Case Study Blog: Hindustan Fertilizer Corporation Limited (HFCL) – Revival, Challenges, and Future Prospects

 

Background

Hindustan Fertilizer Corporation Limited (HFCL) was established in 1978 as a part of a strategic reorganization of India’s public sector fertilizer companies, splitting from Fertilizer Corporation of India (FCIL) and National Fertilizer Limited (NFL). HFCL took charge of key fertilizer manufacturing units at Durgapur (West Bengal), Barauni (Bihar), and Namrup (Assam), alongside the development of a new project in Haldia (West Bengal). Over time, the Namrup unit was demerged into a new entity, Brahmaputra Valley Fertilizer Corporation Limited (BVFCL), in 2002.

The early operations of HFCL were marked by technical challenges and inefficiencies that impacted its profitability. Declared sick in 1992 and referred to the Board for Industrial and Financial Reconstruction (BIFR), HFCL faced continuous losses, which led the Government of India to announce the closure of its plants in September 2002. Despite the shutdown, HFCL’s legacy and infrastructure have remained, presenting opportunities for potential revival in a sector that continues to demand increased domestic fertilizer production.

Products Manufactured

HFCL was primarily involved in the production of urea, a vital nitrogenous fertilizer that plays a significant role in India’s agricultural sector. Urea is one of the most commonly used fertilizers due to its high nitrogen content, which promotes plant growth. HFCL's facilities were geared toward manufacturing ammonia, which served as a precursor for urea production. The company’s operations, before

the closure, were aligned with India’s objectives to increase agricultural productivity through chemical fertilizers.

However, after the plants ceased operations in 2002, production was halted. Since then, discussions on reviving these plants have been aimed at making them viable in a more competitive, gas-based ammonia-urea production market.

Export/Import and Global Trade Relations

Historically, HFCL's production was targeted at meeting domestic demand for fertilizers. Given India’s status as a large agricultural economy, the demand for fertilizers like urea is immense. However, HFCL’s lack of modernization and inefficiencies led to the company's inability to fully compete in both domestic and international markets.

While the company did not have a significant export footprint, India's overall fertilizer sector is influenced by global market dynamics, especially in terms of the import of raw materials like potash and phosphate, and in the competition with private sector players in the international fertilizer trade.

Price War with Private Companies

HFCL’s struggle was partly due to its inability to compete with private sector firms that benefited from technological advancements and operational efficiency. Fertilizer companies in the private sector, both domestic and international, have leveraged modern production methods, securing raw materials at better prices, and offering more competitive rates to farmers.

Additionally, private firms have also been better at responding to market dynamics and consumer needs. For instance, companies like IFFCO and Coromandel International have been able to offer a range of fertilizers beyond urea, including specialty fertilizers and micronutrients, making them more versatile and responsive to the agricultural sector’s evolving needs. This competition placed pressure on HFCL’s outdated facilities, exacerbating its financial troubles.

Sickness and Employment Status

HFCL was declared a sick company in 1992 after years of mounting losses and operational inefficiencies. By 2002, all three of HFCL’s plants at Barauni, Durgapur, and Haldia were shut down, and a Voluntary Separation Scheme (VSS) was introduced for its employees. By the time of its closure, the company had released nearly all of its workforce, with only one employee currently retained for statutory obligations related to the safety and security of its properties and assets.

The financial and technical challenges faced by HFCL, coupled with rising operational costs and inefficiencies, left the company unable to sustain its workforce or maintain a profitable operation. The decommissioning of its plants and the cessation of urea production had a profound impact on employment within the company and the region.

Current Issues and Financial Status

In recent years, there has been a concerted effort by the Government of India to revive HFCL’s Barauni plant, given the persistent gap between domestic fertilizer production and agricultural demand. In 2016, the Cabinet approved the revival of the Barauni Unit of HFCL through a joint venture with Coal India Limited (CIL), NTPC, Indian Oil Corporation Limited (IOCL), and FCIL, creating Hindustan Urvarak & Rasayan Limited (HURL).

HURL successfully completed the construction of the gas-based Ammonia-Urea plant at Barauni, which began commercial production in November 2022. This marks a significant step in HFCL’s revival, although its other plants remain closed.

HFCL's financial performance has been minimal, as the company has relied on income from interest on fixed deposits, rental leases, and water supply services. For instance, in the financial year 2022-23, HFCL reported a net profit of ₹10.29 crore, an improvement from ₹2.51 crore in 2021-22. This growth in profitability, despite no operational fertilizer production, stems from better asset management and reduced liabilities.

Government Strategy for Revival

The government’s strategy for reviving HFCL has centered on public-private partnerships and leveraging the infrastructure at closed units for new projects. The revival of the Barauni plant under HURL is a testament to this approach. The strategy includes building modern, gas-based ammonia-urea plants to align with global standards for energy efficiency and production capacity. The concession agreements and lease deeds signed with HURL for Barauni are expected to breathe new life into HFCL’s legacy infrastructure.

Looking ahead, the government may explore similar models for the Durgapur and Haldia units, depending on the success of the Barauni project. The revival efforts reflect the broader national agenda of reducing India’s dependence on imported fertilizers and boosting domestic production to meet growing agricultural needs.

Financial Performance (2005-2024)

HFCL’s financial history showcases a company that struggled for decades, with years of continuous losses during the 1990s and early 2000s. Since the closure of its plants, HFCL has maintained minimal revenue streams primarily through non-operational sources like rent and interest. Recent financial data highlights improvements:

• 2020-21: Net profit of ₹9.42 crore
• 2021-22: Net profit of ₹2.51 crore
• 2022-23: Net profit of ₹10.29 crore

Despite these profits, they pale in comparison to what HFCL could generate if its plants were fully operational. The revival of the Barauni unit under HURL, which became operational in 2022, is expected to change HFCL’s financial outlook moving forward.

Questions for Discussion

1. What were the key reasons for HFCL’s decline and eventual closure?
2. How do you assess the government's strategy in reviving HFCL's operations through joint ventures?
3. What are the challenges HFCL may face in competing with private companies once its units are revived?
4. How can HFCL leverage its infrastructure for long-term sustainability in the fertilizer market?
5. What role can public-private partnerships play in reviving sick industries?

Teaching Notes

This case study offers insights into the complexities of reviving sick public sector units. Students should focus on the role of operational inefficiencies, competition from the private sector, and the strategic importance of urea production for India’s agriculture. The case also allows for discussion on government intervention, the benefits of joint ventures, and how partnerships can be a solution for industries facing closure.

Students can evaluate how modern production methods and partnerships, like the formation of HURL, provide a roadmap for reengineering failing industries. Further analysis could explore the implications of global fertilizer market dynamics and India’s need for self-sufficiency in agricultural inputs.

Conclusion

HFCL's journey reflects the challenges faced by many public sector enterprises in India that were unable to modernize or compete with the private sector. The company's closure and subsequent efforts to revive its operations through the joint venture with HURL demonstrate the potential for reengineering failing industries. While HFCL has shown positive financial trends in recent years, its long-term sustainability depends on the success of revived units like the Barauni plant. The company’s future hinges on leveraging government strategies, partnerships, and modern technology to regain its position in the fertilizer market, contributing to India’s agricultural growth.