Gas pooling to pave way for further reforms: Zuari Agro

The Union Cabinet Tuesday approved gas pooling for 30 urea manufacturing units in the country. The move would allow sale of gas at a composite price arrived at by pooling gas. This would be a very positive step for the industry as a whole and specifically for the nitrogenous industry said Kapil Mehan, MD & Group CEO, Zuari Agro Chem in an interview to CNBC-TV18. The move will not only help reduce the working capital but will also pave the way for further reforms in terms of pricing, nutrient based subsidy etc., Mehan said. The single price will be a will help level the cost diversity between different units, which was impacting the industry adversely, said Mehan. According to him the cost of gas is likely to go down to USD 11-12 per mmBtu (million metric British thermal units). The company at presents operates at a cost of USD 20 per mmBtu.

Below is the transcript of Kapil Mehan’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What is your first take on this pooling of gas and therefore a uniform price for all fertiliser units? A: It is a very positive and a good step for the industry. What it does is basically reduces the cost diversity across different technologies, across different vintage of plants. This positions the industry for further reforms in terms pricing and in terms of moving over to nutrient based subsidy, etc it is a very positive step for the nitrogenous domestic industry which is the second largest manufacturing base in the world.Latha: Immediately does this considering that at the moment when you are pooling, you are doing it at a time when the imported LNG is at its lowest over the lowest 10 years. So, what does this mean to cash flows, cost, working capital, does it increase or decrease the subsidy burden and therefore the cash flow and working capital cycle?A: I think it will overall reduce the working capital cycle. So, companies who are on imported LNG and who are using high cost material, it definitely helps them to achieve some working capital rationalisation. The major advantage is a strategic one where there is so much of cost diversity between different units that it was not leading up to further reforms in the industry and this single price of gas will pave the way for that. The next step will be a bigger step but this is one enabling step which was required to be taken. So, within the industry, it is very positive for the nitrogenous industry as well as overall fertiliser industry. Once the reform happens, the nitrogenous and urea factor, it will lead to better utilisation of nutrients. Farmers will be more judicious in terms of using balanced nutrients and it will help the government also help better control over the subsidy outgo.Sonia: What is your own cost of gas and now that there will be a uniform gas cost, how much will a company like Zuari benefit from it? A: We have been on a high cost imported LNG basis and our cost was in the range of about USD 20 per mmbtu or so. We have not seen what the final numbers are and the notification is yet to be out but definitely it will be lower than that because we have no domestic gas being used currently in our Goa plant. I think that will be a positive for the company. Sonia: There are some analysts who have interacted with various industry players who believe that the average cost of gas could now be as low as about USD 11-12 per mmbtu. A: That is what we expect it to be around. Latha: What is the sense you are getting in terms of demand now? We have heard a lot of telltale stories of rural demand being dismal, are things very bad or are they turning the corner? A: The cash flows in rural areas are affected because agricultural commodity prices have been low and that definitely impacts the demand for household goods. However, I think as far as farm goods are concerned, they are looking good because the forecast for rains is good so far.Right now we are in an off season kind of a situation where people are preparing to harvest their rabi crops. Going forward the demand will be definitely better than last year because last year was a stressful year as far as agriculture is concerned. Sonia: What is your own working capital requirement at this point and post this how much do you think it could come down to? A: I don’t have the exact numbers and as it is we have entered the blackout period for our annual closing. So, I won’t be able to share the exact numbers. However, definitely directionally it will come down substantially. Sonia: Do you think pooling could be a precursor to perhaps urea decontrol because you said it is a precursor to bigger things? A: I personally feel that my assessment is that this is one step which was required to be taken for further pricing reforms in the industry like moving in to the nutrient based subsidy is concerned which was major demand of industry. With this cost diversity to a large extent having being taken care, the government will be in a position to move to the next step as and when it feels that it is appropriate to do so.