BT Corporate: Birla's Copperfield

CORPORATE: COMMODITIES
Birla's Copperfield

Stymied by drooping fertiliser sales and arcane regulations, Indo-Gulf is looking to its thriving copper business for growth.

By Abir Pal

Going by its current fortunes, A.V. Birla Group company Indo-Gulf Corporation should think of renaming itself Indo-Gulf Copper. In the nine months to December 9, 2000, 70 per cent of the company's estimated Rs 2,600 crore sales came from copper. And in the three months till the end of fiscal 2001, Indo-Gulf's copper sales are estimated to contribute Rs 500 crore. Contrast that with 1999-2000, when Indo-Gulf's topline broke up thus: copper 64 per cent and fertilisers 36 per cent.

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Fact is, India's most efficient fertiliser producer is now more of a copper producer. Since March, Indo-Gulf's 10.5 lakh tonne Jagdishpur (Uttar Pradesh) fertiliser plant has been shut down following a government directive that says it has exceeded or produced more than its 'allowed capacity' of 8.534 lakh tonnes of urea in 2000-01. With its daily production capacity of 3,000 tonnes lying unutilised, Indo-Gulf is losing Rs 60-70 lakh per day. That's precisely why Managing Director Debu Bhattacharya is a particularly gloomy man these days. ''We're being punished for being efficient. We cannot continue like this-with production at a standstill and no growth, our very survival is at stake,'' he says.

The root of Indo-Gulf's problem is the government's policy on fertilisers. A regulated commodity, prices are heavily subsidised by the government, which also decides how much a fertiliser unit can produce in a year. Manufacturers are reimbursed the difference between the retention cost and the market price. Currently, the market price is pegged at Rs 4,600 per tonne of urea, while the subsidy ranges from Rs 1,500 to Rs 1,900 per tonne.

In addition, for anything more than its 'stated capacity' that a company produces, it is entitled to an extra 'fixed-capital' charge. But while producers claim that they're just being 'more efficient', the government feels they understate capacities in order to earn the extra subsidy. Hence, it caps the production capacity at plants like Indo-Gulf's. This time, it's been a double-whammy smack for Indo-Gulf. Fertiliser demand, which was growing at 6 per cent a year as recently as in 1998, has slowed down to 3 per cent and most industry watchers expect it to plateau at that level.

Traditionally, fertiliser has been Indo-Gulf's cash cow, enabling it to earn high margins (in 1999-2000, it earned 25 per cent returns on fertiliser sales), but now it is having to fall back on its other business-copper. Back in 1998, Indo-Gulf had set up a copper smelter, with the express intention of using copper sales to offset the perils related to a regulated segment like fertilisers. And copper is exactly what's keeping Indo-Gulf going. Copper sales in April-December, 2000, netted Rs 1,220.14 crore compared to Rs 444.48 crore worth of fertiliser sales.

The downside is the low margins in copper. But, says Bhattacharya, what it lacks in margins, it will make up in volumes. ''Copper is going to carry fertilisers. While the margins are not large, Indo-Gulf is looking at a volume play,'' he points out. On the cards: an expansion of smelting capacity from 1 lakh tonnes to 1.5 lakh tonnes and steps to improve copper output with more value-added products like foils and tubes.

It's not as if fertilisers and copper are as different as chalk and cheese. Indo-Gulf uses phosphoric acid, a by-product of copper smelting, to make Di-Ammonium Phosphate at a new plant that could generate Rs 100 crore in 2000-01.

On the stockmarket, the Indo-Gulf stock is a pure commodities play. And analysts are a bit confused as to what the company's focus would be on in future: copper or fertiliser? Back in Industry House, the AV Birla Group's Mumbai headquarters, Bhattacharya and his team may be mulling the same thing. And waiting for 2006. Why? Because that's when the fertilisers sector could get deregulated.

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