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Last Updated : Oct 10, 2016 01:37 PM IST | Source: CNBC-TV18

Gas price revision to boost margins by 7-8%: GSFC

The gas price cut will see reduced interest costs and lower the working capital for the company, said VD Nanavaty, Senior VP-Finance and Chief Finance Officer of GSFC. This is likely to lead to a 7-8 percent rise in margins, he said.

The 18 percent reduction in domestic natural gas price that the government effected on October 1 will help Gujarat State Fertilizers & Chemicals boost margins, according to its management.

The gas price cut will see reduced interest costs and lower the working capital for the company, said VD Nanavaty, Senior VP-Finance and Chief Finance Officer of GSFC. This is likely to lead to a 7-8 percent rise in margins, he said.

Below is the verbatim transcript of VD Nanavaty’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Latha: The cut in gas prices, how does that make life easier for you, should we see it in better margins in the second half?

A: Yes, for urea of course it is a pass through. So, the government will mop up the gain but for other fertilisers and our chemical segments this reduction of around 18 percent in gas price will be a good thing going forward.

Latha: You will not have to pass on that advantage for your chemical prices as well you will have perhaps lower working capital requirement, basically how much should margins therefore improve?

A: Yes, definitely there will be lower working capital requirement because subsidy per tonne will go down so that should have been reducing our interest burden and for P&K fertilisers and chemicals gas price is not a pass through. So, we will retain the advantage.

Latha: Net-net margin advantage is how much?

A: Prices have gone down by 18 percent. So, let us see at least some 7-8 percent rise in overall margin.

Anuj: What is the current situation in urea pricing and also on subsidy front if you could give some update on that?

A: Yes, urea pricing with this gas pull price mechanism they have tried to equalise the urea prices throughout the country, so still it is plant specific pricing for which GSFC is around 21,000, out of which the farmer pays 5,000-6,000 and the balance is paid by government where any subsidy held up would block our working capital substantially. But with this lower gas price we will have a lower blockage of funds. So, that should be helping us in the reducing interest burden.

Latha: There was something in your Q1 numbers we didn't quite understand. Cost of raw materials consumed went up 59 percent and inventory cost went up 63 percent. If benzene prices are falling, crude derivatives are falling, gas prices fell even in the first quarter compared to the previous quarter. Why is it that your raw material cost went up so much and will that persist in the second half?

A: No, that went on because we substantially increased the fertiliser production particularly due to better availability of Phos Acid. So, our fertiliser production went up by 43 percent in year-on-year (Y-o-Y) basis in quarter one. So, that is why the absolute number of material consumed is high, otherwise per tonne raw material cost of most of the inputs are down. Benzene is down, rock phosphate is down, Phos Acid as you maybe knowing is USD 715 in the quarter four of last FY. It is down to USD 610 in Q2.

Latha: But if that is the case why did your revenue go down? You are saying you produced 43 percent more, but revenue was down five percent, earnings before interest, taxes, depreciation and amortisation (EBITDA) was down 37 percent.

A: There are two reasons. One is that as you rightly connected the production was higher but it was not sold, so part of that went up to build inventory that is why inventory went up. But as you may be knowing the government has substantially reduced the subsidy on P&K fertilisers. So, my average subsidy is down by 20-25 percent compared to last year and maximum retail price (MRP) of the fertiliser also went down along with the reduction in raw material costs.

Anuj: What would that mean for the numbers? Because your FY16 profit was down five percent compared to FY15 and Q1 actually was even worse. So, suffice to say FY17 would be even lower than FY16?

A: Yes, little bit, not much because we will make up, one is through trading and other is through somewhat rise in the volumes because this financial numbers don't tell the whole story. Our volumes are intact and as I said we have produced more. So, really production volume is more. But now we have to convert into a topline numbers.

Anuj: How much will you make up?

A: Possibly we should add up at least on a flat basis if not down compared to last year.

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First Published on Oct 10, 2016 10:39 am
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