New urea policy to aid margin improvement: RCF's Rajan

Rashtriya Chemicals and Fertilisers (RCF) posted a subdued fourth quarter. The revenues for the quarter ended March 2015 were up only 5 percent at Rs 2025 crore versus Rs 1922 crore for the corresponding quarter of 2014. The EBITDA margins were down at 10 percent versus 14 percent for the same period of last fiscal. Bottom line too saw a hit despite lower finance costs and taxes.Speaking to CNBC-TV18 about the quarter’s performance and the business outlook going forward RG Rajan, CMD of the company said the reduction in profits was mainly due to impairment cost of Rs 82 crore and the impact on margins was due to rupee depreciation and cost of imported liquefied natural gas (LNG).The company imports around 15-20 percent of LNG that is used.However, going forward the company is planning new investments to boost topline growth, said Rajan. Moreover, the new urea policy will also aid margins going forward, he said. The New Urea Policy 2015 has twin objectives: maximising urea production and promoting energy efficiency in urea units.

Below is the transcript of RG Rajan’s interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.Reema: Growth was slow for you this quarter. Your revenues were up only five percent on a year-on-year basis. Your margins were under pressure, it fell from 14 percent to 10 percent. What was the reason for this slow growth in the quarter? Any pressures that you have faced?A: Basically, the reduction in the profit after tax (PAT) is on two accounts. We had to provide for the impairment of our investment in joint venture with FACT at Kochi. And secondly, the domestic gas there was some shortage and we could not run our methanol plant with imported gas. Therefore we had to make provision impairment for the methanol plant also. For these two impairments of around Rs 82 crore have reduced the profits in this quarter.

Otherwise performance wise we were at par or little better than quarter of one year, last year. But these two impairments have reduced the profits.Sonia: Even if you strip of these impairment costs, your core raw material costs, your power, fuel, freight expenditure has also gone up and that has put pressure on your margins as well. Do you see any easing of this pressure in the quarters to come or do you think things could get worse as far as the power, fuel costs are concerned?A: Basically, you are right that to some extent these have gone up because of two reasons. One is that we are using more of the imported liquefied natural gas (LNG) and their costs are higher and two,  the rupee depreciated. These two things caused the costs to go up. And of course, they will remain at the same level, hopefully, in the next quarter also, things will be the same level now.Reema: Even in this quarter you are using the high cost imported LNG and therefore your margins will stay at around 10 percent at the earnings before interest, taxes, depreciation and amortization (EBITDA) level? A: Maybe it may go up little bit because of the new policy announced by government in Urea, which is a very good policy. We hope that we will have better margins in Urea and so the margins should go up in the coming quarters.Sonia: By the end of this year, you managed about 17 percent growth in your top-line at about Rs 7,700 crore and even in this quarter, your Trombay unit did quite well. Your revenues went up 20 percent. Any indication of how much the growth could be in FY16 on the top-line?A: Because already, we are maximising all production at both the plants. There is not much scope for the growth from the current operations but we are planning new investments in the coming years, and when they shape of course, then the top-line will go up significantly. Reema: You told us the total impairment was about Rs 82 crore which is for your Kochi plant as well as the methanol plant. With respect to the methanol plant, you said there was shortage of gas because of which it did not operate at its full capacity. Have we seen a pick-up in the month of April and May and what would be the; give us some sense about how the methanol plant will do in the coming quarters.A: Basically for methanol plant, there are two things, one is that requires domestic gas and secondly, the prices have come down in the recent quarters. Unless the prices go up and unless we get domestic gas for the methanol operations. This plant cannot be operated because at current selling price of methanol and LNG is not viable. So, even today, this plant is shut down, methanol plant is shut down.Sonia: You were telling us that you were using more imported LNG. Can you just give us the break-up of how much is your usage of imported versus domestic and how much is the difference in the cost?A: Out of the total requirement of 6.5 million metric standard cubic metres per day (MMSCMD) of gas, around 1-1.5, it varies on a day-to-day basis, is LNG. Say roughly around 15-20 percent is imported LNG and domestic, suppose that is around USD 7-8 and imported LNG is currently around USD 13-14 per million British thermal units (MMBTU). Reema: The cabinet very recently approved the comprehensive new Urea policy for the next four years and you also alluded to the fact that you hope for better margins on Urea because of this policy. Take us through how this policy will benefit a company like RCF as well as how much can your margins improve by?A: Basically, now all the urea plants in the country will get gas at the same price, at pooled gas price and the energy norms have been tweaked to some extent. W have also done a lot of energy conservation measures in the last four years, so this new policy will help us to produce more in the coming years from Urea, maximise the Urea operations and also benefit from this policy around Rs 100 crore per year. That will be the benefit from this new policy, roughly.