Only a lower depreciation rate, applied retrospectively, helped the urea major report higher profits in 1997-98.

By Dilip Maitra

It used an extra nutrient to boost its bottomline. Or so suggests a financial analysis. Last year, the Rs 795.88-crore Nagarjuna Fertilizers & Chemicals Ltd (NFCL) was hit by the changes in the government's policies, lower sales--and even lower profits. To alter the financial chemistry, the CEO, K.S. Raju, 47, tinkered with the company's accounting practices to show net profits of Rs 122.10 crore, which were 154 per cent higher than the actual profits of Rs 47.98 crore.

To achieve this, the company only had to change the manner in which depreciation had been calculated in previous years. According to NFCL's summary of audited financial results for the year ended March 31, 1998, the company provided a mere Rs 5.96 crore as depreciation in 1997-98 as compared to Rs 76.61 crore in the previous year.

How did NFCL manage to account for such a meagre amount as depreciation even though its asset-base was still Rs 926 crore as on March 31, 1997? According to Schedule XIV of the Companies Act, 1956, urea-manufacturing companies can claim depreciation at the rate of 5.28 per cent of their assets every year. This is because they run continuous process plants. But the rate prescribed by the Fertiliser Industry Co-ordination Committee for deciding the retention price for fertiliser companies is 6.33 per cent.

Until 1996-97, NFCL claimed depreciation at the rate of 6.33 per cent. Suddenly, in 1997-98, the company decided to charge depreciation at the lower rate of 5.28 per cent with "retrospective effect." Therefore, it wrote back the Excess Depreciation of Rs 61.70 crore that it had provided between 1992-93 and 1996-97. The result: the depreciation of Rs 81.66 crore for 1997-98 fell to a mere Rs 5.96 crore. Changing the depreciation accounting norm, though legal, was, perhaps, the only way for NFCL to show a respectable bottomline in a year in which its urea sales dropped by 23 per cent to 8.87 lakh tonnes.

It may be recalled that in November, 1997, the government decided to change its policy regarding the subsidy it gave urea-manufacturers through the Retention Price Mechanism. Under the new policy, the subsidy was restricted to a capacity utilisation level of 115 per cent per unit. What that meant was that if a unit was operating at a higher utilisation level, it would have to sell the excess production without receiving a subsidy for it. The government's decision was prompted by two reasons: to reduce the ballooning subsidy on domestic urea, which stood at Rs 6,600 crore in 1997-98 against a budgeted Rs 5,240 crore. And, two, cheaper global urea prices, which made it attractive for the government to import urea rather than encourage the domestic companies to produce more.

Unfortunately, NFCL produced 6.90 lakh tonnes of urea in 1997-98: a capacity utilisation of 138 per cent on an installed capacity of 5 lakh tonnes per annum (tpa). Like other urea-manufacturers, who had been consistently reporting utilisation levels of over 120 per cent, NFCL also tried to curtail its output after the new policy was announced. Admits P.K. Madhav, 44, Director (Finance), NFCL: "It affected our sales between October 1, 1997 and March 31, 1998."

Moreover, the company's turnover was 13.72 per cent lower in 1997-98 when compared to the previous year due to a fall in its trading activities. NFCL, which also imports urea to sell in the domestic market, imported only 2.04 lakh tonnes in 1997-98 compared to 4.40 lakh tonnes in the previous year. In addition, the company had to make a provision of Rs 70.98 crore in its Profit & Loss Account with retrospective effect to adjust for the slightly inflated turnovers in the previous years. That's because it had assumed that the government would allow it a certain retention price.

However, this proved wrong when a lower price was announced, and NFCL had to deduct the difference to reflect its true turnover of the year. Clearly, Raju was desperately trying to magnify his profits to impress his shareholders. And, in 1997-98, he has, probably, played his last ace in the balance-sheet.

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