Fertilizer Industry

Submission by:

Mrinal Mardia

Neha Jakhotia

Nidhi Sachdeva

Pooja Gupta

Prateek Khosla

Business Strategy for Fertilizer Industry: Term Assignment

Contents A. INTRODUCTION ............................................................................................................................. 2

B. FERTILIZER INDUSTRY: DESCRIPTION ..................................................................................... 2

C. FERTILIZER INDUSTRY IN INDIA ................................................................................................. 2

C.1. INDUSTRY OVERVIEW .............................................................................................................. 2

C.2. KEY SUCCESS FACTORS ......................................................................................................... 3

D. PORTER’S 5 FORCES ANALYSIS ................................................................................................ 3

E. KEY PLAYERS................................................................................................................................ 4

F. GENERATING A STRATEGIC FACTORS ANALYSIS SUMMARY MATRIX ................................ 5

G.1. EXTERNAL FACTORS ANALYSIS SUMMARY ......................................................................... 6

G.2. INTERNAL FACTORS ANALYSIS SUMMARY .......................................................................... 7

G.3. STRATEGIC FACTORS ANALYSIS SUMMARY ....................................................................... 8

G.4. GENERATING ALTERNATIVE STRATEGIES BY USING A TOWS MATRIX ........................... 9

G. STRATEGIES FOR THE PLAYERS ............................................................................................. 11

H. CONCLUSION .............................................................................................................................. 12

I. SOURCES OF INFORMATION .................................................................................................... 12

A. INTRODUCTION

The purpose of this assignment is to understand the business strategy formulation process for

companies against the backdrop of a chosen industry by undertaking a situational analysis for the

same.

In this assignment, the environmental and organisational information has been analysed using various

analytical approaches and the SFAS matrix technique. Strategic options have been generated using

the TOWS matrix and business strategies have been suggested for the corporations of the industry.

The industry chosen for this assignment is the Fertilizer industry in the context of Indian scenario.

B. FERTILIZER INDUSTRY: DESCRIPTION

To begin with, fertilizers are essential plant nutrients important for obtaining optimal yield and quality

of the cultivated crop. After each harvest of crop, the soil needs replenishment of these nutrients

which primarily are nitrogen, phosphorus and potassium; denoted by N P and K respectively.

Nitrogenous fertilizers are applied for high growth, development, yield, and colour of plants.

Phosphatic fertilizers are applied for root development, seed germination, and for countering the

acidic effect of urea.

Potassic fertilizers provide protection against germs and diseases to the crops.

C. FERTILIZER INDUSTRY IN INDIA

India is the 3rd

largest producer and consumer of fertilizers in the world. The fertilizer industry

contributes to 40-50% of agricultural productivity, and with India being a primarily agrarian economy

this industry holds prime importance in the economy.

Agriculture in India contributes to 16% of GDP and employs about 58% of Indian population. It also

contributes to 10% of India’s export earnings and is a major contributor to India’s economic

development.

In the context of this scenario, it is important that this sector sees high and sustainable growth, and

the factors affecting agricultural growth are – higher productivity, direct/indirect subsidies, competitive

pricing in each stage of value chain, and focus on quality of production inputs, techniques and

fertilization process. Each of the above mentioned factors is directly or indirectly affected by the

fertilizers industry and hence this industry has strong drivers.

The following outlines the key statistics related to the industry and the key success factors for it.

C.1. INDUSTRY OVERVIEW

The industry is a highly capital and energy intensive industry and India has a total installed capacity of

18 MTPA (million tonnes per annum) for N and P fertilizers nutrients while their consumption is 28

MTPA. The nutrients are processed into formation of the fertilizer products like Urea, DAP, SSP,

MOP, etc.; which is consumed at 57 MTPA against a production capacity of 42 MTPA.

It is clearly evident that India is short on its capacities and is highly dependent on import of input,

intermediaries and final fertilizer products to meet its growing demands. It imports almost 40-45% of

its total requirement valued at USD 6.9 billion or INR 315 billion. Also, the natural gas required as key

input for manufacture of urea, the most widely consumed fertilizer in India, is partly imported due to

availability constraints in the country.

Also, the industry is highly regulated in terms of pricing, distribution and movement of fertilizers and

the Government provides subsidy to fertilizer companies in order to ensure that the fertilizers are

available to the end-users (farmers) at affordable prices for proper agriculture growth and

development.

With high investment costs, subsidised prices, high costs of production, very high capacity utilisation

and heavy import costs, the industry is characterised by low profit margins especially for the public

sector enterprises which run the older plants which manufacture urea.

C.2. KEY SUCCESS FACTORS

Based on the detailed understanding and analysis of the industry, the following key success factors

were identified:

Agriculture demand and prices

Monsoon showers

Raw material – availability and prices

Investment for capacity expansion

Government subsidies and other regulations

D. PORTER’S 5 FORCES ANALYSIS

A Porter’s 5 forces analysis was also conducted to further scan the environment and the following

was obtained:

Threat of New Entrants: LOW:

High capital investment with high cost and low returns

Difficult to acquire govt. approval for gas allocation

Shortage of natural gas in India

Production of DAP costly; 65% of requirement is imported

Delays in subsidy payments leads to troubles in management of funds

Bargaining Power of Suppliers: HIGH:

Fertilizers industry is a captive market in India

Very limited number of suppliers

High prices of inputs and less diversity of inputs

Raw materials are scarce being natural resources

Heavy dependence on imports for meeting requirements of inputs / intermediaries / products

Bargaining Power of Buyers: LOW:

High demand for agriculture products leads to high requirements for fertilizer products

Nutrients level deplete in soil with each harvest of crop; forcing demand for fertilizers, else

deficiency of nutrients reduces crop yield

High demand of fertilizers with relatively low productivity per unit of fertilizer consumed;

leading to higher demand

Low productivity of substitutes

Lack of product differentiation

Threat of Substitutes: MEDIUM:

Bio fertilizers, organic fertilizers, manures, vermi-compost may serve as substitutes

Natural fertilizers are not as effective as chemical fertilizers

Animal manure is not suitable for commercial production

Rivalry: LOW

It is a highly government regulated industry

Pricing subsidies provided by government

Private players are trying to improve supply chain through retail network

Industry is witnessing already high capacity utilization; players are not suffering from under-

utilized capacities, hence rivalry is low

Uniform prices across industry leads to indirect mutual co-operation

E. KEY PLAYERS

The fertilizers industry operates in public, private and co-operative sectors with major urea production

capacity owned by public and co-operative units, and phosphatic production capacity owned by

private players.

In the public sector, National Fertilizers Limited (NFL) is the largest player with 3.2 MTPA production

capacity of urea fertilizers. In the private sector, Coromandel Fertilizers Limited (CFL) is the largest

player with 3.3 MTPA production capacity of phosphatic fertilizers. Indian Farmers Fertiliser

Cooperative Limited (IFFCO) is the largest co-operative player with 3.7 MTPA of urea and 2.7 of

phosphatic production capacity.

For the purpose of developing the SFAS and TOWS matrix and analysing the companies of the

fertilizers industry, National Fertilizers Limited (NFL) and Coromandel Fertilizers Limited (CFL) have

been selected, one from the public sector and private sector each.

F. GENERATING A STRATEGIC FACTORS ANALYSIS SUMMARY MATRIX

The SFAS matrix will be constructed by creating an EFAS and IFAS matrix using the opportunities

and threats for the external factors and the strengths and weaknesses for the internal factors. Each of

the above will be weighted and ranked in the context of the selected companies, and then the

weighted score for the companies would be calculated.

The following strengths, weaknesses, opportunities and threats have been identified for the

companies, and have been rated for the matrices.

FACTORS WEIGHTS

Opportunities

Gaps between demand and supply 0.12

New JVs and consolidations 0.07

De-regulation 0.10

Fast growing population 0.08

Investment in R&D 0.07

End to End Solutions 0.05

Brand Consciousness 0.05

TOTAL 0.54

Threats

Uncertainty of government policies 0.10

Shortage of feedstock/ government approval 0.12

Large scale imports 0.05

Delays in subsidy payments 0.05

Proximity to feedstock 0.07

Change in Technology-plant as well as chemicals 0.07

TOTAL 0.46

Strengths

Dealer network 0.20

Joint Ventures 0.10

Tie-ups with key raw material suppliers 0.10

R&D Facility 0.05

Dedicated technical and managerial workforce 0.05

TOTAL 0.50

Weaknesses

Old plants/ infrastructure 0.20

Dependence on imports 0.05

High requirement of Natural Gas 0.15

Dependence on subsidies 0.10

TOTAL 0.50

G.1. EXTERNAL FACTORS ANALYSIS SUMMARY

It scores the abilities of the companies to take advantage of the opportunities and avoid the threats

posed by the external factors based on the current situation.

>> Coromandel Fertilizers Limited:

Weight Rating Wtd. Score

Comments

OPPORTUNITIES

Gaps between demand and supply 0.12 4 0.48 Is better equipped for capital expansion

New JVs and consolidations 0.07 5 0.35 Company is more active

De-regulation 0.10 4 0.40 Will have an upper-hand

Fast growing population 0.08 4 0.32 Dependency on agriculture is high

Investment in R&D 0.07 4 0.28 Has invested a lot in R&D

End to End Solutions 0.05 4 0.20 Educating the farmers

Brand Consciousness 0.05 5 0.25 Has built brand image

THREATS

Uncertainty of government policies 0.10 4 0.40 Have not much of a say

Shortage of feedstock/ government approval

0.12 3 0.36 Uncertainties due to priority allocation of natural gas

Large scale imports 0.05 3 0.15 Bulk Order

Delays in subsidy payments 0.05 4 0.20 Always on time

Proximity to feedstock 0.07 4 0.28 Decision as per ROI

Change in Technology-plant as well as chemicals

0.07 5 0.35 Well ahead in technology implementation

Total 1.00 4.02

>> National Fertilizers Limited:

Weight

Rating Wtd. Score

Comments

OPPORTUNITIES

Gap between demand and supply 0.12 3 0.36 Needs CAPEX Expansion

New JVs and Consolidation 0.07 2 0.14 Requires GOI permission

De-regulation 0.10 2 0.20 Not very competitive

Fast growing population 0.08 3 0.24 Dependency on agriculture

Investment in R&D 0.07 3 0.21 Is in the process of Investing

End to End solutions 0.05 4 0.20 Yet in planning stage

Brand consciousness 0.05 3 0.15 Is now trying to build a brand image

THREATS

Uncertainty of government policies 0.10 5 0.50 Has an upper hand in GOI policies

Shortage of feedstock/ government approval

0.12 4 0.48 Priority allocation given

Large scale imports 0.05 4 0.2 Economies of scale

Delays in subsidy payments 0.05 3 0.15 Are not paid on time

Proximity to feedstock 0.07 3 0.21 Decision as per socio-economic policies

Changes in technology- plant as well as chemicals

0.07 3 0.21 Laggards

Total 1.00 3.25

G.2. INTERNAL FACTORS ANALYSIS SUMMARY

It scores the abilities of the companies to take capitalize on the strengths and overcome the

weaknesses of the internal factors based on the current situation.



Weight Rating Wtd. Score

Comments

STRENGTHS

Dealer network 0.20 4 0.80 Strong dealer network allows fast sale

Joint Ventures 0.10 4 0.40 JVs with resource rich countries for P & K fertilizers

Tie-ups with key raw material suppliers

0.10 4 0.40 Already established tie-ups for urgent need of raw materials

R&D Facility 0.05 5 0.25 High investment in R&D at Vishakapatnam for rock phosphate, increasing throughput

Dedicated technical and managerial workforce

0.05 3 0.15 Strong brand image and retail network with dedicated workforce

WEAKNESSES

Old plants/ infrastructure 0.20 5 1.00 Unlike PSUs, Coromandel has new facilities

Dependence on imports 0.05 2 0.10 Raw materials for phosphate fertilizers and potash fertilizers are in scarce in the country

High requirement of Natural Gas

0.15 4 0.60 Low volumes in Urea, low requirement of natural gas

Dependence on subsidies 0.10 4 0.40 profitability in non-urea output companies is less dependent on subsidy by GOI

Total 1.00 4.10

Weight

Rating Wtd. Score

Comments

STRENGTHS

Dealer network 0.20 3 0.60 Dealer network is not as strong

Joint Ventures 0.10 3 0.30 Very less initiatives for JVs

Tie-ups with key raw material suppliers

0.10 4 0.40 Good number of tie-ups with suppliers for urgent requirements

R&D Facility 0.05 2 0.10 Less investment in R&D

Dedicated technical and managerial workforce

0.05 4 0.20 High dedicated workforce

WEAKNESSES

Old plants/ infrastructure 0.20 2 0.40 Old plants still being used, reduces efficiency, productivity

Dependence on imports 0.05 4 0.20 Less dependence as raw material for Urea is easily available in India

High requirement of Natural Gas

0.15 2 0.30 Urea production requires high amount of Natural Gas as input

Dependence on subsidies 0.10 3 0.30 Profit margins are decided by GOI and subsidies are variable to keep stable profitability

Total 1.00 2.80

G.3. STRATEGIC FACTORS ANALYSIS SUMMARY


Strategies Weights Rating Wtd. Score

Comments

S1 Dealers network 0.15 4 0.60 Strong dealer network allows fast sale

S2 Joint Ventures 0.15 4 0.60 JVs with resource rich countries for P & K fertilizers

W1 Old Plants/ Infrastructure 0.20 4 0.80 Unlike PSUs, Coromandel has new facilities

W2 Dependence on Natural Gas 0.10 3 0.30 Urea production requires high amount of Natural Gas as input

O1 De-regulation 0.05 3 0.15 Will have an upper-hand

O2 Fast growing population 0.05 4 0.20 Dependency on agriculture is high

T1 Shortage of feedstock 0.15 2 0.30 Priority Allocation

T2 Proximity to raw materials 0.10 4 0.40 Decision as per ROI

T3 Delay in subsidy payments 0.05 4 0.20 Always on time

Total 1.00 3.50


Strategies Weights

Rating Wtd. Score

Comments

S1 Dealers network 0.15 3 0.45 Dealer network is not as strong

S2 Joint Ventures 0.15 2 0.30 Very less initiatives for JVs

W1 Old Plants/ Infrastructure 0.20 2 0.40 Old plants still being used, reduces efficiency, productivity

W2 Dependence on Natural Gas 0.10 3 0.30 Urea production requires high amount of Natural Gas as input

O1 De-regulation 0.05 2 0.10 Not very competitive

O2 Fast growing population 0.05 4 0.20 Dependency on agriculture

T1 Shortage of feedstock 0.15 3 0.45 Priority allocation given

T2 Proximity to feedstock 0.10 2 0.20 Decision as per socio-economic policies

T3 Delay in subsidy payments 0.05 3 0.15 Are not paid on time

Total 1.00 2.55

G.4. GENERATING ALTERNATIVE STRATEGIES BY USING A TOWS MATRIX


Strength

• Strategic tie-ups with key raw

material suppliers

• Offers complete range of

agricultural needs of the farmers

• Strong financials of the

Company and healthy credit

rating

Weakness

• Heavy dependence on

Tunisia for phosphoric acid.

• Lacks very strong operational

efficiency

Opportunity

• Huge scope for increase in

farm productivity

• Crop protection business

• Export Market

• Growing demand for

Specialty Nutrient

O-S strategies

• Investments to augment

capacity and R&D facility of

Vishakhapatnam plant

• Acquisition of Sabero Organics

enabling expansion of product

range and size of market.

• Raising working capital finance

at competitive interest rates.

• New plant, setting up in joint

venture for raw material /

products requirements

O-W Strategies

• Strong turnaround of Sabero

Organics

• Reduction of inventory levels.

Threat

• Insufficient Rainfall

• Reduction in Nutrient based

subsidy rates applicable for

2012-13

• Rising international raw

material prices.

• Rupee Depreciation

• Delay in payment of fertilizer

subsidy

T-S strategies

• Currently no tie-ups with

suppliers for P and K nutrients.

It should seek even more tie-ups

with the suppliers.

• Liaison with Government to

increase MSPs

• Focus on farm mechanization

T-W Strategies

• Raise MRPs along while

increasing operational

efficiency.

• Backward integration for

better efficiencies


Strength

• One of the Largest Govt.

Fertilizers Company

• Large Distribution base - Dealer

Network

• Huge talented employee pool –

project exposure

Weakness

• Old plant-- CAPEX

• Low Profitability

• No performance linked Pay

packages – even at top.

• Low on JV’s – Products and

R&D

Opportunity

• Change of feedstock- FO to

FG.

• Neem Coated Urea- New

Product

• Untapped trading opportunity

- pesticides

• Inflation Favourable GoI

support - Fiscal Deficit

O-S strategies

• More new ‘Neem’ based product

– create Product Differentiation

• Can gain huge profits in

untapped trading segment –

exploit dealer Network

O-W Strategies

• Push for higher efficiency

with new plants – better

margins

• Reforms in GoI pay scheme

–Performance Based- Fiscal

Deficit

• Large scale joint imports –

Buyer bargain power

Threat

• Only single Nutrient

Products – Urea

• Deregulation – Cheap

Imports

• Monsoon Dependent – High

Inventory – Cash Flow

Problems

• Low NG/ RLNG supply

T-S strategies

• Invest in Building Phosphate

capabilities

• Diversify in opposite climate –

countries – Excite young talent

T-W Strategies

• Invest in JV’s with other large

GoI company – Joint R&D

• Close old unavailable plants

– decrease loss

G. STRATEGIES FOR THE PLAYERS

Based on the results of the TOWS matrix constructed for the companies, the following strategies are

being suggested:

For Coromandel Fertilizers Limited:

Additional investments to augment capacity and R&D facility of Vishakhapatnam plant

Acquisition of Sabero Organics enabling expansion of product range and size of market

Raising working capital finance at competitive interest rates to enable effective management

of costs

Setting up of joint venture for meeting raw material / products requirements with companies

in phosphatic resource-rich countries

Strong turnaround of Sabero Organics

Reduction of inventory levels for efficient working capital management and avoiding

diseconomies of operational inefficiencies

Currently there are no tie-ups with suppliers for P and K nutrients. It should seek even more

tie-ups with the suppliers.

Enter into liaison with Government to increase MSPs

Focus on farm mechanization to improve the crop productivity, and make fertilizers earn more

profits for farmers, thereby in-turn increasing the demand for fertilizers.

Raise MRPs along while increasing operational efficiency.

Backward integration for better efficiencies

For National Fertilizers Limited:

More new ‘Neem’ based product in order to create Product Differentiation

Exploit dealer network and strengthen its distribution network to gain huge profits in untapped

trading segment

Push for higher efficiency with new plants and earn better margins

Indulge in large scale imports by making joint arrangements of requirements with other plants

– create a buyer bargaining power

Invest in enhancing phosphate production competencies and capabilities

Diversify business in countries with opposite climate to reduce uncertainties of climatic

conditions

Invest in JV’s with other large public sector companies and enjoy benefits of joint R&D

initiatives

Close old unavailable plants, and modernize existing setups to decrease losses from

inefficient operations.

H. CONCLUSION

Through this term assignment, we have attempted to use the understanding of environmental,

industrial, situational, organisational analysis to develop strategies for the companies. We have also

used the tools of business strategy like EFAS, IFAS, SFAS, and TOWS matrix to compare both

companies with respect to their strengths, weaknesses, opportunities and threats, and also arrive at

the business strategies.

Findings from this assignment on the fertilizers industry using Coromandel Fertilizers Limited and

National Fertilizers Limited, the largest private and public sector players respectively are as follows:

The highest opportunity offered to both companies is the existing positive gap between demand and

supply due to fast growing population and high demand for agriculture products.

The strongest threat posed is the high shortage of feedstock and dependence on government’s

approval for natural gas allocation.

The biggest strength to the companies can prove to be a strong dealer network to improve the

distribution of fertilizer products to areas where demand exists.

The deepest weakness lies in the diseconomies arising from the old plants and infrastructure which

hampers the productivity and further reduces the already low returns.

The summary of scores for both the players in the EFAS, IFAS and SFAS matrices are as follows:

Parameter CFL NFL

EFAS 4.02 3.25

IFAS 4.10 2.80

SFAS 3.50 2.55

The above scores clearly indicate that Coromandel Fertilizers Limited is best equipped to manage

and use the strengths, weaknesses, opportunities and threats posed by the external and internal

factors of the industry. It is scoring much higher than NFL in its ability to manage the strategic factors

also.

An analysis of all the above results has yielded the suggestion of the strategies mentioned in point H.

I. SOURCES OF INFORMATION

The report has been prepared using data, inferences and understanding from:

Planning Commission report - Working group for XII

GoI Ministry of Chemicals & Fertilizers - Department of Fertilizers

Fertilizer Association of India - Fertilizer Scenario 2011

Annual reports and business reports for Coromandel Fertilizers Limited and National

Fertilizers Limited

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Documents

Fertilizer Industry