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Business News/ Money / Personal-finance/  The changing face of Zuari Agro Chemicals
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The changing face of Zuari Agro Chemicals

Zuari Agro Chemicals is scripting a transformation by buying Mangalore Chemicals and Fertilizers

Zuari Agro Chemicals aims to increase market share, improve the share of non-subsidy based businesses and lower dependency on trading. The purchase of Mangalore Chemicals can further this strategy. Photo: Pradeep Gaur/MintPremium
Zuari Agro Chemicals aims to increase market share, improve the share of non-subsidy based businesses and lower dependency on trading. The purchase of Mangalore Chemicals can further this strategy. Photo: Pradeep Gaur/Mint

Zuari Agro Chemicals Ltd is scripting a transformation by buying Mangalore Chemicals and Fertilizers Ltd. It aims to increase market share, improve the share of non-subsidy based businesses and lower dependency on trading, the firm said in a presentation.

The purchase of Mangalore Chemicals can further this strategy. It would almost double Zuari group’s domestic urea capacity, based on the data provided in the presentation. It will add two percentage points to its diammonium phosphate and complex fertilizers market share. Its market share in water-soluble fertilizers will rise from 13% to 23%.

The additions to capacity and market share can take Zuari a long way. The company’s dependence on imports is rather high. In 2013-14, more than 30% of sales volume was imported. Since that has lower margins than locally made fertilizers, Zuari’s profitability has taken a hit. As a result operating margins narrowed to 4.7% in 2013-14.

Mangalore Chemicals derives a lower percentage (25%) of revenues from imports. However, since it uses naphtha against the industry norm of natural gas, the company’s profitability is also low. Operating margin is below 7%. Profits have either stagnated or are growing in single digits.

This compares unfavourably with industry leader Coromandel International Ltd, a private firm that derives only 7% of sales volume from imports. It generates operating margin of almost 9%. Return on equity in 2013-14 was 19%, compared with Zuari’s negative return. It posted a loss in 2013-14.

Perhaps that’s why the company has got a new head. Last month, Zuari appointed Kapil Mehan as managing director. As managing director of Coromandel International from October 2010 to February this year, Mehan had helped the company grow its non-fertilizer business. From 14% in 2010-11, the contribution of the non-fertilizer business to Coromandel’s turnover increased to 18% in December. The rise may look small, but this growth led to a disproportionate 10 percentage point expansion in the contribution of the non-fertilizer business to Coromandel’s operating profit.

This strategy is being implemented at Zuari now. Mangalore Chemicals will help Zuari expand its domestic capacity and non-subsidy based business to an extent.

The results may take time to show. Building a non-subsidy business in lieu of trading can be time-consuming. Non-subsidy based businesses like specialty nutrients and crop protection face intense competition. It took Coromandel almost four years to increase its non-subsidy based business’s contribution to overall revenues by four percentage points.

Secondly, it is not yet clear when Mangalore Chemicals will receive adequate gas supplies, which can help it improve profitability.

The writer doesn’t own shares in the above-mentioned companies.

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Published: 16 Apr 2015, 06:24 PM IST
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