pattern is observed in the case of the net profit margin which indicates that there has been a continuous increase in the net profit earned by the company over the sales in the financial periods concerned. The first three quarters of 2009 was excellent for the company with the net profit increasing by 263% and the net profit margin increasing by 209% as compared to same period in the previous financial year. Due to CDR the interest payment on debts reduced which resulted in improved financial condition of the company. Even the cash flow of the company improved after it went for CDR. Cash flows from operating activities, investment activities and financing activities have increased from FY 2008-09 to 2009-10. During FY2008-09,
3 ,0 0 0.0 0 2 ,5 0 0 .0 0 2 ,0 0 0.0 0 1 ,5 0 0 .0 0 ) n o i 1 ,0 0 0 .0 0 l l i m 5 0 0.0 0 . s R ( 0.0 0 -5 0 0.0 0 -1,0 0 0.0 0 -1,5 0 0.0 0
2002-03 Source : Annual R eports 2003-04 2004-05

Cash Flow Composite

Operating Acivities

Inves tment Activities

Finan cing Activities

NFCL tried to payoff its debts and invest into other ventures using the cash obtained from the operating activities as well as it utilized the funds accumulated over previous financial years. But after CDR took place, an inflow of cash was seen from all the activities. Investments were made in

the company and the company .It also issued preferential shares, convertible to equity shares, after a period of time. Due to relatively poor sales in FY2008-09, the cash from operating activities was lower as compared to previous financial year but cash inflow was seen in from financing and investment activities. Cash from investments rose to Rs 292.36m in FY2008-09 from Rs 878.62m into investments in the previous year and cash from financing activities raised to Rs 531.13m during FY2007-08 from Rs 796.31m in FY2008-09. This trend was followed in FY2009-10 too with the cash flow from operating activities soaring up by 218.59% as compared to the previous financial year. Similarly the cash flow from investments in the company increased by 603.46%. But there was a fall of 20% in cash flow from financing activities owing to the sale of preference shares as compared to the previous year.

Study of various functions at NFCL During the SIP we were also introduced to some of the functions at NFCL, which are briefly explained below. Process(collections) Dealer places order to the sales officer who issues sales cum delivery order and then goods are delivered to the dealer. If the dealer is ready to make payment in time then its fine or else amount is deducted from dealers security advance which is a sort of security deposit of the dealers with the company. However, it should be noted that it seldom happens. Now, if the dealer has defaulted in the past then he is allowed to pay through demand draft only or else he can pay through other instruments such as out station cheque. If SBI is present at the point of sale then payment is through SBI cash management product (SBI CMP) otherwise payment is through corporation banks corp FCS (fast collection services). Eitherway money is transferred in a day to Hyderabad in companys cash credit account. Process (specialty fertilizer division) Salient features of specialty fertilizer division

a) Import mainly from china and Israel. b) Unlike urea sold all over the country. However Pune and Gujrat account for 40 % of the sale. c) Very small volume of business approximately 50,000 tonnes. d) Used mainly with micro irrigation. e) Discounts offered on early cash payment (unlike urea business) f) Main products are multi-k, poly feed , SOP, MAP g) Company also offers micro irrigation solutions. In micro irrigation 50% of the subsidy is provided by the government. Specialty fertilizer is imported from Israel and China at Chennai and Bombay ports in 25 Kg packs. Now, if there is a demand for 25 kg packs , packets are supplied to various godowns to meet the demand. However if there is no demand for 25 kg packs, packets are sent to Hyderabad for repackaging into small packs of 2 kg, 1 kg and kg packs. If at the point of sale urea business is present, there is decentralised invoicing but if there is no urea business at the point of sale delivery challan and warehouse report is sent to Hyderabad. Invoice is dispatched from Hyderabad every fortnightly.

NEED FOR THE STUDY

To know that current assets are needed because sales do not convert into cash

instantaneously.

To understand that an operating cycle involved in the conversion of sales into cash.

To identify the time gaps in purchase of raw materials and production, production and sales, sales and realization of cash.

To understand that the firm should maintain sound working capital position that is having adequate working capital to run its business operations.

To understand that both excessive and inadequate working capital means ideal funds which earns no profit for the firm. So the firm should maintain balanced working capital.

SCOPE OF THE STUDY

The capital management plays a vital role in the accomplishment of organization objectives in the corporate scenario the concept capital can be classified in o fixed capitals and working capital. The fixed capital covers all the crucial decisions such as capital budgeting decisions, expansion and modernization decisions

The working capital covers the total expenditure, which concentrates on routine organization activities. It is a difficult task before task before an organization to keep an amount as working capital

However, the amount of working capital can be determined on the length of activities, the size of the activities, the area of policy and procedure and the volume of an organization. The

working capital management reviles around the performance of day to day activities. If the size of activities of an organization is high the company should maintain as vice versa.

The researcher has accomplished the main purpose of her project work by collecting the data majorly form secondary sources.

OBJECTIVES OF THE STUDY

To study the existing system of working capital management in Nagarjuna fertilizers

To examine the feasibility of present system of Managing cash, Debtors and Inventory To analyze the financial performance of the company with reference to its working capital components

Suggesting a better way if any for improving management or working capital To maintain the Adequate Working Capital

METHODOLGY OF THE STUDY

The data is corrected with the help of

 Primary data Secondary data

Primary data:

Primary data has been collected from the return statements of the company.

Interaction with the planning and development department. Interaction with the finance department

Secondary data:

Accounting manuals of Nagarjuna fertilizers Websites of Nagarjuna fertilizers Printed matters of (from authorized text book

LIMITATIONS OF THE STUDY

The scope is limited to the operations of Nagarjuna fertilizers.

The information obtained from the Primary and secondary sources were limited to

Nagarjuna fertilizers.

 The key performance indications were taken from 2003-2008.

The operating results, the Balance sheet was of last Six years.

Comparison analysis was done in comparison of its sister units

OBJECTIVES OF THE STUDY

Growth

To ensure a steady growth by enhancing the competitive edge of Nagarjuna fertilizers in existing Business, News areas and International operation so as to fulfill National expectations from Nagarjuna fertilizers.

Profitability

To provide a reasonable and adequate return on Capital employed, Primary through improvements in operational efficiency, capital Utilization and productivity and generate adequate internal resources to Finance the company's growth.

Technology

To achieve technology excellence in operations by development of Indigenous Technologies to and efficient absorption and adaptation of imported Technologies to suit Business needs and priorities and provide a competitive advantage of the company

Image

To fulfill the expectation which stock holders like government as own, employees, customers and the country at large have from BHEL References:

Bhattacharya,Hrishikes, Working Capital ManagementStrategies and Techniques,2001

Pandey,I M(1978), Financial management , 2009

Damodran, Aswath ,Corporate finance,2002

ICMR , Financial Management, 2004

Annual reports of NFCL for the years 2004-09 , 2003-04, 2002-04

Kolanu ,T. ; Kumar, Sunil,Greening agriculture in India : An overview of opportunity and constraints,2000

Primavesi, Ana ; Soil life and chemical fertilizers , 2001

Singh, Sukhpal ;Marketing of Indian Organic Products: Status, Issues, and Prospects (www.iimahd.ernet.in )

www.Fert.nic.in

www.bseindia.com

www.QuickMBA.com

www.nagarjunafertilizers.com

www.nagarjunagroup.com

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http://www.dailyindia.com/show/14040.php/India_expects_higher_food_grain_production http://www.unu.edu/Unupress/unupbooks/80478e/80478E10.htm http://www.zuari-chambal.com/Chambal_AR_PDF.pdf.