Fertiliser 2008

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Industry ReportIndustry : Fertilise

Fertiliser Industry

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Fertiliser Industry

2 October 16, 2008

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors

should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor

in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report.

Contents

Page No.

Fertiliser Industry ................................................................................... 3

Steady demand.........................................................................................4

Decontrolling of fertiliser...will boost the returns ...............................................7

KG basin gas...will reduce subsidy and add profit ...............................................8

Valuation ................................................................................................9

COMPANIES

Tata Chemicals ....................................................................................... 11

Chambal Fertilisers and Chemicals ............................................................... 27




3/40

Fertiliser Industry

Fertiliser demand is expected to grow at a CAGR of 3-4% on the back of rising

demand for food-grains. Demand for fertilisers is rising worldwide. However

India's Government-regulated fertiliser industry is facing supply constraints due

to non-promotion of the investment fertiliser policy. During the year, Government

has partially de-controlled the sector by linking subsidy with the import parity

price (IPP). It has resulted in the commencement of new capacities by way of

de-bottlenecking/revamp of urea plants over a short span of time. However,

the sector is facing shortage of gas and this situation will ease out only when KG

basin gas will be available. Rising input cost has increased the subsidy burden of

the Government from Rs360bn in FY08 to Rs1250bn (expected) in FY09;

disbursement of the whole subsidy in cash is quite uncertain.

Steady demand: We believe that demand for fertiliser will grow at a CAGR

of 3-4% on the back of rising food demand. The increase in the demand for

food was owing to the reduced land under cultivation (because of

urbanization), diversion of calories from food to fuel and increasing demand

due to rising income in the developing countries.

Decontrolling of fertiliser will boost the returns: Government has

decontrolled phosphatic (DAP) as well as partially decontrolled urea during

the year. Decontrolling of urea will boost the EBIT to 36% (15%-20% as earlier

assuming delivered cost of gas at US$7/mmbtu. Hence, companies will get

higher than regulated PAT i.e.12%. Chambal Fertilisers and Chemicals

(CFCL's) 7.7% and Tata Chemicals (TCL's) 10.1% existing production fall undeIPP regime, while de-bottlenecking will add EPS of Rs4.5 and Rs0.6 in TCL

and CFCL, respectively in FY10.

KG basin gas will reduce the subsidy and add profit: Fertiliser industry is

facing a shortage of natural gas as against the total requirement of

42.9mmscmd in FY09. Hence, KG basin gas is crucial for the fertiliser sector

because Government has given priority to the sector for allocation of gas.

KG basin gas is expected to be available by Q4FY09. We believe that with

the availability of KG basin gas, subsidy burden of the Government wil

reduce substantially. Also, depending upon the gas pricing, bottom-line of

the companies that are going for expansion could shoot up further.

Initiating coverage: We are POSITIVE on the sector on the basis of the

consumption-based growth, positives in urea policy and availability of KG

basin gas. We are initiating coverage on TCL and CFCL with BUY ratings on

the back of positives in the new urea policy, de-bottlenecking of urea plant

and other growth avenues. Both the stocks are trading at an attractive

valuation and having a dividend yield of 4-5%.

Industry ReportOctober 16, 2008

India Fertiliser Index

Source: Bloomberg, PL Research

Stock Performance

1M 6M 12M

50

70

90

110

130

150

170

190

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

SENSEX Index (21.7) (34.9) (44.5)

Fertiliser Index (37.2) (42.4) (36.6)

Tata Chemicals (39.0) (49.5) (44.6)

Chambal Fert. (23.3) (17.2) (7.1)




4/40

Fertiliser Industry

4 October 16, 2008

Steady demand

Fertiliser sector is consumption-based growth sector and directly linked with

the one of the basic necessities of life i.e. food. Global food prices have increased

very sharply and the reasons for that are many. Reduced land under cultivationdue to urbanization, diversion of calories from food to fuel and increasing demand

due to rising income in developing countries like India and China are some of

them. As per CRISIL, fertiliser demand will grow at a CAGR of 3-4% over the next

three years.

Global Wheat Price

Source: Food and Agriculture Organization (FAO), International Fertiliser Association

(IFA)

Global Fertilizer Consumption

Source: Food and Agriculture Organization (FAO), International Fertiliser Association

(IFA)

100

120

140

160

180

200

220

FY00 FY01 FY02 FY03 FY04 FY06 FY07 FY08

US$/Tonne

0

20

40

60

80

100

120

140

160

180

200

FY00 FY01 FY02 FY03 FY04 FY06 FY07 FY08E FY09E

(mt

onnes)

Urea DAP MOP Total




5/40

Fertiliser Industry

October 16, 2008 5

One of the ways to improve food availability is to improve yield by increasing

the use of fertilisers. In the last few years, very few additional capacities of

fertilisers have come up and as a result, the demand-supply gap is widening.

Also, the prices of fertilisers too have shot up. China, India and USA are the

major consumer of fertilisers. Given the fact that India consumes around 15-18% of global fertiliser production, we believe that India will be the key

determinant of global fertilizer prices, going forward.

Global Fertilizer Prices

Source: IFA and FAI

Due to non-promotion of the new investment in the fertiliser policy in India, no

major capacity has come up in the last decade. The demand-supply gap is

widening every year and there is an increase in the import of fertilisers. With

increasing input costs as well as increased consumption, the Government's subsidy

bill has been mounting.

Import of Fertilizers in India

Source: FAI

0

500

1,000

1,500

2,000

2,500

2004 2005 2006 2007 Feb-08 Aug-08

US

$/Tonne

Urea DAP Ammonia Phosphoric Acid

0

500

1,000

1,500

2,000

2,500

3,000

FY01 FY02 FY03 FY04 FY05 FY06 FY07

U

S$/Tonne

Urea DAP MOP




6/40

Fertiliser Industry

6 October 16, 2008

Subsidy

Source: FAI

In 2008-09, the Government is expecting the fertiliser subsidy bill at Rs1250bn

as against Rs360bn provided in the Budget 2008. Government will soon release

subsidy of Rs220bn and Rs320bn in two tranches in cash and also assure that the

balance subsidy of Rs710bn will be paid in cash. This move has given some relief

to the fertiliser companies. However, the balance amount of subsidy disbursement

of Rs710bn is quite uncertain. Government has issued bonds of Rs.75bn in FY08

which were en-cashed at 10-15% discount. Hence, issue of subsidy bond in the

future will affect the profitability of the companies.

0

200

400

600

800

1,000

1,200

1,400

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E

(Rsbn)




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Fertiliser Industry

October 16, 2008 7

Decontrolling of fertiliser...will boost the returns

Government has fully de-controlled phosphatic fertiliser and partially de-

controlled urea by introducing the much awaited IPP-linked investment policy.

There has been no change in the existing policy for urea (NPS-III), whereasadditional incentives will be for higher utilization/revamp/Brownfield and

Greenfield projects in the new investment policy. The policy provides for an IPP

benchmark with floor and ceiling price of US$250/tonne and US$425/tonne,

respectively, for additional production (beyond existing production) of urea.

Basis of Selling Price

Investment Mode Selling Price Conditions

Revamp 85% of IPP Any improvement in the capacity of existing plants through investment up to Rs10bnin the existing ammonia urea production and subject to the above-mentioned flooand ceiling prices. Will start production of additional capacities within four years onnotification.

Expansion 90% of IPP Setting-up of a new ammonia urea plant in the premises of existing plants. Capexshould not exceed Rs30bn subject to above-mentioned floor and ceiling prices. Wilstart production of additional capacities within five years on notification.

Revival/ Brownfield Projects 95% of IPP Revival of Hindustan Fertilisers Corporation (HFCL) and Fertiliser Corporation of India(FCIL) plants. No cap for investment in the Brownfield projects. Subject to abovementioned floor and ceiling prices. Will start production of additional capacities withinfive years on notification.

Greenfield Projects Not decided Pricing would be at a discount on IPP and decided on a bidding process after firmingup of locations of proposed new plants. The floor and ceiling will be decided at thetime of bidding.

Source: Ministry of Fertiliser

The new policy considers only non-APM gas for new investment. All APM gas wil

be allocated towards production in the existing plants. The floor and ceiling

prices are recommended based on the feedstock price of US$4.88 per MMBTU

which is the price of RIL gas plus estimated taxes. In case of any sharp increase

(more than double the current price) in the price of feedstock in the future, the

floor and ceiling prices will have to be adjusted to take care of the increased

cost of production. Further, the above will be reviewed after five years keeping

in view the prevailing gas prices and investment costs.

We believe that a departure from cost plus 12% post-tax return in new investment

policy is POSITIVE for the sector, as price of expanded urea production has been

partly de-controlled with the floor and ceiling price. We believe that new urea

investment policy will give at-least 36% of EBIT (15%-20% as earlier) assuming

delivered cost of gas at US$7/mmbtu. Companies will get higher than regulated

PAT as earlier i.e.12%. CFCL's 7.7% and TCL's 10.1%. Existing production will fall

under the IPP regime, while de-bottlenecking will add EPS of Rs4.5 and Rs0.6 in

TCL and CFCL, respectively in FY10.




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Fertiliser Industry

8 October 16, 2008

KG basin gas...will reduce subsidy and add profit

The fertiliser industry is facing a shortage of natural gas as against tota

requirement of 42.9MMSCMD in FY09. Hence, KG basin gas is crucial for the

fertiliser sector because the Government has given priority to the sector forallocation of gas. This gas is expected to be available by Q4FY09. We believe

that with the availability of the KG basin gas, subsidy burden of the government

will substantially reduce. Also, depending on the gas pricing, bottom-line of the

companies that are going for expansion, could shoot up further.

Requirement of gas for the fertilizer sector is expected to increase in the years

to come. Gas is required not only for meeting the current shortfall being faced

by the existing gas based urea units but also on account of conversion of Naphtha

and FO/LSHS based units to NG/LNG, de-bottlenecking of existing urea units,

setting up of new and expansion of existing urea units and revival of closed urea

units of HFCL and FCI. As per the New Pricing Scheme (NPS) - III, all non-gasbased urea units will be converted to gas till FY10. Under the above scenario,

the total requirement of gas for the fertiliser sector by the end of XI Plan period

is expected to be 76.3 MMSCMD. The break-up of gas requirement year wise and

the corresponding production capacity of urea are given below:

Gas demand

FY08 FY09 FY10 FY11 FY12

Urea Production Capacity (In Lac Tonnes) 226.2 226.2 259.9 329.4 329.4

Gas Demand (MMSCMD) 41.0 42.9 55.9 76.3 76.3

Source: Ministry of Petroleum and Natural Gas




9/40

Fertiliser Industry

October 16, 2008 9

Valuation

We are initiating the coverage on TCL and CFCL with BUY rating on the back of

positives in the new urea policy, de-bottlenecking of urea plant and other growth

avenues. Both the stocks are trading at attractive valuation and having dividendyield of 4-5%.

Peer Comparison

CMP Equity MCap EPS (Rs) PE (x) Div. EV/EBITDA (x) P/BV (x)

(Rs) (m) (Rs m) FY08 FY09E FY08 FY09E Yld. (%) FY08 FY09E FY08 FY09E

Chambal Fertilizers 47 416.2 19,603 4.0 9.6 11.8 4.9 3.8 6.3 3.7 1.7 1.3

Tata Chemicals 167 243.5 40,647 19.6 34.5 8.5 4.8 5.2 8.4 3.8 1.1 0.9

Zuari Industries* 180 29.4 5,299 33.3 46.9 5.4 3.8 1.7 5.8 5.4 0.8 0.6

Coromandel* 123 139.9 17,208 14.4 19.0 8.5 6.5 2.8 4.3 9.2 2.2 1.6

Potash Corp*# 106 316.4 33,476 3.4 12.5 31.1 8.4 0.3 11.2 5.7 5.6 4.3Mosaic*# 44 443.9 19,626 4.7 11.8 9.5 3.8 0.0 4.4 2.4 2.9 1.7

CF Industries*# 65 56.3 3,637 6.6 16.6 9.8 3.9 0.1 2.3 1.7 3.1 1.7

Agrium Inc*# 43 158.0 6,840 3.3 9.7 13.3 4.5 0.3 6.0 3.7 2.2 1.6

Source: Company Data, PL Research * Bloomberg Estimates # Y/e Dec




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Fertiliser Industry

10 October 16, 2008

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11/40

Tata Chemicals

TCL is a key beneficiary of the new investment policy of urea. We believe thatTCL's top-line and bottom-line will grow with the two years CAGR (FY08A-FY10E)

of 28.2% and 24.2%, respectively on the back of the positives in the new ureapolicy, de-bottlenecking of the urea plant, skyrocketing phosphoric acid pricesand addition in the natural soda ash capacities.

Incentive to higher utilization in new policy...enhances earnings in FY09

and FY10: We believe that the company's 10.1% of FY09 and FY10 productionwill be eligible for IPP. We expect that a positive move in the policy will giveincremental PAT of Rs413m (EPS - Rs1.7) in FY09 and FY10.

De-bottlenecking...right step at the right time: TCL is going for de-bottlenecking of the urea plant which will add 3.4lac tonnes (39.3% of existingcapacity). We believe that de-bottlenecking will boost the PAT by Rs157m(EPS - Rs0.6) in FY09 and Rs1,091m (EPS - Rs4.5) in FY10 on the back of IPP

linked urea policy.

IMACID JV...Its rock-eting: Spurting phosphoric acid prices will improvethe profitability of Indo Maroc Phosphore SA (IMACID) substantially. We expectthat IMACID will add a PAT of Rs1,935m (EPS - Rs7.9) in FY09, assumingphosphoric acid prices at US$1800/tonne

Addition in natural soda ash capacity...a safe play: Post the acquisition ofGCIP, TCL's natural soda ash capacity increased from 14% to 59%. We believethat GCIP will add PAT of Rs1,242m (EPS - Rs5.1) in FY09, while the newsoda ash plant in Kenya will run at the capacity of 50% in FY09.

Valuation: At the CMP of Rs167, TCL is trading at 4.8x at its FY09Econsolidated EPS of Rs34.5 and 5.5x at its FY10E consolidated EPS of Rs31.2

We recommend BUY the stock with a price target of Rs242 (potential upside- 44.7%) based on 8x of FY10E earning.

Key Financials (Y/e March) FY07 FY08 FY09E FY10E

Revenue (Rs m) 58,036 60,232 100,304 99,057

Growth (%) 44.6 3.8 66.5 (1.2

EBITDA (Rs m) 10,909 9,850 18,373 16,529

PAT (Rs m) 5,080 4,769 8,404 7,355

EPS (Rs) 20.9 19.6 34.5 30.2

Growth (%) 17.3 (6.1) 76.2 (12.5

Net DPS (Rs) 7.1 8.7 12.1 10.6

Profitability & Valuation FY07 FY08 FY09E FY10E

EBITDA margin (%) 18.8 16.4 18.3 16.7

RoE (%) 19.8 12.8 19.0 15.1

RoCE (%) 24.6 11.5 21.9 21.1

EV / sales (x) 1.0 1.4 0.7 0.6

EV / EBITDA (x) 5.3 8.4 3.8 3.6

PE (x) 8.0 8.5 4.8 5.5

P / BV (x) 1.6 1.1 0.9 0.8

Net dividend yield (%) 4.2 5.2 7.2 6.3

Source: Company Data; PL Research

Price Performance (RIC: TTCH.BO, BB: TTCH IN)


Rating BUY

Price Rs167

Target Price Rs242

Implied Upside 44.7%

Sensex 10,581

(Prices as on October 16, 2008)

Trading Data

Market Cap. (Rs bn) 40.6

Shares o/s (m) 2,435.4

Free Float 70.7%

3M Avg. Daily Vol (000) 245.1

3M Avg. Daily Value (Rs m) 67.5

Major Shareholders

Promoters 29.3%

Foreign 12.7%

Domestic Inst. 28.1%

Public & Others 29.9%

Stock Performance

1M 6M 12M

Absolute (39.0) (49.5) (44.6)

Relative (17.3) (14.6) (0.1)


Company ReportOctober 16, 2008

150

200

250

300

350

400

450

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

(Rs)




12/40

Tata Chemicals

12 October 16, 2008

Investment Highlights

Incentive to higher utilization in new policy...enhancesearnings in FY09 and FY10

Government has partially decontrolled urea in the new investment policy by

linking the subsidy with IPP, subject to floor and ceiling price of US$250/tonne

and US$425/tonne, respectively. IPP will be applicable to the production beyond

the benchmark that is specified by the Government. Hence, production by way

of higher utilization/revamp/Brownfield projects/Greenfield projects, but

beyond the benchmark will be eligible for IPP. TCL will be eligible for 85% of IPP

We believe that the company's 10.1% of FY09 and FY10 production will be eligible

for IPP based on FY08 production level (123.8%) and subject to minimum

production of one million tonnes of urea (target production specified by the

Government) . We expect that a positive move in the policy will give incrementa

PAT of Rs413m (EPS - Rs1.7) in FY09 and FY10 (Assuming delivered cost gas at

US$7 per mmbtu).

Policy benefit on existing production (Rs m

Remarks

EBIT based on IPP

Sales (In Tonnes) 112,978 Assuming company will maintain the capacity utilization level (123.8%) of FY08and will achieve the target production of one million tonne as per policy. Hence10.1% of total production fall under IPP.

Sales Realization US$425@Rs42/US$(Rs/T) 17,850 Assuming IPP of urea shouldn't fall below US$500/Tonne.

Sales 2,017

EBIT 38.1% Assuming delivered cost of gas at US$7/mmbtu.EBIT 768

EBIT based on Normal Pricing

Sales (In Tonnes) 112,978

Sales Realization 10,048

Sales 1,135

EBIT 15.0%

EBIT 170

Incremental EBIT 598

Interest - TCL had total debt of Rs23,452.8m in standalone books, in which Rs19,070m takenfor acquisition of GCIP. Hence, we are not considering the interest cost.

PBT 598

Tax (185)

PAT 413

Equity 2,435

Incremental EPS 1.7

Source: PL Research




13/40

Tata Chemicals

October 16, 2008 13

Our estimates are based on the assumption that IPP of urea is at US$500 per

tonne and delivered cost of gas is at US$7 per mmbtu. We have made a sensitivity

analysis on IPP at different price levels and delivered cost of gas at US$8 per

mmbtu.

Sensitivity analysis (Rs m

Higher Utilization at 123.8% IPP at US$

Gas @ US$8 450 400 350

Sales (In Tonnes) - Eligible for IPP 112,978 112,978 112,978 112,978

Sales Realization (85% of IPP @Rs42/US$) 17,850 16,065 14,280 12,495

Sales 2,017 1,815 1,613 1,412

EBIT % at IPP 33.2% 31.2% 22.6% 11.6%

EBIT % at normal case 15.0% 15.0% 15.0% 15.0%

Incremental EBIT due to higher utilization 367 294 123 (48)

Tax (114) (91) (38) 15

PAT 253 203 85 (33)

Equity 2,435 2,435 2,435 2,435Incremental EPS (Rs) 1.0 0.8 0.3 (0.1)

Source: PL Research

De-bottlenecking...right step at the right time

TCL is going for de-bottlenecking of its urea plant with a capex of Rs2bn which

will add 3.4lac tonnes (39.3% of the current installed capacity) and will come

on stream by December 2008. Funding of capex of Rs2bn will be done through

internal accruals. De-bottlenecking of urea will be benefited by the IPP-linked

urea policy. We believe that de-bottlenecking will boost the PAT by Rs157m (EPS

- Rs0.6) in FY09 and Rs1,091m (EPS - Rs4.5) in FY10 (Assuming delivered cost of

gas is at US$7 per MMBTU).

Earning through de-bottlenecking (Rs m

Particulars 2008-2009E 2009-2010E Remarks

Sales (In Tonnes) 51,000 250,000 Assuming that the company will achieve the target productionof 1.94m tonne as per policy and 15% & 73.5% utilization inFY09 and FY10, respectively.

Sales Realization US$425 @ Rs42/US$ 17,850 17,850 Assuming IPP of urea shouldn't fall below US$500/Tonne

Sales 910 4,463

EBIT 38.1% 38.1% Assuming delivered cost of gas at US$7/mmbtu.

EBIT 347 1,700

Interest (120) (120) Total Capex - Rs2bn.Funding of the capex is through interna

accruals but we are considering the opportunity cost.PBT 227 1,580

Tax (70) (490)

PAT 157 1,091

Equity 2,435 2,435

Incremental EPS 0.6 4.5

Source: PL Research




14/40

Tata Chemicals

14 October 16, 2008

Further, our estimates are based on the assumption that IPP of urea is at US$500

per tonne and delivered cost of gas is at US$7 per MMBTU. We have made a

sensitivity analysis on IPP at different price levels and delivered cost of gas at

US$8 per MMBTU.

Sensitivity analysis

Particulars Gas @ US$8

2008-2009E 2009-2010E

Sales 910 4,463

EBIT (%) 33.2% 33.2%

EBIT 302 1,482

Interest (120) (120)

PBT 182 1,362

Tax (56) (422)

PAT 126 939

Equity 2,435 2,435

Incremental EPS (Rs) 0.5 3.9Source: PL Research


Particulars 2008-2009E 2009-2010E

IPP @US$ 450 400 350 450 400 350

Sales (In Tonnes) 51,000 51,000 51,000 250,000 250,000 250,000

Sales Realization (85% of IPP @Rs.42/US$) 16,065 14,280 12,495 16,065 14,280 12,495

Sales Realization (In US$) 382.5 340 297.5 382.5 340 297.5

Sales 819 728 637 4,016 3,570 3,124

EBIT (%) 31.2% 22.6% 11.6% 31.2% 22.6% 11.6%

EBIT 256 165 74 1,253 807 362

Interest (120) (120) (120) (120) (120) (120)PBT 136 45 (46) 1,133 687 242

Tax (42) (14) 14 (351) (213) (75)

PAT 94 31 (32) 782 474 167

Equity 2,435 2,435 2,435 2,435 2,435 2,435

Incremental EPS (Rs) 0.4 0.1 (0.1) 3.2 1.9 0.7

Source: PL Research

IMACID JV...Its rock-eting

Spurting phosphoric acid prices will improve the profitability of IMACID

substantially. We expect that IMACID will add a PAT of Rs1,935m (EPS - Rs7.9) in

FY09. We assume that the phosphoric acid prices will remain at US$1800/tonne

which is on a conservative basis because IMACID has contracted at US$2300/

tonne in Q2FY09. IMACID posted PAT of Rs830m (1.7x of FY08 PAT) in Q1FY09

itself. IMACID has repaid all the debt in FY08; thus, becoming a debt-free

company.




15/40

Tata Chemicals

October 16, 2008 15

We have made a sensitivity analysis of phosphoric acid prices for FY10 because

we are confident that in FY09, IMACID will achieve the EPS of Rs7.9. Our estimates

for FY10E are based on the phosphoric acid price at US$1500/tonne.

Sensitivity analysis (Rs mPhosphoric Acid Price US$ per Tonne 1,000 1,100 1,300 1,500 1,800

Sales 6,014 6,615 7,818 9,021 10,825

EBITDA 1,503 1,654 1,955 2,255 2,706

EBITDA Per Tonne (Rs) 10,500 11,550 13,650 15,750 18,900

Depreciation (287) (287) (287) (287) (287)

EBIT 1,216 1,367 1,667 1,968 2,419

Tax (243) (273) (333) (394) (484)

PAT 973 1,093 1,334 1,574 1,935

Equity 2,435 2,435 2,435 2,435 2,435

EPS (Rs) 4.0 4.5 5.5 6.5 7.9

Source: PL Research

Addition in natural soda ash capacity...a safe play

Post the acquisition of GCIP, TCL's natural soda ash capacity has increased from

14% to 59%. Cost of manufacturing natural soda ash is half of synthetic soda

ash. We believe that GCIP will add EPS of Rs5.1 in FY09, while TCL has set up a

new natural soda ash plant of 3.5lac tonnes in Kenya in FY08, This plant is

poised to run at a capacity of 50% and produce 2lac tonnes in FY09.

TCLs soda ash installed capacity

Source: Company Data, PL Research

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY07 FY08 FY09E FY10E

(mT

onnes)

India - Synthetic BMGL - Synthetic BMGL Kenya - Natural GCIP - Natural




16/40

Tata Chemicals

16 October 16, 2008

We believe that TCL's inorganic chemicals' consolidated EBIT margin will improve

from 9.3% in FY08 to 15.7% in FY09 due to acquisition of GCIP, where the margins

are higher than other plants. Further, we have considered the consolidated EBIT

margin to 10.5% in FY10 mainly on account of 15% dip in the soda ash realization

in our estimate. Soda ash is an energy-intensive commodity and we believe thatsoda ash price could cool-off in FY10 due to a new capacity coming up in China

and due to softening of the energy cost.

We have made the sensitivity analysis by declining the price of soda ash by 10%

and 20%, respectively in FY10.

Sensitivity Analysis

Current - 15% decline 10% decline 20% Decline

EBIT 12,269 13,442 11,096

% Decline -9.6% 9.6%

PBT 10,499 11,672 9,326

% Decline -11.2% 11.2%

PAT 7,355 8,258 6,598

% Decline -12.3% 10.3%

EPS 30.2 33.9 27.1

% Decline -12.3% 10.3%

Source: PL Research




17/40

Tata Chemicals

October 16, 2008 17

Worst and best case scenario

We are showing the worst and best case scenario of TCL's FY09E and FY10E EPS,

assuming the soda ash and urea prices are stable.

Worst and Best Case (Rs

Worst Case Best Case

FY09E FY10E FY09E FY10E

Base Case 34.5 30.2 34.5 30.2

Less: EPS due to higher utilization of Urea 1.7 1.7 1.7 1.7

Less: EPS due to de-bottlenecking of Urea 0.6 4.5 0.6 4.5

Less: EPS contribution by IMACID 0.0 6.5 0.0 6.5

32.2 17.6 32.2 17.6

Add: EPS due to higher utilization of UreaWorst Case - Gas price at US$8/mmbtuBest Case - Gas price at US$7/mmbtu 1.0 1.0 1.7 1.7

Add: EPS due to de-bottleneckingWorst Case - Gas price at US$8/mmbtuBest Case - Our estimate is on best case. 0.5 3.9 0.6 4.5

Add: EPS contribution by IMACIDWorst Case- Phosphoric Acid at US$1000/ tonneBest Case - Phosphoric Acid at US$1800/tonne 0.0 4.0 0.0 7.9

33.7 26.5 34.5 31.7

FY09E Chng FY10E Chng

Worst Case 33.7 -2.3% 26.5 -12.4%

Base Case 34.5 30.2Best Case 34.5 0.0% 31.7 4.9%

Source: PL Research

PE Band

Source: PL Research

0

50100

150

200

250

300

350

400

450

Apr-99

Oct-99

Apr-00

Oct-00

Apr-01

Oct-01

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

4 7 10 13 Price (Rs)




18/40

Tata Chemicals

18 October 16, 2008

Soda ash industry

Global soda ash demand in 2007 grew to 47.1m tonnes from 44.3m tonnes in

2006, an overall growth of 6.3%. Of this, China's share grew to 15.9m tonnes

from 14.3m tonnes, representing a growth of 10.7%. Russia witnessed a growthof 4.5% over the same period. At the regional level, soda ash demand in Asia and

the Middle East increased by 11.4%, from 22m tonnes in 2006 to 24.5m tonnes in

2007. These markets account for 89% of the growth in global demand.

Soda ash is an important industrial chemical used in the manufacture of glass,

detergents, dyes, silicates and other chemicals. Much of the global demand was

driven by the emerging markets like China, India, Russia and Latin America,

where growth is linked to rising income levels and growing urbanization. The

latter drives infrastructure growth. While the improving quality of life, for a

larger population base leads to a greater demand for automobiles, detergents

and dyes, the growth in building construction has led to an increase in theglobal demand for glass. As the growth rate in the emerging economies of China

India, East Europe and Latin American countries is expected to be above 8% per

annum, the current growth trends in soda ash demand will continue.

The world capacity of both synthetic and natural soda ash is about 48m tonnes.

Around 90% of the world production of soda ash comes from Europe, US and

Asia. During 2007, the global production of soda ash increased marginally from

42m tonnes to 43m tonnes. The soda ash industry is experiencing significant

cost pressures due to the soaring prices of various commodities like oil, coal

and coke. These rising costs have led to international soda ash spot prices

increasing from US$215/T in April 2007 to US$ 325/T in March 2008 on a costand freight (C&F) India basis.

Given the low per capita consumption of soda ash in India (2.7 kg), when

compared to countries like China (9.8 kg) and USA (22 kg) and the sustained

higher economic growth in the country, there is clearly a scope for consumption-

driven growth in the soda-ash business. Soda ash demand in India in FY07 was

around 2.2m tones, driven primarily by the growing demand from float glass

manufacturers, who cater to the construction and auto sectors. Custom duties

on soda ash imports have been gradually reduced from 15% in 2005-06 to 7.5% in

2007-08, while imports have also become cheaper. TCL continues to remain

cost competitive and the acquisition of Brunner Mond Group Ltd (BMGL) and

GCIP has placed TCL in a better position to face global competition because of

the access to cheaper natural soda ash. Domestic demand for soda ash continues

to grow at around 5%.

Soda ash prices (ex-factory)

Source: CRISIL

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

Apr'97

Feb'98

Dec'98

Oct'99

Aug'00

Jun'01

Apr'02

Feb'03

Dec'03

Oct'04

Aug'05

Jun'06

Apr'07

Feb'08

(Rs/Tonne)




19/40

Tata Chemicals

October 16, 2008 19

Business Overview

Tata Chemicals is basically categorised into two segments:

Inorganic Chemicals

Inorganic chemical consists of soda ash, salt, cement, sodium bicarbonate and

other chemical products. Inorganic chemical constitutes around 54% of

consolidated sales, while soda ash constitutes 43%. TCL has maintained its

leadership position in the domestic market with a market share of 32% in FY08.

Globally, the company has a total soda ash capacity of 5.5m.

Fertilizers

TCL has its presence across all the three key agro-nutrients, namely nitrogen

(N), phosphorous (P) and potassium (K). Given the nature of the Government

regulations, the sale of fertilisers is localized to certain geographical regions

within India. The fertilizer business is focused in the areas of North and East

India. TCL's product portfolio comprises of nitrogenous fertilizers (urea) and

phosphatic fertilizers (DAP and complexes) representing 37.4% and 46.4%

respectively of the total fertiliser revenues, while potassic fertilizer (MOP) which

is imported, accounts for 6.6%.

Segmental breakup

Sales EBIT


0

20,000

40,000

60,000

80,000

100,000

120,000


(Rsm)

Inorganic Chemicals Fertilizers

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


(Rsm)

Inorganic Chemicals Fertilizers




20/40

Tata Chemicals

20 October 16, 2008

Global Operations

Brunner Mond: BMGL is wholly owned subsidiary of TCL acquired in December

2005 for Rs8bn. BMGL has plants in England, Holland and Kenya with the tota

capacity of 2m tones. This acquisition made TCL, the world's third largest sodaash and sodium bio-carbonate producer. Magadi, Kenya is the second largest

natural soda ash producer in the world.

IMACID: TCL bought one-third stake in IMACID in FY06 for Rs1.7bn. IMACID is an

equal JV between Office Cherifien de Phosphates (OCP) - the world's largest

producer of rock phosphate and phosphatic fertilizers, CFCL and TCL. Investment

was made primarily to secure supplies of phosphoric acid for producing DAP and

NPK composite fertilizers at Haldia.

GCIP: TCL acquired GCIP in FY08 for US$1bn. GCIP has 75% subsidiary named

General Chemical Soda Ash Partners Inc (GCSAP). GCSAP has natural soda ashplants in US with the total capacity of 2.5m tonnes. TCL has an access to 75% of

GCSAP's cash flow. This acquisition made TCL, the world's second largest soda

ash player after Solvay.

Capex Plan

Capacity Expansions Current Expended Capex Exp. Time(Tonnes) (Tonnes) (Rs m)

Urea Babrala 864,600 1,204,600 2,000 FY09

Soda Ash - Mithpur 917,700 1,200,000 FY10

Salt - Mithpur 550,550 700,000 FY10

Cement - Mithapur 440,000 600,000 FY10

Sodium Biocarbonate - Mithpur 70,000 1,200,000 2,000 FY10

Source: Company Data

TCL will add further 7lac tonnes soda ash (4.5 lac tonne natural + 2.5 lac synthetic

of additional capacity in all the locations by way of de-bottlenecking of plants

in the next 18-30 months. TCL is investing Rs500m and Rs1250m in bio-fuel and

distribution business, respectively. TCL will fund the capex through internal

accruals and if required, than by sale of investment (TCL have total quoted

investments of Rs1987.9m in FY08). Distribution business will be funded through

both debt and equity.




21/40

Tata Chemicals

October 16, 2008 21

New Initiative

Bio-fuel: TCL is setting up a fully integrated, commercial scale plant for ethano

production (from sweet sorghum) with a capacity of 30,000 kilo litres per day in

Nanded, Maharashtra. Plant will be operational by Q3FY09 and total capex wouldbe Rs50 crore.

Distribution centre: TCL has entered into 50:50 JV with Total Produce Plc,

Ireland for sourcing and distributing fresh fruits and vegetables. In the distribution

business, TCL will acquire land and setup the storage centre. The company wil

purchase fruits and vegetables from farmers and after separating the scrap,

will sell the same to the retailers. In the initial years, TCL is focusing on reducing

the wastage and scrap. Total capex for TCL and Total Produce Plc. would be

around Rs2-2.5 bn. On a pilot basis, the company had started its first centre at

Ludhiana in May 2008 and the second centre will be soon coming up at Kalyan,

Mumbai by March 2009. The company is planning to open around 45 centres inthe coming 4-5 years throughout the country in various stages.

R&D Centre: TCL has setup a R&D centre at Pune with a staff capacity of 28

scientists and aims to recruit 150 scientists over the next three years. The

company will leverage its bio and nanotechnology business to change its revenue

mix over the next five years.

Tata Kisan Sanchar (TKS): TCL has setup around 613 TKS centres in the North

and East of the country to supply the agri-inputs, including TCL's fertilizers that

provides a variety of solutions that meets the farmer's needs. TKS' initiatives

extend to farm management services, advice on crops and farming practices,

information on prices of their produce, farm credit, storage, crop insurance

and a variety of other things.

Inorganic Growth

Soda ash facility at Tanzania: TCL is entering into a 50:50 JV with the Tanzania

Government for setting up a natural soda ash plant with the capacity of 0.5m

tonnes. But the JV is currently withheld due to environmental issues in Tanzania

Acquisition: TCL is looking for further acquisition or setting-up the urea plants

in Bangladesh and the middle-east countries or another soda ash facility in

China and US.




22/40

Tata Chemicals

22 October 16, 2008

Key Risks and Concerns

Local levies

The threat of imports has increased in the recent past, with the lowering ofcustoms duty and abolishment of anti-dumping duty (abolished in January 2005)

As per international agreements, custom duty is required to be brought down to

zero. Import duty of 35% in FY01 has come down to 7.5% in FY08; this has

resulted in an increase in the imports, from 0.049m tonnes in FY01 to 0.25m

tonnes in FY08.

Delay in the payment of subsidy

Delay in the payment of subsidy or issuance of subsidy bond of fertilizer by the

Government could cause serious financial burden to TCL.

Delay in de-bottlenecking of urea plant

Any delay in the de-bottlenecking of the project could postpone the revenue

and profitability of the company.

Availability of natural gas

Natural gas is the cheapest feedstock for urea. However, due to the shortage of

this gas, TCL is using naphtha to manufacture urea. Going ahead, usage of naptha

instead of natural gas will adversely affect the profitability of company.

Sharp fall in commodity prices

TCL is in the commodity business and commodity prices are falling from the

peak. Hence, any sharp fall in the commodity prices could lead to an adverse

impact on the company.

Forex liabilities

Sharp depreciation of rupee against US dollar could affect the profitability of

TCL because the company has foreign currency loans. We have not consideredthese losses in our estimate.

Pension Fund Liabilities

TCL has pension fund liabilities in UK and US which are mainly invested in these

markets. Hence, a sharp fall in the global market could impact the profitability

of TCL. We have not considered these losses in our estimate.




23/40

Tata Chemicals

October 16, 2008 23

Financials

Key Assumptions

Y/e March FY07 FY08 FY09E FY10E

Soda Ash - IndiaSales (Tonnes) 721,946 680,200 728,000 837,204

Sales Realization (Rs) 10,445 12,147 12,147 10,325

EBIT (%) 24.2 22.1 21.0 19.0

Soda Ash - BMGL

Sales (Tonnes) 1,568,000 1,629,000 1,750,000 1,890,000


EBIT (%) 11.2 (3.4) 4.7 1.8

Soda Ash - GCIP

Sales (Tonnes) 1,905,000 1,905,000

Sales Realization (Rs) 7,350 6,248

EBIT (%) 24.1 10.7

Salt

Sales (Tonnes) 496,802 479,697 467,968 512,803


EBIT (%) 24.2 22.1 21.0 19.0

Urea

Sales (Tonnes) 1,016,886 1,043,047 1,121,308 1,320,308


EBIT (%) 9.6 13.1 10.2 12.5

DAP

Sales (Tonnes) 278,493 225,564 275,000 275,000


EBIT (%) 9.6 13.1 10.2 12.5

IMACID - Phosphoric Acid

Sales (Tonnes) 120,469 140,410 143,190 143,190


EBIT (%) 10.7 18.1 22.3 21.8





24/40

Tata Chemicals

24 October 16, 2008

Income Statement (Rs m


Sales

Inorganic Chemicals 30,534 32,330 49,482 46,486

Fertilizers 27,503 27,901 50,823 52,571Total 58,036 60,232 100,304 99,057

Growth (%) 3.8 66.5 (1.2)

EBIT

Inorganic Chemicals 5,549 3,005 7,748 4,866

As % of Sales 18.2 9.3 15.7 10.5

Fertilizers 2,621 3,706 6,500 7,403

As % of Sales 9.5 13.3 12.8 14.1

Total 8,170 6,712 14,248 12,269

EBIT Margin (%) 14.1 11.1 14.2 12.4

Unallocated Income 255 633 - -

Interest (944) (461) (2,370) (1,770)

PBT 7,481 6,884 11,879 10,499

PBT Margin (%) 12.9 11.4 11.8 10.6

Tax (2,401) (2,115) (3,475) (3,144)

Tax Rate (%) 32.1 30.7 29.3 29.9

PAT before exceptional Items 5,080 4,769 8,404 7,355

PAT Margin (%) 8.8 7.9 8.4 7.4

Exceptional Items - 4,875 - -

PAT 5,080 9,644 8,404 7,355





25/40

Tata Chemicals

October 16, 2008 25

Balance Sheet (Rs m


Source of Funds

Equity Capital 2,152 2,341 2,435 2,435

Share Premium 1,819 6,524 8,617 8,617Profit & Loss/ General Reserve 21,748 28,320 33,282 37,625

Networth 25,718 37,185 44,335 48,678

Total Debt 18,642 48,505 39,494 29,494

Deferred Tax Liability 2,337 2,695 2,695 2,695

Deferred Capital Grants 211 148 148 148

Total 46,908 88,532 86,671 81,014

Application of Funds

Net Fixed Assets 30,561 33,712 29,727 28,766

Goodwill on Consolidation 7,632 46,492 46,492 46,492

Investments 7,753 4,174 4,174 4,174

Inventories 6,352 9,302 12,095 15,020Sundry Debtors 9,665 11,999 13,195 16,386

Cash & Bank 1,545 6,767 10,383 10,597

Loans & Advances 2,582 6,215 6,215 6,215

Sundry Creditors (8,428) (15,214) (15,394) (19,117)

Acceptances/ Other Liabilities (2,654) (4,121) (6,182) (9,273)

Provisions (8,135) (10,800) (14,040) (18,252)

Working Capital 926 4,148 6,272 1,576

Miscellaneous Expenses 37 5 5 5

Total 46,908 88,532 86,671 81,014


Cash Flow (Rs mY/e March FY07 FY08 FY09E FY10E

Cash from operating activities 12,103 14,783 14,020 16,525

Cash from investing activities (8,340) (41,572) (140) (3,300)

Cash from financing activities (3,382) 32,011 (10,264) (13,012)

(Dec)/Inc in cash 380 5,223 3,616 213

Opening Cash 1,165 1,545 6,767 10,383

Closing Cash 1,545 6,767 10,383 10,597





26/40

Tata Chemicals

26 October 16, 2008

Key Ratios


Growth Ratio (%)

Sales 44.6 3.8 66.5 (1.2)

EBITDA 35.3 (9.7) 86.5 (10.0)PAT 17.3 (6.1) 76.2 (12.5)

EPS 17.3 (6.1) 76.2 (12.5)

Asset Based Ratio (%)

RoCE/RoI 24.6 11.5 21.9 21.1

RoE/RoNW 19.8 12.8 19.0 15.1

Gearing

Debt/Equity 0.7 1.3 0.9 0.6

Per Share (Rs)

EPS 20.9 19.6 34.5 30.2BV 105.6 152.7 182.0 199.9

DPS 7.1 8.7 12.1 10.6

CEPS 56.0 53.3 92.4 85.4

Margins (%)

EBIT 14.1 11.1 14.2 12.4

PAT 8.8 7.9 8.4 7.4

Tax Rate 32.1 30.7 29.3 29.9

Dividend Payout 33.9 44.3 35.0 35.0

Velocity (Days)

Debtors 54.5 65.6 60.0 60.0Inventories 41.9 47.4 55.0 55.0

Valuations (x)

P/E 8.0 8.5 4.8 5.5

P/CEPS 3.0 3.1 1.8 2.0

P/BV 1.6 1.1 0.9 0.8

M.Cap/Sales 0.7 0.7 0.4 0.4

EV/EBITDA 5.3 8.4 3.8 3.6

EV/Sales 1.0 1.4 0.7 0.6





27/40

Chambal Fertilisers and Chemicals

CFCL is the key beneficiary of the new investment policy of urea. We believe

that CFCL's top-line and bottom-line will grow with the three years CAGR (FY07A

FY10E) of 15.8% and 57.4%, respectively on the back of positives in the newurea policy, partial de-bottlenecking of urea plant, skyrocketing phosphoric acid

prices and addition in ships portfolio.

Incentive to higher utilization in the new policy...adds the bottom-line

We believe that the company's 7.7% of FY09 and FY10 production will be

eligible for IPP. We expect that a positive move in the policy will give

incremental PAT of Rs507m (EPS - Rs1.2) in FY09 and FY10.

Partial de-bottlenecking...eligible for IPP: CFCL is going for a partial de

bottlenecking of the urea plant which will add 1.34lac tonnes. We believe

that de-bottlenecking will boost the PAT by Rs270m (EPS - Rs0.6) in FY10 on

the back of IPP linked urea policy.

IMACID JV...commodity story: Spurting phosphoric acid prices will improve

the profitability of IMACID substantially. We expect that IMACID will add PAT

of Rs1,935m (EPS - Rs4.6) in FY09 assuming phosphoric acid prices at

US$1800/tonne.

Addition in ship portfolio...contribution to the PAT: CFCL has got delivery

of three new ships in 1HFY09 and will get delivery of one ship in FY10 tha

will contribute the bottom-line, going forward.

Valuation: At the CMP of Rs47, CFCL is trading at 4.9x at its FY09E

consolidated EPS of Rs9.6 and 4.7x at its FY10E consolidated EPS of Rs10.0

We recommend BUY the stock with the price target of Rs70 (potential upside- 48.6%) based on 7x of FY10E earning.

Key Financials (Y/e March) FY07 FY08 FY09E FY10E

Revenue (Rs m) 29,806 32,850 45,118 46,262

Growth (%) 10.2 37.3 2.5

EBITDA (Rs m) 4,910 5,811 9,569 10,41

PAT (Rs m) 1,072 1,648 4,016 4,17

EPS (Rs) 2.6 4.0 9.6 10.0

Growth (%) 53.8 143.7 4.0

Net DPS (Rs) 1.8 1.8 1.8 1.

Profitability & Valuation FY07 FY08 FY09E FY10E

EBITDA margin (%) 16.5 17.7 21.2 22.5

RoE (%) 11.7 14.1 27.1 23.0

RoCE (%) 14.5 17.1 25.7 25.7

EV / sales (x) 1.3 1.1 0.8 0.8

EV / EBITDA (x) 7.8 6.3 3.7 3.

PE (x) 18.3 11.9 4.9 4.

P / BV (x) 2.1 1.7 1.3 1.

Net dividend yield (%) 3.8 3.8 3.8 3.


Price Performance (RIC: CHMB.BO, BB: CHMB IN)


Rating BUY

Price Rs47

Target Price Rs70

Implied Upside 48.6%

Sensex 10,581

(Prices as on October 16, 2008)

Trading Data

Market Cap. (Rs bn) 19.6

Shares o/s (m) 4,162.1

Free Float 50.0%

3M Avg. Daily Vol (000) 7,095.0

3M Avg. Daily Value (Rs m) 483.4

Major Shareholders

Promoters 50.0%

Foreign 9.8%

Domestic Inst. 10.0%

Public & Others 30.2%

Stock Performance

1M 6M 12M

Absolute (23.3) (17.2) (7.1)

Relative (1.6) 17.6 37.4


Company ReportOctober 16, 2008

30

40

50

60

70

80

90

100

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

(Rs)




28/40


28 October 16, 2008

Investment Rationale

Incentive to higher utilization in new policy...adds thebottom-line

We believe that CFCL's 7.7% of FY09 and FY10 production will be eligible for IPP

based on FY08 production level (116%) and subject to minimum production of

1.94m tonnes (target production specified by the government) of urea. We expect

that positive move in the policy will give incremental PAT of Rs507m (EPS -

Rs1.2) in FY09 and FY10, assuming the delivered cost of gas at US$7/mmbtu

CFCL will be eligible for 85% of IPP.

Policy benefit on existing production (Rs m

Remarks

EBIT based on IPP

Sales (In Tonnes) 154,348 Assuming company will maintainthe capacity utilization leve(119%) of FY08 and will achieve thetarget production of 1.94m tonneas per policy. Hence, 7.7% of totaproduction fall under IPP.

Sales Realization US$425 @ Rs42/US$ 17,850 Assuming import parity price ourea shouldn't fall below US$500/Tonne.

Sales 2,755

EBIT 36.0% Assuming delivered cost of gas atUS$7/mmbtu.

EBIT 993

EBIT based on Normal PricingSales (In Tonnes) 154,348

Sales Realization (Rs) 10,180

Sales 1,571

EBIT 15.0%

EBIT 236

Incremental EBIT 757

Interest - Chambal has 85% of total debts inshipping business. Hence, we havenot considered finance cost.

PBT 757

Tax (250)

PAT 507Equity 4,162

Incremental EPS 1.2

Source: PL Research




29/40


October 16, 2008 29

CFCL can increase the capacity utilization further from FY08 level i.e. 116% and

add the bottom-line to that extent. We have made a sensitivity analysis at

different level of capacity utilization and delivered cost of gas (assuming IPP at

US$500/tonne).


Higher Utilization at 116% 120% 125%

Gas@ US$8 US$7 US$8 US$7 US$8

Sales (In Tonnes) - Eligible for IPP 154,348 229,350 229,350 315,810 315,810

Sales Realization US$425 @ Rs42/US$ 17,850 17,850 17,850 17,850 17,850

Sales 2,755 4,094 4,094 5,637 5,637

EBIT % (In higher utilization) 30.9% 36.0% 30.9% 36.0% 30.9%

EBIT % at normal utilization 15.0% 15.0% 15.0% 15.0% 15.0%

Incremental EBIT due to higher utilization 438 861 651 1,186 896

Tax (145) (284) (215) (391) (296)

PAT 294 577 436 795 601

Equity 4,162 4,162 4,162 4,162 4,162Incremental EPS (Rs) 0.7 1.4 1.0 1.9 1.4

Source: PL Research

Further, our estimates are based on the assumption that IPP shouldn't fall below

US$500/tonne. We have made a sensitivity analysis at different levels of IPP

(assuming capacity at FY08 level of 119% and delivered cost of gas at

US$7/mmbtu):


Higher Utilization at IPP at US$

450 400 350

Sales (In Tonnes) - Eligible for IPP 154,348 154,348 154,348

Sales Realization (85% of IPP @ Rs42/US$) 16,065 14,280 12,495

Sales Realization (In US$) 383 340 298

Sales 2,480 2,204 1,929

EBIT % (In higher utilization) 28.9% 20.1% 8.6%

EBIT % at normal utilization 15.0% 15.0% 15.0%

Incremental EBIT due to higher utilization 345 112 (123)

Tax (114) (37) 41

PAT 231 75 (83)

Equity 4,162 4,162 4,162

Incremental EPS (Rs) 0.6 0.2 (0.2)

Source: PL Research




30/40


30 October 16, 2008

Partial de-bottlenecking...eligible for IPP

CFCL is going for partial de-bottlenecking of its urea plant with a capex of

Rs4bn which will add 1.34lac tonnes (8% of current installed capacity) and wil

come on stream by April 2009. Funding of capex of Rs4bn will be done throughinternal accruals. De-bottlenecking of urea will be benefited by IPP-linked urea

policy. We believe that de-bottlenecking will boost the PAT by Rs270m (EPS -

Rs.0.6) in FY10 assuming the delivered cost of gas at US$7/mmbtu and capacity

utilization of 70%. De-bottlenecking will also result in energy saving but we

have not considered the same in our estimate.

Earning through de-bottlenecking (Rs m

Particulars 2009-2010E Remarks

Sales (In Tonnes) 93,800 Assuming company will achieve thetarget production of 1.94m tonneas per policy and 70% capacityutilization level in new capacity.

Sales Realization US$425 @ Rs42/US$ 17,850 Assuming import parity price ourea shouldn't fall below US$500/Tonne

Sales 1,674

EBIT% 36.0% Assuming delivered cost of gas atUS$7/mmbtu.

EBIT 603

Interest (200) Total Capex - Rs4bn.Funding othe capex is through internaaccrual but we are considering theopportunity cost.

PBT 403

Tax (133)

PAT 270

Equity 4,162

Incremental EPS (Rs) 0.6

Source: PL Research

Management will take a decision for further de-bottlenecking up to 25% increase

in the urea capacity only after successful implementation of 1.34lac tonnes.




31/40


October 16, 2008 31

We have made a sensitivity analysis at delivered cost of gas at US$8/mmbtu and

further at different levels of IPP (assuming other factors remain constant)


Particulars Gas @ US$8 IPP @US$450 400 350

Sales 1,674 1,507 1,339 1,172

EBIT 30.9% 28.9% 20.1% 8.6%

EBIT 517 435 269 101

Interest (200) (200) (200) (200)

PBT 317 235 69 (99)

Tax (105) (78) (23) 33

PAT 213 158 46 (66)

Equity 4,162 4,162 4,162 4,162

Incremental EPS (Rs) 0.5 0.4 0.1 (0.2)

Source: PL Research

IMACID JV ...commodity story

Spurting phosphoric acid prices will improve the profitability of IMACID

substantially. We expect that IMACID will add PAT of Rs1,935m (EPS - Rs4.6) in

FY09, assuming phosphoric acid prices at US$1800/tonne which is on a

conservative basis. This is because IMACID has contracted at US$2300/tonne in

Q2FY09 and average realization was US$1717/tonne in Q1FY09. IMACID posted

PAT of Rs830m (1.7x of FY08 PAT) in Q1FY09 itself. IMACID has repaid all the

debt in FY08, thus becoming a debt-free company.

Dimension of phosphoric acid


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY06 FY07 FY08 FY09E FY10E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Realization Per Tonne EBITDA Per Tonne PAT Per Tonne PAT (RHS)




32/40


32 October 16, 2008

We have made a sensitivity analysis of phosphoric acid prices for FY10 because

we are confident that in FY09, IMACID will achieve the EPS of Rs4.6. In FY10E,

our estimates are based on the phosphoric acid price at US$1500/tonne.

Sensitivity analysis (Rs mPhosphoric Acid Price US$ / Tonne 1,000 1,100 1,300 1,500 1,800

Sales 6,014 6,615 7,818 9,021 10,825

EBITDA 1,503 1,654 1,955 2,255 2,706

EBITDA Per Tonne (Rs) 10,500 11,550 13,650 15,750 18,900

Depreciation (287) (287) (287) (287) (287)

EBIT 1,216 1,367 1,667 1,968 2,419

Tax (243) (273) (333) (394) (484)

PAT 973 1,093 1,334 1,574 1,935

Equity 4,162 4,162 4,162 4,162 4,162

EPS (Rs) 2.3 2.6 3.2 3.8 4.6

Source: PL Research

Addition in ship portfolio...contribution to the PAT

CFCL has acquired delivery of three new ships in 1HFY09 and will get delivery of

one ship in FY10 that will contribute to the bottom-line, going forward. Shipping

business is an asset-based model and CFCL has five ships in their portfolio

currently (there will be six ships in FY10). CFCL has sold off a 1987 built single

hull aframex tanker in FY08 for a profit of Rs229.1m and we believe that the

company could fetch good value from the new ships in future. At present, CFCL

has four double hull vessels ships.

CFCL has bought the ships through debt which has been raised in FY07 at anattractive and competitive rate of LIBOR plus 90bps with the maturity of 12-13

years.




33/40


October 16, 2008 33

Worst and best case scenario

We are showing the worst and best case scenario of CFCL's FY09E and FY10E

EPS, considering the IPP price of urea at US$500/tonne.

Worst and best case

Worst Case Best Case

FY09E FY10E FY09E FY10E

Base Case 9.6 10.0 9.6 10.0

Less: EPS due to Higher Utilization 1.2 1.2 1.2 1.2

Less: EPS due to de-bottlenecking 0.0 0.6 0.0 0.6

Less: EPS contribution by IMACID 0.0 3.8 0.0 3.8

8.4 4.4 8.4 4.4

Add: EPS due to Higher UtilizationWorst Case - Gas price at US$8/mmbtuand utilization at FY08 level (116%).

Best Case - Gas price at US$7/mmbtuand utilization at 125% level. 0.7 0.7 1.9 1.9

Add: EPS due to de-bottleneckingWorst Case - Gas price at US$8/mmbtuBest Case - Our estimate is on best case. 0.0 0.5 0.0 0.5

Add: EPS contribution by IMACIDWorst Case- Phosphoric Acid at US$1000/ tonneBest Case - Phosphoric Acid at US$1800/tonne 0.0 2.3 0.0 4.6

9.1 7.9 10.3 11.5

FY09E Chng FY10E Chng

Worst Case 9.1 -5.3% 7.9 -20.9%

Base Case 9.6 0.0% 10.0 0.0%

Best Case 10.3 7.2% 11.5 14.1%

Source: PL Research

PE Band

Source: PL Research

0

10

20

3040

50

60

70

80

90

100

Apr-99

Oct-99

Apr-00

Oct-00

Apr-01

Oct-01

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

4 6 8 10 Price (Rs)




34/40


34 October 16, 2008

Company Background

CFCL, a company from the K K Birla group is one of the major players in the

fertilizer business and largest manufacturers of urea in the private sector. The

company also trades in DAP, complex fertilizers, pesticides and seeds. Thecompany has diversified into the other businesses like software, shipping and

textile.

Segmental breakup

Sales EBIT


0

10,000

20,000

30,000

40,000

50,000

FY08 FY09E FY10E

(Rsm)

Urea Traded Goods Shipping

Textile & Others IMACID Software

-2,000

0

2,000

4,000

6,000

8,000

10,000

FY08 FY09E FY10E

(Rsm)

Urea Traded Goods Shipping

Textile IMACID Software




35/40


October 16, 2008 35

Business Overview

Agri Inputs

CFCL's seed and pesticides trading business is growing faster and has enteredinto a new segment of commodity trading of mustard and cumin. Through CFCL's

relationship program "Uttam Bandhan", the company is in direct touch with

75,000 farmers. CFCL helps in building brand equity in the market, launching of

new products and educating the farmers to improve yields and productivity.

Textile

CFCL has spinning segment with the capacity of 80,208 spindles bearing the

name "Birla Textile Mills". In FY07, CFCL had commissioned 39,888 spindles to

seize the opportunities presented by the new economic environment in the

textile industry.

Software and business process

CFCL's subsidiary, ISG Novasoft, has embarked in the third-party India BPO sector

focusing on the broad area of asset-based lending services, with an initial thrust

in residential mortgages. ISG Novasoft is executing a unique and innovative

platform-based BPO strategy in scaling up transactional BPO services in India

to capture the compelling cost advantages that an India back-end offers

Chambal's software business is incurring losses due to amortization of software

development charges and will be a turnaround only when the company will get

substantial order in the future.

IMACID

IMACID is an equal JV between Office Cherifien de Phosphates (OCP) - the world's

largest producer of rock phosphate and phosphatic fertilizers, CFCL and TCL for

producing phosphoric acid with the annual capacity of 4.3m tonnes.

Foray into Infrastructure Sector

Chambal Infrastructure Ventures (CIVL) is a Special Purpose Vehicle (SPV) and awholly owned subsidiary of the CFCL. This subsidiary is engaged in the

development and setting up of power projects. It has, in turn, incorporated two

wholly-owned subsidiaries viz. Chambal Energy (Chhattisgarh) and Chamba

Energy (Orissa) for taking up power projects in the states of Chhattisgarh and

Orissa, respectively. CIVL has signed a MoU with the Government of Chhattisgarh

for setting up of 1100 MW thermal power plant. Application for setting up the

thermal power plant of 1200 MW in the state of Orissa is pending for approval




36/40


36 October 16, 2008

Key Risks and Concerns

Delay in the payment of subsidy

Delay in the payment of subsidy or issuance of subsidy bond of urea by theGovernment could cause serious financial burden to CFCL.

Delay in de-bottlenecking of urea plant

Any delay in the de-bottlenecking of the project could postpone the revenue

and profitability of the company.

Availability of natural gas

Natural gas is the cheapest feedstock for urea. However, due to the shortage of

this gas, CFCL is using naphtha to manufacture urea. Going ahead, usage of

naphtha instead of natural gas will adversely affect the profitability of company

Sharp fall in commodity prices

CFCL is in the commodity business and commodity prices are falling from the

peak. Hence, any sharp fall in the commodity prices could lead to an adverse

impact on the company.




37/40


October 16, 2008 37

Financials

Income Statement (Rs m


SalesFertilisers 20,000 19,023 21,544 23,218

Traded Goods 2,230 3,399 5,000 5,000

Shipping Business 1,766 3,282 4,006 5,203

IMACID - Phosphoric Acid 2,554 3,313 10,825 9,021

Others 3,257 3,833 3,743 3,820

Total 29,806 32,850 45,118 46,262

Growth (%) 10.2 37.3 2.5

EBIT

Fertilisers 2,699 2,711 3,811 4,415

As % of sales 13.5 14.3 17.7 19.0

Traded Goods 91 240 225 225

As % of sales 4.1 7.1 4.5 4.5

Shipping Business 394 789 796 1,059

As % of sales 22.3 24.0 19.9 20.4

IMACID - Phosphoric Acid 300 704 2,419 1,968

As % of sales 11.8 21.3 22.3 21.8

Others (453) (778) (330) (357)

As % of sales (13.9) (20.3) (8.8) (9.3)

Total 3,031 3,667 6,921 7,310

EBIT Margin (%) 10.2 11.2 15.3 15.8

Unallocated Income/(Expense) (240) (314) (224) (224)

Interest (1,052) (960) (918) (968)

PBT 1,739 2,393 5,779 6,117

PBT Margin (%) 5.8 7.3 12.8 13.2

Tax (688) (756) (1,763) (1,942)

Tax Rate (%) 39.6 31.6 30.5 31.8

PAT before exceptional Items 1,050 1,637 4,016 4,175

PAT Margin (%) 3.5 5.0 8.9 9.0

Exceptional Items 108 738 - -

PAT 1,158 2,374 4,016 4,175





38/40


38 October 16, 2008

Balance Sheet (Rs m


Source of Funds

Equity Capital 4,162 4,162 4,162 4,162

Share Application - 30 30 30Share Premium 64 1,127 1,127 1,127

Profit & Loss/ General Reserve 4,902 6,371 9,511 12,809

Networth 9,129 11,690 14,829 18,128

Total Debt 20,124 18,545 18,545 18,545

Deferred Tax Liability 3,163 2,844 2,844 2,844

Other Liabilities 1,409 978 978 978

Total 33,825 34,058 37,197 40,495

Application of Funds

Net Fixed Assets 23,361 24,439 22,921 26,593

Intangible Assets 981 1,605 1,605 1,605

Goodwill on Consolidation 736 470 470 470Investments 218 223 223 223

Inventories 3,864 3,177 4,272 5,007

Sundry Debtors 6,026 2,213 5,340 6,259

Cash & Bank 1,393 1,449 2,868 1,591

Loans & Advances 1,082 861 861 861

Other Current Assets 66 3,849 3,849 3,849

Sundry Creditors (1,777) (1,880) (2,670) (3,129)

Acceptances/ Other Liabilities (743) (970) (1,164) (1,455)

Provisions (1,405) (1,392) (1,392) (1,392)

Working Capital 8,505 7,307 11,964 11,591

Miscellaneous Expenses 25 14 14 14

Total 33,825 34,058 37,197 40,495


Cash Flow (Rs m


Cash from operating activities (1,091) 6,086 3,651 6,600

Cash from investing activities (7,911) (3,899) (1,355) (7,000)

Cash from financing activities 9,433 (2,131) (876) (876)

(Dec)/Inc in cash 431 56 1,419 (1,277)

Opening Cash 962 1,393 1,449 2,868

Closing Cash 1,393 1,449 2,868 1,591





39/40


October 16, 2008 39

Key ratios


Growth Ratio (%)

Sales (4.2) 10.2 37.3 2.5

EBITDA (0.2) 18.3 64.7 8.8PAT (28.8) 53.8 143.7 4.0

EPS (28.8) 53.8 143.7 4.0

Asset Based Ratio (%)

RoCE/RoI 14.5 17.1 25.7 25.7

RoE/RoNW 11.7 14.1 27.1 23.0

Gearing

Debt/Equity 2.2 1.6 1.3 1.0

Per Share (Rs)

EPS 2.6 4.0 9.6 10.0BV 21.9 28.1 35.6 43.6

DPS 1.8 1.8 1.8 1.8

CEPS 7.7 9.9 16.6 18.0

Margins (%)

EBIT 10.2 11.2 15.3 15.8

PAT 3.5 5.0 8.9 9.0

Tax Rate 39.6 31.6 30.5 31.8

Dividend Payout 64.7 31.6 18.7 17.9

Velocity (Days)

Debtors 59.8 45.8 50.0 50.0Inventories 40.9 39.1 40.0 40.0

Valuations (x)

P/E 18.3 11.9 4.9 4.7

P/CEPS 6.1 4.8 2.8 2.6

P/BV 2.1 1.7 1.3 1.1

M.Cap/Sales 0.7 0.6 0.4 0.4

EV/EBITDA 7.8 6.3 3.7 3.5

EV/Sales 1.3 1.1 0.8 0.8





40/40

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as

information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not beconsidered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the

accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the

information, statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well

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PLs Recommendation Scale

BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months

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1.6%

0%

10%

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30%

40%

50%

60%

Buy Accumulate Reduce Sell

%

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Documents

Fertiliser 2008