Zero Budget Farming and NFL

Photo: India Mart

Synthetic Fertilizers enrich soil with nitrogen, phosphorous and potassium; the three primary nutrients necessary for plant growth.

Post union budget for FY21, there has been a spate of copy cat versions of media reports that seemed to suggest that Zero budget farming is anti-fertilizer, anti-pesticides, and anti-chemical move; as it emphasizes largely on traditional methods of farming. 

However,  the reality is different. It is actually a theory that calls for the attention of the farmers towards using natural farming practices to cultivate crops. Without pesticides, the crop yield would come down drastically.

But that is actually not the issue here. We need to look at this from budget speech angle,  when  I believe the FM, Nirmala Sitaraman actually meant of a balanced use of fertilizers because a number of studies have shown that excess use of Urea is not only hindering crop yield but is also a cause of soil pollution. This is fine and we need to support the FM on this noble issue. 

However, even if this is the case then the Fertilizer companies, especially those who are heavy on Urea,  need not have to worry much as India has a deficit in Urea production of around 6/7 million Metric Tones and a reduction in import will help the government in balancing BOP.  And at the same time check on the borrowings. "

2ndly, we need to understand that organic farming though has been romanticized like imparting education through Sanskrit Medium,  cannot in toto, replace the synthetic fertilizers. 

Mainly, because of logistic problems and our traditions or customs. Tell me how many farmers would like to use Pig excreta or Chicken excreta or bone meal (organic manure from crushes boner of animals) in their fields,  especially those who are traditionally vegetarians? 

2ndly, like we know the specific locations for getting inorganic manure,  most of us are not aware from where or from which source, Phosphate and Potash or Calcium come. Right? 

So, in the immediate future or in the next 2/3 the fertilizer companies who are only into the production of inorganic manure need not worry.

Now against this backdrop,  let us see what is the investment rationale of buying the scrip of National Fertilisers Ltd or NFL (Rs.25.55):

• NFL has a market cap of only Rs.1260.79 crore,  P/E of  8.44 against the Industry P/E of 12.17. A liberal P/E of 10 for this PSU mini Ratna, can take this scrip to above Rs.30.
• Its FY20, expected EPS should be around Rs.6/7. Which gives the natural target of around Rs.45/50.
• The book value of the shares of the company is Rs.45.23. This is a disinvestment Candidate and hence book value is very important, for QIP or for strategic sell. 
• It is constantly paying dividend during the last 5 years and at the current price of Rs.25.55, the dividend yield comes at 7.24%, which is more than one year saving bank interest rate. 
• NFL reported a 3% increase in its consolidated net profit at Rs.107.11 crore for the quarter ended December as against Rs.103.59 crore in Q3FY19. During the nine months (April -December 2019) of current financial year, the total fertilizers sale rose by 25% to 43.73 lakh tonnes. Hence, it has sound financials and do give us much ammunition for large investments in the shares of this company. 
• NFL, currently operates five natural gas based urea Plants, located at Nangal, Bathinda in Punjab, Panipat in Haryana and two plants at Vijaipur in Madhya Pradesh.
• Apart from making urea,  it is also into Bio Fertilizers, which means it is going to be positively affected by the FM's new initiative of "Going Green".
• The company's Chairman Mr.Mishra, in a YouTube video has said that the company would like to import the products which it doesn't manufacture and trade in India, through various channels. It is also implementing various energy saving devices in their plants according  to Mr. Mishra. 

Introduction:

NFL, a Schedule ‘A’ & a Mini Ratna (Category-I) Company, having its registered office at New Delhi was incorporated on 23^rd August 1974. Its Corporate Office is at NOIDA (U.P). It has an authorized capital of Rs. 1000 crore and a paid up capital of
Rs. 490.58 crore out of which Government of India’s share is 74.71 % and 25.29 % is held by financial institutions & others.

Manufacturing Plants:

NFL has five gas based Ammonia-Urea plants viz. Nangal & Bathinda plants in Punjab, Panipat plant in Haryana and two plants at Vijaipur at District Guna, in Madhya Pradesh.
The Panipat, Bathinda & Nangal plants were revamped for feed stock conversion from Fuel Oil to Natural Gas, an eco-friendly fuel during 2012-13 / 2013-14.
Vijaipur plants of the company were also revamped for energy savings & capacity enhancement during 2012-13, thus increasing its total annual capacity from 20.66 LMT from 17.29 LMT, an increase of 20%. The company currently has a total annual installed capacity of 35.68 LMT (Re-assessed capacity of 32.31 LMT) & is the 2^nd largest producer of Urea in the country with a share of about 16% of total Urea production in the country.

Company has a Bio-Fertilizers Plant at Vijaipur with a capacity of 600 tonnes of solid & liquid Bio-Fertilizers to produce three strains of Bio-Fertilizers viz. PSB, Rhizobium and Azotobacter are produced.

Products:

NFL is engaged in manufacturing and marketing of Neem Coated Urea, three strains of Bio-Fertilizers (solid & liquid) and other allied Industrial products like Ammonia, Nitric Acid, Ammonium Nitrate, Sodium Nitrite and Sodium Nitrate. The brand name of the company is popularly known in the market as ‘KISAN’.

The company has also started production of certified seeds under its Seeds Multiplication Program for sale under its own brand name as Kisan Beej.

Imports & Trading:

Apart from manufacturing business, the company is also expanding its business, in a consistent & phased manner, by way of imports and trading of various agro-inputs like Non-Urea Fertilizers, certified seeds, Agrochemicals, Bentonite Sulphur, City compost through its existing PAN India dealer’s network under single window concept.

Marketing setup:

NFL Marketing Network comprises of Central Marketing Office at NOIDA, three Zonal Offices at Bhopal, Lucknow & Chandigarh, 16 State & 2 UT Offices and 35 Area offices spread across the marketing territory of NFL.

The company has 10 Soil testing laboratories (6 Static & 4 Mobile) with annual capacity of testing around 65000 samples for Macro Nutrients and 10000 samples for Micro Nutrients and are fully dedicated to the testing of soil health helping farmers to facilitate balanced fertilization.

Research Centers

The company has a R&D set up at each Manufacturing Unit i.e. at Nangal, Panipat, Bathinda and Vijaipur as well as at Corporate Office (Noida) which are primarily focused and undertakes various innovation studies to develop new, efficient & safer processes, value added products and suggest implementation of energy saving schemes.

Implementation of Energy Saving Schemes:

The company has recently implemented various energy saving schemes such as Purge gas recovery plant at Vijaipur-II, hooking up of old redundant Ammonia Synthesis Converter (S-200) with New Converter (S-300) at Panipat & Bathinda Units and additional 2 nos. cooling tower cells in Urea Plant at Vijaipur-II. The company has also commissioned two roof top solar plants of 100 KW & 90 KW at Corporate Office, Noida and Bathinda Unit.

Further, in order to meet the strict energy norms fixed by GoI under New Urea Policy 2015 w.e.f. 01-04-2018, though the investment is economically unviable without suitable dispensation as sought by NFL from GoI, the company is in the process of implementing energy saving schemes i.e. Installation of Gas Turbine Generator along with Heat Recovery Steam Generation Unit at Panipat, Bathinda & Nangal Units with an estimated cost of Rs. 700 crore.

The company is also going to implement energy saving schemes at Vijaipur-I & II to further bring down the energy consumption.

New Investments:

  Bentonite Sulphur Plant of 25000 MTPA capacity at Panipat Unit with a cost of Rs. 44 crore has been commissioned on 20th December 2017  Setting up Di-nitrogen Tetroxide (N2O4) plant at Vijaipur Unit on Built Own Operate & Supply basis (BOOS) for ISRO  R&D initiative with M/s IARI, New Delhi to design & develop an applicator & logistic arrangement for application of Urea Ammonia Nitrate (UAN) which is envisaged to be manufactured at Nangal Unit.

Besides above, the company is also envisaging the following investments:

  Construction of Natural draft prilling towers at Panipat & Bathinda Units to improve Urea prill size with estimated cost of Rs. 90 crore (Rs. 45 crore each for Panipat & Bathinda Unit).  Agro Chemical plant at Bathinda for production of farm insecticides  Di-Ammonium Phosphate (DAP) plant of 10 LMT per annum along with Phosphoric Acid Plant in Algeria under buy back arrangement & in Joint Venture mode with GSFC, RCF and NMDC.   Seed processing plants at Indore, Bathinda and Panipat.

Joint venture

NFL in collaboration with M/s EIL and M/s FCIL has formed a Joint Venture (JV) Company as Ramagundam Fertilizers & Chemicals Limited (RFCL) to revive the old FCIL plant at Ramagundam. The equity participation in the joint venture is 26% each by NFL & EIL, 11% by FCIL and 11% by State Government of Telangana. This plant shall have the annual Urea capacity of 12.71 LMT. The zero date of the project is 25th September 2015 and is targeted to be completed by end of December 2018. The project is in progress.

Conclusion: National Fertilizers Limited (NFL) is a massive company and it is surprising how the shares are triaded at almost the half of Book Value. 

Buy the shares of the company for short and medium term targets of Rs. 32/41/47. There is no need to keep SL as it is an investment grade scrip.