Fertiliser Sector Report - PINC Research

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Dawn of a new era...

FERTILISER SECTOR

Contents

Investment Summary .............................................................................. 1

Investment Rationale ............................................................................... 2

Sector Background .................................................................................. 10

Companies

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

Coromandel International Ltd. .................................................................. 34

Deepak Fertilisers and Petrochemicals Corporation Ltd. ........................ 40

Nagarjuna Fertilisers and Chemicals Ltd ................................................ 47

Rashtriya Chemicals and Fertilisers Ltd ................................................. 55

Annexures .................................................................................................. 63

1

Chambal Fert. 52 22 45,270 47,645 5.9 7.3 8.8 7.2 73 BUY

Coromandel Int. 213 30 59,022 70,118 25.4 31.7 8.4 6.7 285 BUY

Deepak Fert. 89 8 13,398 15,519 13.9 15.1 6.4 5.9 114 BUY

Nagarjuna Fert. 34 15 18,742 21,205 1.7 3.3 19.8 10.4 47 BUY

RCF 65 36 59,655 64,260 3.8 4.8 17.0 13.6 73 HOLD

FERTILISERS

Investment SummaryBeginning of a new EraThe share of agriculture to India’s GDP has declined over timeand currently stands at ~17%. However, it still plays a vital roleas it employs ~60% of the population and provides a crucialbackward and forward linkage to the rest of the economy. Thegovernment is targeting 8-9% GDP growth and self-reliance infood production. Fertilisers, being directly associated withagriculture should significantly benefit from such an upturn.

Favourable policy changesRising subsidy bills and dependency on imports has resultedin several positive policy changes like realisation linked withinternational prices parity (IPP), decrease in MRP of complexfertilisers, energy reduction benefits to be retained with players.These changes would act as incentives to hike capacity aswell as improve the profitability and returns on the business.

Demand remains robust; Supply yet to catch upOver the last 5 years fertilisers’ consumption has grown at aCAGR of 6.7%. With no significant capacity addition in thelast 10 years, this demand has been met through importsincreasing the proportion of imports from 15% to 45%.

RIL gas – A natural supportNatural gas from RIL’s KG basin provides a big support to theindustry in achieving self-sufficiency in Urea production. Withfirst priority, fertiliser sector has received ~15mmscmd of naturalgas out of ~40mmscmd in first allocation from RIL KG D6.

Expansion and efficiency improvementChanging favourable scenario has led fertiliser manufacturersto implement energy reduction measures and capacityadditions. Consequently there will be considerable accretion(15-40%) to earnings from FY11 onwards.

ATTRACTIVE VALUATIONSWe believe that fertiliser sector with rising demand andfavourable policy changes offer a great investment opportunity.Companies with strong positioning and ongoing projects shouldmake significant improvement in profitability in the comingyears. We initiate coverage on the sector with a positive outlookand our top picks are Coromandel and Chambal Fertilisers.

Sector Summary

12 October 2009

Sector View - Attractive

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KEY FINANCIALSCMP Mkt Cap Net sales (Rs mn) EPS (Rs) P/E (x) TP

(Rs) (Rs bn) FY10E FY11E FY10E FY11E FY10E FY11E (Rs)

PINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO>

Company Rating

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Chirag [email protected]: +91-22-6618 6462

Satish [email protected]: +91-22-6618 6488

Nutrients consumption trend (mn MT)

1

-

50

100

150

200

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

Fert Index BSE Rebased

-

6

12

18

24

FY 82 FY 91 FY 00 FY 09

Consumption Import

2

-

7.0

14.0

21.0

28.0

FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09

Production Imports

-

4.0

8.0

12.0

16.0

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Capacity N Production N Capacity P Production P

[email protected]

INVESTMENT RATIONALE


Despite the emphasis laid by the government to increase agricultural productivity by usingmore fertilisers and other inputs, domestic capacity has not increased due to lack ofavailability of raw materials and restrictive policies.

Why to look at fertiliser sector => dark nights are over, be an early bird & enjoy thedawnThe Past…No capacity addition in the last decadeGovernment’s target of achieving self sufficiency in food grains production is resulting inhigher usage of fertilisers to increase productivity. Despite this there has been no significantcapacity addition in last decade and all current capacities are not operating at 100%utilisation level.

Increasing dependency on imports

Lack of significant indigenous capacity additions and higher usage of fertilisers resulted inhigher dependency on imports to meet the growing demands. Consequently, proportion ofimports increased significantly against the govt’s target of self-reliance

Capacity and Production of Fertilisers (mn MT)

Source: Fertiliser Association of India (FAI)

Share of imports in fertiliser consumption (mn MT)

Source: FAI

Stagnant productioncapacity since lastdecade...

Increasing share ofimports to meet thedemand...

3

0

250

500

750

1,000

FY03 FY04 FY05 FY06 FY07 FY08 FY09

Urea P & K Fertilisers

-

60

120

180

240

FY 07E FY 08 P FY 09 P FY 10 P FY 11 P FY 12 P

Ex isting fields New discov eries LNG supplies Coal bed methane Pipeline imports

Mounting subsidy burdenFertiliser sector being highly regulated and controlled, any negatives for the sector hasimpacted both the government and the manufacturers. Increasing dependency on importsand MRPs fixed at customer’s end despite of rising input costs, has resulted in mountingsubsidy load for the government with subsidy at ~Rs1tn in FY09.

The Present…There has been several positive developments for the fertiliser sector in the last one year,which augur well for the future. Key ones are discussed below,

Natural Gas (NG) availability in IndiaGas finding at RIL KG D6 basin is going to be a big booster for India in terms of meetingenergy requirements. As per Crisil research, NG availability is expected to grow at aCAGR of ~17% for the next three years. RIL has already started production of 40mmscmdfrom its KG basin, which is likely to double by year-end.

Natural gas is a key raw material for Ammonia that is used in production of Urea andcomplex fertilisers. Indigenous availability promises higher natural gas allocation to fertilisersector, which is a major positive. In the first allocation from RILKG basin, fertiliser sectorhad top priority and received allocation of ~15mmscmd of NG.

[email protected]


Subsidy granted to fertiliser sector (Rs bn)

Source: FAI

NG Availability (mmscmd)

Source: Crisil Research

Ballooning subsidy bill...

Increasing availability ofnatural gas...

[email protected]


Positive policy changes

Increasing subsidy burden and higher dependence on imports has led fertiliser ministry tomake several positive changes in the fertiliser policy in the last one year. These are aimingtowards more transparency, competitiveness and growth in the sector.

Key changes in Urea Policy

Guidelines to switch from liquid fuels (Naphtha & LSHS) to natural gas

Capital subsidy for players switching from LSHS to natural gas

No permission is required from government for de-bottlenecking or expansion

Benefits of energy saving to be retained with manufacturers for five years

Revived capacity’s realisation (for subsidy calculation) to be linked with IPP.

Key changes in Complex Fertiliser Policy

Nutrient based pricing of complex fertilisers (resulted in reduction of prices by 15-25%for farmers that should increase usage of complex fertilisers)

Manufacturer can sell their product anywhere in India, actual freight cost to be returned

· Fertilisers subsidy to manufacturers are linked with international prices of raw materialsand fertilisers

No permission is required from government for de-bottlenecking or expansion

Profits to be shared between producers and government if they contract raw materialat lower prices than prevailing market rates

Govt is also planning to provide nutrient based subsidy that should bring competition in thesector.

Sharp correction in raw materials and fertiliser prices

A sharp correction in the international prices of raw materials and fertilisers in CY10 fromtheir peaks of CY09, has provided further boost to the fertiliser sector. This will helpgovernment with reduced subsidy outflow and players with higher capacity utilisation.

Price movement of raw materials and fertiliser

Ammonia (USD/MT) Phosphoric Acid (USD/MT)

0

300

600

900

1200

Apr-9

4

Jul-9

5

Oct-9

6

Jan-

98

Apr-9

9

Jul-0

0

Oct-0

1

Jan-

03

Apr-0

4

Jul-0

5

Oct-0

6

Jan-

08

Apr-0

9

0

600

1,200

1,800

2,400

Apr-9

5

Jun-

96

Aug-

97

Oct-9

8

Dec-

99

Feb-

01

Apr-0

2

Jun-

03

Aug-

04

Oct-0

5

Dec-

06

Feb-

08

Apr-0

9


Nutrient based pricing forcomplex fertilisers...

Realisation of expandedcapacity for Urea to linkwith IPP...


5

0

300

600

900

1,200

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E

[email protected]


The future…

Many of the fertiliser companies have taken proactive measures to reap the benefits ofrevised policy. These changes are likely to have partial impact on earnings in FY10 and fullblown impact from FY11 onwards.

Benefits to the Government

Decline in international prices of fertilisers entail lesser fertiliser subsidy bill in FY10 andFY11. With pressure easing, the government should be in a position to provide furtherassistance and timely disbursement of subsidy to the manufacturers.

Benefits to Urea Manufacturers

Urea players are likely to have considerable benefit from the changed scenario of fertilisersector. We have discussed below the benefits accruing to the players under our coverage.

Capacity addition

Production above cutoff will be linked to 85% of international price of Urea with a floor andceiling of USD250 and USD425 respectively. This should add significantly to the earningsof the companies. Even at realisation of USD250, operating margins will be ~30% and withincreasing international prices, companies will have significant growth in profitability.

Urea (USD/MT) DAP (USD/MT)

0

250

500

750

1000

Apr-9

4

Sep-

Feb-

Jul-9

8

Dec-

May

-

Oct-0

2

Mar

-

Aug-

Jan-

07

Jun-

08

0

350

700

1050

1400

Apr-9

4

Jul-9

5

Oct-9

6

Jan-

98

Apr-9

9

Jul-0

0

Oct-0

1

Jan-

03

Apr-0

4

Jul-0

5

Oct-0

6

Jan-

08

Apr-0

9


Fertiliser subsidy to decline (Rs bn)


Correction in raw materialprices to lessen govt.’ssubsidy burden...

[email protected]


Reduced Energy Consumption

De-bottlenecking and upgradation of technology will lead to savings in energy costs andthe complete benefits will be retained with manufacturers for the first five years.

Ease in Working Capital management

Availability of more natural gas will decrease the proportion of usage of liquid fuels likeNaphtha and LSHS, this inturn should reduce working capital requirement and ease theshort-term loan requirement. There are chances that with reduced subsidy, the companiesshould not be allocated any fertiliser bonds as subsidy.

Benefits to Complex and Phosphatic Manufacturers

There has been more usage of Urea as compared to other fertilisers in the past mainly dueto their lower market price. This led to an imbalance in the nutrient content of soils.Government took the corrective action in FY08 by reducing the MRP of different complexfertilisers based on nutrient content.

Higher utilisation

Post reduction of MRP of complex fertilisers by 20-25%, farmers are likely to increase theusage of complex fertilisers that should result in better yield. With higher usage, thereshould be more demand for complex fertilisers. Higher demand and realisation linked withinternational price should motivate in higher production. The players with more capacityshould benefit most in these situations. Coromandel is the largest complex fertilisermanufacturer among the listed companies.

Capacity addition

Changes in fertiliser’s policy and increasing demand scenario should result in capacityaddition with tie-ups for raw materials. Coromandel International (among in our coverage)is forming a JV (along with GSFC and GCT) for setting up a 380k MT p.a. Phosphoric acidplant. The same will cater to a planned capacity addition of ~450k MT p.a. of complexfertilisers at Kakinada commencing production from end of FY11. This should contributepartially to earnings in FY11 and full impact from FY12 onwards.

Working Capital management

There are chances that with reduced subsidy, there will be no further fertiliser bondsallocation to companies, which inturn should reduce short-term loan requirement formanaging working capital.

Benefits from Capacity addition and energy reduction

Source: FAI, Company, PINC Research

Manufacturers Reassessed Cut-off IPP linked RIL gasallocation Expected Energy ReductionCapacity(mn MT) Capacity(mn MT) production(mn MT) (mmscmd) (Gcal/MT of Urea)

Chambal 1.72 1.84 0.20 1.15 0.20

Nagarjuna 1.17 1.41 0.18 1.55 0.45

RCF Thal 1.71 1.77 0.27 3.05 0.40

Coromandel NA NA NA NA NA

Deepak NA NA NA NA NA

Energy reduction benefits tobe retained with Ureaplayers...

Reduction in MRP ofcomplex fertiliser to increaseusage...

[email protected]


Are the valuations justified => we think yes, best is yet to comeShare prices of fertiliser companies have shown significant rise from their lows in Mar’09.However, we believe there is still a significant upside remaining for these companies.

Fertiliser business – A cash cowFertiliser business with government assured return of 12% post tax has worked as a cashcow for fertiliser companies. With demand greater than supplies, the only problem thatfertiliser companies have faced in past was managing their working capital. Untimelydisbursement of subsidy, bonds against cash subsidy and usage of liquid fuels in absenceof natural gas remain the reasons for volatility in working capital management.

Correction in raw material prices, higher availability of natural gas, lower subsidy burdenfor government and favourable changes in policy should result in higher cash generation forthese companies. Analysis of Nagarjuna Fertiliser’s cash flow numbers provide sense ofpure Urea business (other companies have mix of business and issues). Current marketcapital of Nagarjuna Fertilisers i.e. Rs15bn is recoverable in four years from the cashgeneration from operations.

Higher Returns

Most of these companies had higher returns in the past and with the situation improvingwe believe that they should yield higher returns in the future.

FY05 FY06 FY07 FY08 FY09 FY10E FY11E Market Cap Mar Cap/ FY11Ecash after WC

Chambal Fert Before w. c. 4.4 4.0 4.0 4.4 7.1 6.2 6.6 22.9 2.9After w. c. 3.3 5.6 (0.5) 5.5 12.2 2.2 7.8

Coromandel Int Before w. c. 1.1 1.3 1.5 3.5 7.6 2.9 3.7 28.0 12.4After w. c. 1.1 (0.5) 1.2 3.3 0.2 4.7 2.3

Nagarjuna Fert Before w. c. 3.2 2.7 2.6 2.8 3.0 3.3 4.0 15.0 3.1After w. c. 4.0 3.4 4.7 3.4 4.0 3.0 4.8

RCF Before w. c. 3.3 2.2 3.1 3.1 2.9 3.2 3.5 36.4 14.0After w. c. 1.3 1.7 (0.7) 1.4 (3.1) 11.2 2.6

Deepak Fert Before w. c. 0.9 0.7 1.4 1.6 2.5 2.1 2.4 7.9 3.9After w. c. 1.1 0.4 0.7 1.6 1.7 2.1 2.0

Cash flow from operations (Rs bn)

Source: Company, PINC Research

ROCE (%) ROE (%)


-

9.0

18.0

27.0

36.0

FY05 FY06 FY07 FY08 FY09 FY10E FY11E

Chambal Fert Coromandel FertNagarjuna Fert RCFDeepak Fert

-

12.0

24.0

36.0

48.0


Chambal Fert Coromandel FertNagarjuna Fert RCFDeepak Fert

[email protected]


BSE Vs Fertiliser sector

As discussed earlier, fertiliser sector lost its flavour in the market due to its inherentproblems. By comparing movement of fertiliser index (made with all major fertilisercompanies based on their market cap) vis-à-vis BSE Sensex, it can be observed thatfertiliser sector has underperformed Sensex in recent past. Even after recovery from theirbottom in Mar’09, the fertiliser index is still behind the market.

Positive intrinsic and extrinsic factors augur well for the fertiliser sector in future. We feelthat there will be a complete rerating of fertiliser sector with visibility of their future profitability.

Higher Dividend – A support

Few of the fertiliser companies provide good dividend yield, which further provide support tothe share price of the stock.

Fertiliser Index Vs BSE

Source: Capitaline Plus, PINC Research

-

90

180

270

360

Jan-04 Feb-05 Mar-06 Apr-07 May -08 Jun-09

Fert Index BSE Rebased

Dividend Yield (%)


-

1.5

3.0

4.5

6.0

FY07 FY08 FY09 FY10E FY11E

Chambal Fert Coromandel Fert Nagarjuna Fert RCF Deepak Fert

Fertiliser index under-performing the market...

Higher dividend yield-a support to share price...

[email protected]


What are the top picks => here is the answerThe five companies under our coverage should reap the benefit of uptrend in fertilisersector based on their positioning. We have tried to choose our best pick based on followingcriteria.

Way to look at the sectorWe feel that there are few key parameters to analyse the strength and earning potential forUrea and complex fertiliser manufacturers.

Urea playersAvailability of natural gas

Expansion and energy reduction plans

Production with IPP linkages

Larger the player, more the benefits

Complex ManufacturersTie-ups for sourcing raw materials

Expansion plans

Larger the player, more the benefits

Higher ReturnsFertiliser stocks have robust returns, higher cash generation from operations and higherdividend yield as discussed earlier. Few of the companies should also witness significantimprovement in their earnings in next two years.

Best PicksBased on all the factors mentioned above, we have done the relative grading of all thestocks under our coverage.

Based on all the factors, our best picks for the fertiliser sector are Chambal Fertilisersand Coromandel International Ltd.

We subscribe ‘BUY’ recommendation for Nagarjuna fertiliser and Deepak fertiliser;however, they have other businesses like Refinery and Chemicals respectively contributingsignificantly to their earnings. We initiate RCF with ‘HOLD’ recommendation, despite itbeing one of the largest fertiliser manufacturing PSUs due to lack of clarity of any expansionplan, government’s stake in future expansions and costlier valuations at the current level.However, any positive changes in the policy regarding revival of sick units will benefit RCFthe most.

Positioning Future triggers Financial Prudence Returns to shareholdersCompanies

TotalScoreBusiness Capacity/ Product Exposure Ongoing Working Debt/ Profit Gr in Dividend

concentration Market Portfolio to Policy Projects Capital Equity next 2 years Returns Yield

Chambal 3 4 3 4 5 5 2 4 3 4 37Coromandel 5 5 5 4 4 3 5 1 5 2 39Nagarjuna 2 3 4 4 4 5 1 5 1 1 30RCF 3 3 3 4 2 2 5 3 2 2 29Deepak 4 4 4 2 4 2 3 1 4 5 33

Relative Grading

Source: PINC Research Note: Rating on a scale of 1 to 5 (5 being the best)

Availability of natural gas isthe key for Urea players...

Tie-ups for raw materialsvital link for complexmanufacturers...

Our best picks: ChambalFert. & Coromandel Int...

10

Factors impacting Fertiliser sector

InternationalMarket

RawMaterial

AgricultureSector

GovernmentPolicies

FertiliserSector

Source: PINC Research

ProductionCapacity

Agriculture sector employs~60% of population andcontributes ~17% to IndianGDP...

[email protected]

SECTOR BACKGROUND

Fertiliser sector plays a significant role in a country like India, where agriculture sector stillcommands a dominant presence. Due to its specific importance, Government of India hasalways been directly associated with this sector in all its decision making process. Duringthe green revolution, this sector saw major capacity addition but since last decade therehas been no considerable addition and this has increased our dependency on imports tomeet our fertiliser requirements. For understanding the dynamics of this sector, it is importantto recognise the role of all associated variables, their limitations and expectations fromthis sector.

Existing production capacity, availability of raw materials, government policies, internationaldemand-supply scenario for fertilisers are some of the major factors influencing the fertilisersector. We will try to understand the equation of fertiliser sector with each of thesestakeholders to analyse the likely future of this sector.

AGRICULTURE SECTORThough the share of agriculture sector to the Indian GDP has declined over the period oftime and currently stands at ~17% of the GDP, it still plays a vital role as it employs ~ 60%of the Indian population. Along with that, it provides crucial backward and forward linkagesto the rest of the economy. Government from the time of green revolution movement istrying to achieve self-reliance in food grains production, and concerted efforts in this directionhave resulted in substantial increase in agriculture production.


11

Grain production increasedwith CAGR of ~2.6% in last60 years...

[email protected]

Production and Yield of food grains

Total food grain production has increased at a CAGR of 2.6% from ~60 mn MT in 1950-51to ~230 mn MT in 2007-08. This is associated with an increase in yield from 522 kg/hectare to 1854 kg/ hectare in 2008.

Even with ~4x growth in food grain production in last 60 years, situation is still not rosy.With population expected to grow at ~1.2% CAGR in next decade and 300 mn peoplebelow poverty line posses a big challenge in future to achieve the target of self-sufficiencyin food grain production for India.

Food grain production

Source: Indiastat, DoF (Dept of Fertilisers, Ministry of Fertilisers and Chemicals)

0

75

150

225

300

FY 5

1

FY 5

9

FY 6

7

FY 7

5

FY 8

3

FY 9

1

FY 9

9

FY 0

7

0

500

1000

1500

2000Production (mn MT) Yield (Kg/ Hectare)

Growth in Indian population

Source: Populstat

Agricultural land& irrigation coverage

Source: Indiastat, DoF

-

40

80

120

160

1900

1925

1950

1975

2000

2025

Indian Population (Bn)

0

40

80

120

160

FY 5

1

FY 6

5

FY 7

9

FY 9

3

FY 0

7

0

15

30

45

60Area (mn Hectare) Irrigation Cov erage


Current irrigation penetrationis ~46%...

12

Urea being cheaper waswidely used as comparedto P and K nutrients...

[email protected]

With agricultural land stagnant at around 125 mn hectare from last four decade, the increasein production is a result of better irrigation facilities (coverage increased from ~20% to~45%), advanced farming techniques, high productive seeds and lastly, higher usage offertilisers.

There has been an increase of 1.7x in usage of fertilisers in the last two decade. Annualconsumption of fertilizers in nutrient terms (N, P & K ), has increased from 0.7 lacs MT in1951-52 to 225.70 lacs MT 2007-08, while per hectare consumption of fertilisers, whichwas less than 1 Kg in 1951-52 has risen to the level of ~117 Kg in 2007-08. However, afactor most noticeable is that Urea comprise ~55% of total usage in all these years.

Plants require balanced nutrition for their growth. Nitrogen (N), Phosphorous (P) andPotassium (K) are the primary nutrients, where as sulphur (S), Calcium (Ca) and Magnesium(Mg) are secondary nutrients (these are used in lower amount as compared to primarynutrient but are important for growth of plants). Apart from these six nutrients, there arearound ten other micronutrients required for different kind of crops.

Fertiliser consumption in India (’000 MT)

Higher usage of Urea (~46% N), a fertiliser used for meeting the Nitrogen requirement,over the years, created an imbalance in the nutrition content of the soil. The reasons fordisproportionate usage of fertilisers and reverse action taken by government are discussedunder the relationship between fertiliser sector and government.

Proportion of Urea in total fertiliser (‘000 MT)

Indiastat, DoF

-

15,000

30,000

45,000

60,000

FY 9

1

FY 9

3

FY 9

5

FY 9

7

FY 9

9

FY 0

1

FY 0

3

FY 0

5

FY 0

7

Total Fertiliser Consumption Urea consumption


13

Fertiliser consumption hasincreased by ~6.7% in lastfive years...

[email protected]

With limitation of agricultural land and lower irrigation penetration, higher and balancedusage of fertilisers is the key to strengthen the agriculture sector. Government’s emphasison eradicating poverty, self-reliance on food and check on sky rocketing food-inflationaugurs well for the fertiliser sector.

FERTILISER PRODUCTION CAPACITY

India is the third largest fertiliser manufacturer in the world with an installed capacity of~12 mn MT of nitrogen and 5.7 mn MT of phosphatic nutrients. However, with increasingdemand for fertilisers, around ~25% N, ~50% P and ~100% K nutrients requirements aremet through imports.

As discussed earlier, plants require all nutrients in balanced proportion for their propergrowth. Complex fertilisers contain N: P: K: S in different proportions. The following chartsprovide clarity on the demand-supply scenario of different primary nutrients.

Fertiliser consumption in India ('000 MT)Year Urea Complex DAP SSP MOP Misc Total

FY 91 14,077 3,113 4,248 3,558 1,631 1,180 27,807FY 92 14,003 3,276 4,518 3,165 1,701 1,115 27,777

FY 93 14,905 3,043 4,052 2,008 974 1,364 26,347FY 94 15,810 3,159 3,480 2,353 1,053 1,490 27,345

FY 95 17,112 3,974 3,586 2,626 1,270 1,308 29,876FY 96 17,909 3,851 3,451 2,983 1,392 1,301 30,888FY 97 19,024 3,588 3,624 3,018 1,198 1,326 31,779

FY 98 19,619 3,785 5,372 3,660 1,729 1,287 35,451FY 99 20,396 3,821 5,828 3,693 1,621 1,254 36,613

FY 00 20,278 4,523 6,937 3,601 2,049 1,181 38,568FY 01 19,186 4,780 5,885 2,860 1,829 1,016 35,557

FY 02 19,917 4,963 6,181 2,605 1,992 894 36,552FY 03 18,493 4,810 5,473 2,499 1,912 786 33,973FY 04 19,767 4,757 5,625 2,544 1,841 853 35,388

FY 05 20,665 5,508 6,256 2,549 2,406 883 38,268FY 06 22,298 6,694 6,764 2,756 2,731 890 42,133

FY 07 24,338 6,799 7,381 2,910 2,586 829 44,844FY 08 25,963 6,571 7,497 2,288 2,881 606 45,805

Source: Indiastat, DoF


14

Nitrogen imports standsat ~25%...

[email protected]

Nutrient wise production and consumption of nutrients in India

Demand-Supply for Phosphorous (mn MT)

Source: DoF

Demand-Supply for Nitrogen (mn MT)

Source: DoF

Demand-Supply for Potassium (mn MT)

Source: DoF


Phosphorous imports standsat ~50%...

Potassium imports standsat ~100%...

-

4.0

8.0

12.0

16.0

FY

82

FY

84

FY

86

FY

88

FY

90

FY

92

FY

94

FY

96

FY

98

FY

00

FY

02

FY

04

FY

06

FY

08

Consumption Production Import

-

1.5

3.0

4.5

6.0

FY

82

FY

84

FY

86

FY

88

FY

90

FY

92

FY

94

FY

96

FY

98

FY

00

FY

02

FY

04

FY

06

FY

08


-

1.0

2.0

3.0

4.0

FY

82

FY

84

FY

86

FY

88

FY

90

FY

92

FY

94

FY

96

FY

98

FY

00

FY

02

FY

04

FY

06

FY

08


15

Hydrocarbon is the onlyrequirement for productionof Urea...

[email protected]

India is highly dependent on imports for their fertiliser requirements. Except nitrogen, weare highly exposed to international prices of phosphatic and potassic fertilisers due tohigher component of imports.

It is clearly apparent from the above graphs that there has been no significant capacityaddition for any kind of fertilisers in the last decade. The current situation is that out of totalcapacity of ~23 mn MT for Urea, ~2.8 mn MT is closed. This resulted in ~90% capacityutilization for available production capacity for Urea. Situation is even worse in Phosphaticand complex fertilisers as capacity utilisation is only ~65%. Major reason for lower capacityutilisations is the insufficiency of indigenous raw materials.

RAW MATERIAL AVAILABILITY

As discussed above, capacity utilisation for existing facilities are ~65% and ~90%respectively for complex fertilisers and Urea. Reasons for low capacity utilisations are

Unavailability of sufficient raw materials in India

Inadequate long-term tie-ups for supply of raw materials with international players

Loopholes in government policies

Raw Materials for Urea

Urea Manufacturing Process

Urea is manufactured with chemical reaction of Ammonia and Carbon dioxide at high-temperature and high-pressure conditions. It can be seen clearly in the manufacturing flowsheet that the raw materials required for production of intermediates (Ammonia and Carbondioxide) of Urea are Air and Hydrocarbon. Air, which takes care of Nitrogen and Oxygenrequirement, is freely available in the atmosphere. Hydrocarbon is required for meeting therequirement of Hydrogen and Carbon. Apart from usage for feed, hydrocarbons are also


Urea Manufacturing Process

Ammonia Carbon Dioxide Urea

Hydrogen + Nitrogen Air Oxygen + Carbon

Hydrocarbon (NG, Naphtha, FO)(Main Raw Material)


+ =>

16

Naphtha consumptiondecreasing for fertilisers...

[email protected]

needed to meet fuel requirements. Different hydrocarbons used for feed/ fuel in Ureamanufacturing are Natural gas, Naphtha and Fuel oil.

Segmentation based on different hydrocarbons used for feed and fuel in FY08 is givenbelow,

Usage of Natural gas has following advantages over other feed/ fuel options:

Higher operating efficiency

Lower energy consumption

Lower cost of production

In FY08, ~66% of feed and ~55% of fuel requirements were met through Natural gas.Government is continuously trying to increase the consumption of natural gas for Ureamanufacture. Usage of Naphtha for fertilisers is showing a decline since the last few years.

Feed-wise segmentation


Fuel-wise segmentation


Mixed feed16

Fuel Oil11

Nephtha7

Netural Gas66

Others19

Fuel Oil12

Nephtha14 Netural Gas

55

Naphtha usage for fertilisers

Source: Indiastat


~80% of capacity is runningon Natural gas and mixedfeed...

0

5000

10000

15000

20000

FY86

FY88

FY90

FY92

FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

Total Consumption ('000 MT) Consumption (Fertiliser)

17

Further requirement of NGat ~13mmscmd for switchingand revamping...

[email protected]

As per the current fertiliser policy, all Urea plants operating with Naphtha and Fuel oil asfeed, has to switch completely to natural gas by 2010. Availability of natural gas from RILKG basin and higher imports of LNG augur well for the increased usage of natural gas.With signs of adequate availability of natural gas and favorable policy environment bygovernment, many of the fertiliser companies are going for debottlenecking of their existingcapacities.

Around 26mmscmd of natural gas were available to fertiliser plants in FY08, which showsa shortfall of ~15mmscmd. With all debottlenecking under progress, switch from otherfeed to natural gas and resumption of closed plants will further increase the requirementsof natural gas to ~54mmscmd by FY12.

In the first allotment of gas from RIL KG basin, fertiliser industry was given the first priorityand received the allocation of ~15mmscmd of natural gas out of ~40mmsmd production.With production of gas doubling from RIL KG basin by FY10 and increased availability ofimported LNG, it is unlikely that existing plants will face any constraints regarding availabilityof raw material for the existing plants and planned de-bottlenecking.

Demand scenario of natural gas for Urea plants

Source: Crisil Research, PINC Research

41.4

3.59.3

41.4

26.2

15.2

0

15

30

45

60

FY08 FY10 FY12E

Av ailable Deficit Rev amp requiremnet Sw itch requirement


18

Ammonia, Phosphoric acid,Potash and Sulphuric acidare raw materials for complexfertilisers...

[email protected]

Raw Materials for Complex Fertilisers

Complex fertilisers contain two or more than two nutrients out of Nitrogen, Phosphorousand Potassium. They are represented as N: P: K, where N, P and K represents thepercentages of NH3, P2O5 and K2O. With importance on balanced nutrient content, nowSulphur is also considered as an important nutrient and so fertilisers are represented asN: P: K: S.

Complex Fertiliser Manufacturing Process

As per the nutrient content of complex fertilisers, different raw materials are used. Asdiscussed earlier, India is heavily dependent on imports for P and K nutrients to the tuneof 50% and 100% respectively. Around 45% of Sulphur requirements are also met throughimports. Such a high dependency on imports for raw material is the reason for lowercapacity utilisation of complex fertilisers.

Over the years, import trends for Ammonia and phosphoric acid are given below:

Complex Fertiliser Manufacturing Process

Nitrogen Sulphur

Phosphorous Potassium

Complex Fertilisers(N: P: K: S)

Ammonia Sulphuric Acid

Phosphoric Acid Muriate of Potash

Rock Phosphate Sulphuric AcidSource: PINC Research

Ammonia Import


Phosphoric Acid Import



-

500

1,000

1,500

2,000

FY 8

2FY

84

FY 8

6FY

88

FY 9

0FY

92

FY 9

4FY

96

FY 9

8FY

00

FY 0

2FY

04

FY 0

6FY

08

Ammonia Imported ('000 MT)

-

800

1,600

2,400

3,200

FY 8

2FY

84

FY 8

6FY

88

FY 9

0FY

92

FY 9

4FY

96

FY 9

8FY

00

FY 0

2FY

04

FY 0

6FY

08

P2O5 Import ( ' 000 MT)

Increasing dependency onimports to meet rawmaterials requirement...

19

Higher imports has exposedIndia to internationalmarket...

[email protected]

Apart from lower capacity utilisation, higher dependency on imports has exposed fertiliserindustry to international price fluctuations. Immense rise in raw material and fertiliserprices in 2007-08 led to a significant impact on the government’s kitty in FY09 as subsidyoutflow. High volatility in prices and gaps in current subsidy policy for complex fertiliserforced many of the established players to shutdown their production in Q4FY09.

INTERNATIONAL MARKET

As discussed earlier, Indian fertiliser sector is highly dependent on imports to meet domesticfertiliser demand. India consumes ~14% of total fertiliser production in the world. In termsof consumption, India is among the top three countries and is in top four nations in termsof fertiliser’s production.

Fertiliser industry went through a highly volatile price regime in the last 1.5 years. Natureof price volatility, which made all fertiliser companies to earn highest ever profit in FY09and YoY de-growth in Q1FY10 can be seen in the price movement graphs of fertilisers andraw materials prices given below.

Prices of fertilisers

International Urea price which were in the range of USD300/ MT in Jan’07, reached to USD835 in Sep’08 and is currently trading at USD280. Similarly, Di-Ammonium phosphate(DAP) price rose from USD320/MT to USD1330/MT in May’08 and is currently trading atUSD 340/ MT.

Urea (USD/ MT) DAP (USD/ MT)


0

350

700

1050

1400

Apr-9

4

Jul-9

5

Oct-9

6

Jan-

98

Apr-9

9

Jul-0

0

Oct-0

1

Jan-

03

Apr-0

4

Jul-0

5

Oct-0

6

Jan-

08

Apr-0

9


0

250

500

750

1000

Apr-9

4

Dec-

95

Aug-

97

Apr-9

9

Dec-

00

Aug-

02

Apr-0

4

Dec-

05

Aug-

07

Apr-0

9

Sharp correction in fertiliserprices...


[email protected]

Raw Material Prices

Rise in fertiliser prices were due to extraordinary surge in raw material and intermediateproduct prices. Price movement for major raw materials is given below

Fertiliser companies and government get impacted differently from price movement of rawmaterials and finished goods. In the current fertiliser policy, exposure of fertiliser players islimited to short-term price movement. Actual brunt of soaring prices was borne by thegovernment of India. We will discuss this in later part of this report, after talking aboutfertiliser policy.

Ammonia (USD/ MT) Phosphoric Acid (USD/ MT)

Phosphate Rock (USD/ MT) Sulphur (USD/ MT)


0

300

600

900

1200

Apr-9

4

Jul-9

5

Oct-9

6

Jan-

98

Apr-9

9

Jul-0

0

Oct-0

1

Jan-

03

Apr-0

4

Jul-0

5

Oct-0

6

Jan-

08

Apr-0

90

600

1,200

1,800

2,400

Apr-9

5

Jun-

96

Aug-

97

Oct-9

8

Dec-

99

Feb-

01

Apr-0

2

Jun-

03

Aug-

04

Oct-0

5

Dec-

06

Feb-

08

Apr-0

9

0

150

300

450

600

Apr-9

4

Jun-

95

Aug-

96

Oct-9

7

Dec-

98

Feb-

00

Apr-0

1

Jun-

02

Aug-

03

Oct-0

4

Dec-

05

Feb-

07

Apr-0

8

0

250

500

750

1000

Apr-9

4

Sep-

95

Feb-

97

Jul-9

8

Dec-

99

May

-

Oct-0

2

Mar

-04

Aug-

05

Jan-

07

Jun-

08



Source: Crisil Research Source: Crisil Research

21

Government - A decisionmaker in fertiliser sector...

[email protected]

GOVERNMENT’S INVOLVEMENT

Due to the direct association between fertiliser sector and agriculture sector, governmentof India (GOI) has always been the decision maker for fertiliser sector. Department offertilisers, under the Ministry of Chemicals and Fertilisers performs following role,

Planning for fertilizer production including import of fertiliser

Allocation and supply linkages for movement and distribution of urea

Administration of concession schemes and management of subsidy for controlled aswell as decontrolled fertilisers

Determination of retention price for urea, quantum of concession of decontrolledfertilisers costing of such fertilizers and pricing of Phosphatic and Potassic fertilisers.

In simple terms, GOI is responsible for timely supply of fertilisers at subsidised prices tofarmers across the country.

FERTILISER POLICY

Fertiliser policy has been made with an aim of achieving the maximum degree of self-sufficiency in the production of fertilisers based on utilisation of indigenous feedstock andto ensure availability of fertilisers to the farmers.

With growing population and limited agricultural land, it is essential to raise the grainproductivity to meet the food demand of the country. Things become further significant forGOI, as ~300mn population is still below the poverty line.

Fertiliser – A highly subsidised Industry

To support the higher usage of fertilisers, GOI provides significant subsidy assistance tofertiliser industry. The subsidy on fertilizers is passed on to the farmers in the form ofsubsidised MRPs. The selling prices (farm gate prices) are much lower than the actualcost of these fertilisers and this difference is borne by GOI as subsidy.

Contrary to other industry, where selling prices are linked with inflation, there has been noincrease in farm gate price of Urea from the last seven years and price of complex fertilisershave declined by 20-25% across different mix in 2008.

There are multiple reasons for the unusual pricing behaviour in the fertiliser industry

GOI wants more usage of fertilisers to increase productivity

Fertilisers being associated with agricultural sector is a political issue

Reduction in complex fertiliser prices to increase usage of balanced nutrients


Fertiliser sector a highlysubsidised industry...

22

No increase in MRP of Ureadespite increasing MSP forgrains...

[email protected]

Increase in raw materials and fertiliser prices in international market has influenced Indianfertiliser industry as well. Due to no corresponding rise in farm gate prices, it has led toincrease in subsidy burden for the Indian government over the years.

Product Mar’03 – Jun’08 Jun’08 onwards

DAP 9,350 9,350

Muriate of Potash, MOP 4,455 4,455

MAP 9,350 9,350

Triple Super Phosphate 7,460 7,460

Single Super Phosphate 3,400 3,400

Ammonium Sulphate 10,350

16:20:00:13 7,100 5,875

20:20:00:00 7,280 5,343

20:20:00:13 7,280 6,295

23:23:00:00 8,000 6,145

28:28:00:00 9,080 7,481

10:26:26:00 8,360 7,197

12:32:16:00 8,480 7,637

14:28:14:00 8,300 7,050

14:35:14:00 8,660 8,185

15:15:15:00 6,980 5,121

17:17:17:00 8,100 5,804

19:19:19:00 8,300 6,487

Complex fertilisers (Rs / MT)

Source: DoF

Period Farm gate price (Rs / MT)

Pre-August 1992 3,060

Aug'92 - Jun'94 2,760

Jun'94 - Jun'97 3,320

Jun'97 - Jan'99 3,660

Jan'99 - Feb'00 4,000

Mar'00 - Feb'02 4,600

Mar'02 - Jan'03 4,830

Feb'03 5,070

Mar'03 till date 4,830

Urea (Rs / MT)


Reduction in MRP toincrease usage of P and Knutrients...

Source: DoF

23

Subsidy bill to reduce by~50% in FY10...

[email protected]

Proportion of subsidy to complex fertilisers increased to 66% in FY09 against sub 50%level in the previous years. Primary reasons for change in proportion are

Decrease in complex fertiliser prices in Jun’08

Higher dependency for P & K nutrients on international market

Unprecedented rise in fertilisers and raw materials price in H1FY09

Fertilisers – A highly regulated Industry

Increasing subsidy burden year on year has become a bone in government’s neck. Fertiliserindustry is one of the highly regulated industries and probably that has been the reason foralmost no growth in this sector in 21st century. However, seeing the deteriorating situation,GOI has done several policy changes in the recent pass aiming

Facilitating Urea capacity addition

Increasing the capacity utilisation of complex fertilisers

Corrective actions in policy which resulted in limitations for fertiliser manufactures

Check on rising subsidy bills

We will discuss the highlights of current fertiliser policy and will try to analyse how it isinfluencing fertiliser’s manufacturers and government of India.

Current Policy for Urea

MRPs are fixed for end customers

Shift from cost plus system to new pricing scheme

Benefits to energy efficient players

Mandate guidelines for shifting to natural gas from other higher cost fuels by 2010

FY03 7,788 3,225 11,013

FY04 8,509 3,326 11,835 2,002

FY05 10,637 5,142 15,779 3,372 17,149

FY06 11,749 6,550 18,299 5,914 20,841

FY07 15,354 10,598 25,952 8,788 28,826

FY08 23,204 17,134 40,338 5,000 36,550

FY09 33,901 65,555 99,456 17,158 116,614

FY10E 21,000 24,000 45,000

Net incidenceof subsidy for

the year

Liabilitiescarryover to

next year

TotalSubsidy

Subsidy Released

Urea P & KFertilisers

Year

Source: DoF, Crisil Research, PINC Research

Subsidy given to Fertiliser Sector (Rs Crore)


24

Expanded production in Ureato link with IPP realisation...

[email protected]

Capacity expansion above cut-off limit is linked to international prices – no requirementof government approval

Revamping – Investment of ~Rs10bn – Realisation linked to 85% of IPP*

Expansion – Investment of ~30bn – Realisation linked to 90% of IPP*

Revival of sick plants – Realisation linked to 95% of IPP*

Greenfield projects – Prices decided through bidding route

* IPP linkages are to the extent of floor and ceiling of USD250 and USD425 respectively

Incentive for energy reduction program, as benefits will be completely retained by thecompany for 5 years

50% of sales is controlled by government and rest 50% can be sold by companiesanywhere, with reimbursement of actual freight

Current Policy for Complex Fertilisers

Pricing based on nutrient content of the fertilisers

Significant reduction in MRPs of complex fertilisers to support higher usage

Sulphur will get similar treatment as Nitrogen, Phosphorous and Potassium for subsidycalculation

Subsidy linked to international prices of raw materials and fertilisers

No permission is required for expansion from government

· Additional benefits to company for sourcing raw material cheaper than existing pricesin the market

No restriction on location to sell the fertilisers, actual freight cost to be reimbursed

Current concerns for fertiliser manufacturers

Urea

Current policy for Urea capacity expansion with floor at USD250 / MT makes investmentless attractive for expansions other than de-bottlenecking

No firm allocation of natural gas is creating problems in financial closure of expansionprojects

No capital subsidy to units switching from Naphtha to natural gas

Complex Fertilisers

In current policy, the manufacturers get subsidy based on lower of current month’sprice and previous month prices, this can have significant impact on margins in decliningraw material price scenario, however, in long term it get balanced when situations areother way around


Subsidy linked withinternational prices forcomplex manufacturer...

25

Floor rate of USD250/MT ismaking brownfield expansionor revival less attractive...

[email protected]


Expectations from the forthcoming policy changes

Urea

Higher revision of floor prices of expanded Urea produce from USD250 / MT to attractUrea players in brown-field expansion or revival of sick plants

Firm allocation of natural gas for future expansion to bring more clarity in expansionand will speed up the financial closure of projects

No future subsidy as fertiliser bonds

Complex Fertilisers

Manufacturers can have significant hit in margins in declining raw material price scenario

Continuation of subsidy on sulphur used in specialty fertilisers

No future subsidy as fertiliser bonds

Sector structure

Ownership structure of fertiliser manufacturers

Fertiliser sector is divided into two categories based on the nutrients and in three categoriesbased on ownership.

Future growth

There has been a CAGR of ~6.7% in fertiliser consumption in the last five years with~8.5% for complex fertilisers and ~5.5% for Urea. We believe that reduced prices of complexfertilisers and higher knowledge among farmers should witness a continuation of the robustgrowth of consumption of complex fertilisers over Urea. We do not believe subdued monsoonin 2009 is going to influence this sector severely, as still imports contribute a significantportion and sector is likely to grow at more than 5% in near future.

Urea Manufacturer (%)


Phosphatic Manufacturer (%)


Private Sector45

Co-operative Sector26

Public Sector29

Private Sector63

Co-operative Sector30

Public Sector7

There has been a CAGRof ~6.7% of fertiliserconsumption in the last fiveyears...

26

C O M P A N I E S

27

STOCK DATA

RELATIVE PERFORMANCE

Market Cap Rs21.6bnBook Value per share Rs30.8Eq Shares O/S (FV Rs10) 416.2mnFree Float 50.4%Avg Traded Value (6 mnths) Rs246mn52 week High/Low Rs75/29Bloomberg Code CHMB INReuters Code CHMB.BO

CHAMBAL FERTILISERS AND CHEMICALS LTD.

Chambal Fertilisers and Chemicals Ltd (CFCL) is one of the largestUrea manufacturers contributing ~10% of total Urea production in India.Located near HBJ pipeline strengthens company's candidature in anyallocation of natural gas. Energy reduction initiatives are likely tofurther boost profitability. CFCL has a 33% stake in IMACID, a JV formedto produce Phosphoric acid. It has further diversified into shipping,textile, IT/ITES and plans to foray into power generation.RIL KG basin to improve profitabilityCFCL has received ~1.15mmscmd of natural gas at the cost of USD6.21/mmbtu (including transportation). Availability of more gas should reduceproduction cost and improve operating margins. Non-usage of liquid fuels(Naphtha and LSHS) should further result in lower working capital requirementsand higher profitability.Energy reduction to boost earningsCFCL’s initiative for reduction in energy consumption should result in decreaseof 0.2Gcal of energy per MT of Urea. This benefit (~470mn) will be completelyretained with the company. Along with energy reduction, CFCL will get benefitof IPP linked pricing on ~0.2mn MT of Urea, which should provide an EPSRs0.8 to Rs3.5, depending on the prevailing international Urea prices. Anyfurther plans of de-bottlenecking will add significantly to earnings due to IPPlinked realisations.IMACID - A rewarding JVDespite production facility only for Urea, CFCL with its JV in Morocco is wellpositioned to take benefit of spike in phosphoric acid prices. It has productioncapacity of ~0.4mn MT p.a. of Phosphoric acid.

VALUATIONS AND RECOMMENDATIONAvailability of natural gas and energy reduction programme should increaseprofitability by CAGR of 18% in the next two years, considering conservativeinternational Urea prices. At CMP of Rs52, CFCL is trading at 7.2x and 4.8xof P/E and EV/EBITDA respectively for FY11 estimates of Rs7.3. Withexpected favourable development in Urea business, we initiate coveragewith a 'BUY' recommendation and a target price of Rs73 with a time horizonof 18 months.

PERFORMANCE (%)

1M 3M 12MAbsolute 8.1 (15.6) 1.1Relative (1.9) (27.9) (23.0)

12 October 2009

Chirag Dagli +91-22-6618 [email protected]

Satish Mishra +91-22-6618 [email protected]

Initiating CoverageBUY

CMP : Rs52 TP : Rs73

TOP SHAREHOLDERS

BSE Sensex : 16,643

KEY FINANCIALS Rs mn

KEY RATIOS

FY07 FY08 FY09 FY10E FY11ENet Sales 29,470 32,056 55,974 45,270 47,645YoY Gr. (%) (4.4) 8.8 74.6 (19.1) 5.2Op. Profits 4,514 5,016 6,530 7,334 8,004OPM (%) 15.3 15.6 11.7 16.2 16.8Adjusted Net Profits 1,315 1,165 2,175 2,458 3,022YoY Gr. (%) (10.9) (11.4) 86.7 13.0 22.9

Adj. Dil. EPS (Rs) 3.2 2.8 5.2 5.9 7.3ROCE (%) 10.4 8.5 11.8 11.2 12.6ROE (%) 14.7 11.2 17.7 18.1 19.5PER (x) 16.5 18.6 10.0 8.8 7.2EV/ Net Sales (x) 1.4 1.2 0.8 1.0 0.9EV/ EBDITA (x) 7.9 7.3 6.0 6.0 4.8


Name % holding

LIC of India 4.01

Manbhawani Investments Ltd 1.26

Sundaram Bnp Paribas Mutual Fund 1.03

0

25

50

75

100

Oct-08 Jan-09 Apr-09 Jul-09 Sep-09

Chambal Fert BSE (Rebased)

[email protected]

Chambal Fertilisers and Chemicals Ltd.


BACKGROUND

Chambal Fertilisers and Chemicals Ltd (CFCL) was promoted in 1985 by Zuari AgroChemicals Ltd (A Birla Group Company). CFCL’s Urea production facilities are situatednear HBJ pipeline at Gadepan (Rajasthan). With production capacity of 2mn MT p.a.,CFCL is the largest private manufacturer of Urea contributing ~10% to the total Ureaproduction in the country. To provide one-stop solution, CFCL sources other agri-inputslike DAP, MOP, SSP, pesticides & seeds and sells along with its manufactured Ureaunder the ‘Uttam’ brand.

The company, in 1997 formed a JV, Indo Maroc Phosphore SA (IMACID), at Morocco, withTata Chemicals and Office Cherifien Des Phosphates as equal partners. The JV has aproduction capacity of 1.4k MT p.d. of Phosphoric acid that has huge scarcity in India.

CFCL has further diversified itself into shipping, textile and ITES. Through its 100% subsidiary,Chambal Infrastructure Ventures Limited, CFCL has plans to set up 1200MW plant atChhattisgarh and Orissa.

BUSINESS DETAILS

CFCL has following major line of businesses:

Fertilisers

Manufactured fertilisers

Traded fertilisers

Phosphoric acid through its JV, IMACID

Shipping division

Textile

Contributions have remained significant from fertilisers, shipping and IMACID business.Textile and other businesses are still contributing negative at PBIT level. Managementexpects these divisions to turn positive and start contributing from FY11. However, nocapex is planned for these divisions.

Segment Contribution

Net Sales Mix (%)


PBIT Mix (%)

Traded fertilisers27

Manufactured fertilisers43

Shipping9

Textile5

Others3

IMACID14

IMACID14

Shipping29

Fertilisers64

Largest private manufacturerof Urea...

29

0

100

200

300

400

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Tanker Fleet Order Book Order Inflow s Inflow s

[email protected]



Business details continue….

IMACID

Despite having manufacturing facilities only for Nitrogen nutrients, CFCL has made significantpresence in Phosphorous nutrients through its Morocco JV, IMACID. CFCL, Tata Chemicalsand Office Cherifien Des Phosphates (OCP) are equal partners in this JV. OCP is one ofthe world largest suppliers of Phosphate Rock and its derivatives. With a production capacityof ~0.4 mn MT p.a. of Phosphoric acid, the JV should provide good returns to CFCL due tohigher demand for P2O5.

Shipping Business - to remain lack luster

Chambal Fertiliser’s shipping division has a fleet of five Aframax tankers with total capacityof ~5lacs DWT. This segment contributed 9% and 29% to Net sales and PBIT respectivelyin FY09. However, the scenario has completely changed with continuous drop in timecharter and spot rates in the last six months. Further adding to worries, order book fortankers in the global market has increased significantly in FY09, which will further putpressure on pricing.

Chambal is relatively better positioned with four of its tankers on time charter at the rate ofUSD26,000. Guideline to phase out single hull vessels from 2010 will have lower impact onCFCL as only one of its tankers is single hull. We have done separate valuations forCFCL’s shipping division in our valuation estimates.

Chambal Infrastructure Ventures Limited (CIVL)

This subsidiary is set to foray into the power generation business. It has set up two whollyowned subsidiaries, Chambal Energy (Chhattisgarh) Ltd and Chambal Energy (Orissa) Ltdthat are looking at options of ~1200MW thermal plant at these two states. Currently talksare going on regarding land acquisition, environmental clearance, utilities facilities andcoal linkages. The projects have not yet been finalised and we feel no ground leveldevelopment to take place in next two years. Hence, we have not considered powerproject in our valuations.

Global Order Book for tankers

Source: Platou

Presence in high demandPhosphoric acid businessthrough JV...

[email protected]




RIL KG Gas to improve profitability

CFCL being situated at HBJ pipeline has access to natural gas from all sources.The company has received 1.15 mmscmd of natural gas in the first allocation of 15.4mmscmd gas from RIL KG basin to fertiliser companies. Cost of RIL gas for CFCL isUSD6.21/mmbtu (including transportation).

Low cost gas to improve margins

Post availability of natural gas from RIL, the company has switched from higher cost fuelslike Naphtha and LSHS to gas. This will result in reduction in production cost and shouldimprove the profitability. With the increased usage of gases, plant’s operating efficiencywill improve and result in better operating margins for the company. Non-usage of liquidfuels will also result in lower working capital requirements and result in higher profitability.

Capacity Addition

Favorable government policy of linking increased Urea production to international priceand availability of natural gas post RIL KG development have motivated many fertilisercompanies to undertake debottlenecking. CFCL’s total production is expected to cross2mn MT of Urea p.a. by FY10.

Energy reduction programme to boost top-line and bottom-line

After energy reduction measure taken by CFCL, energy consumption has decreased by0.2Gcal/ MT to 5.3Gcal/ MT of Urea. CFCL will be doubly benefited as along with benefitsfrom energy reductions, the added production will be linked with international price ofUrea.

As per current guidelines, CFCL will be eligible for IPP for excess production over 1.84mnMT (Target production – 1.94mn MT). Benefit will be to the extent of 85% of internationalprice with a floor and ceiling of USD250 and USD425 respectively.

Profits due to Energy reductionProduction 0.2 mn MT p.a.Energy consumption 6.3 Gcal/ MTEnergy cost 6.21 USD/ mmbtuUrea realisation 250 USD/ MTNet Sales 2,400 Rs mnEnergy cost 1,490 Rs mnOther Expenses 30 USD / MTOther Expenses 288 Rs mnOperating profit 622 Rs mnOPM % 25.9Depreciation 68 Rs mnPBIT 554 Rs mnInterest cost 50 Rs mnPBT 505 Rs mnTax 172 Rs mnPAT 333 Rs mnNo of shares 416 mnEPS 0.8 Rs

Reduction in energy 0.20 Gcal/ MT

Total Production 2.0 mn MT

Total Energy Saving 0.40 mn Gcal

Total Saving 473 Rs mn

Tax Paid 161 Rs mn

PAT 312 Rs mn

No of shares 416 mn

EPS 0.8 Rs


Profits due to capacity addition

Capacity above cut-off to linkwith IPP...

Energy reduction benefitsto be retained with Ureamanufacturer...

31

-

6.0

12.0

18.0

24.0

FY05 FY06 FY07 FY08 FY09 FY10E FY11E-

15,000

30,000

45,000

60,000Net Sales (Rs mn) OPM (%)

-

6.0

12.0

18.0

24.0


0.6

1.2

1.8

2.4ROCE (%) ROE (%) D/E

[email protected]



Financials set to accelerate

Margins to remain firm

Last two years saw exceptional volatility in prices of fertilisers and raw materials. Due tosignificant rise in international prices of fertilisers during ’08, companies having substantialtrading volumes saw peak revenues in FY09. We expect CFCL net sales to decrease by19% YoY in FY10, which should increase by 5% in FY11. As discussed earlier, availabilityof more gases and energy reduction exercise will improve operating margins significantly.

CFCL has a very high D/E of 2:1 in FY09 as compared to its peers in fertiliser’s space,mainly due to term loan on ships. Going forward, better working capital management andhigher cash generation with IPP linked realisations for fertiliser business should reduce D/E ratio. We expect ROE to remain high at ~19% while ROCE should linger at ~11% due tohigher capital employed driven by shipping division.

Improving Operating Margins


Steady Returns


More natural gas shouldimprove operating margins...

Ease in working capitalshould reduce short termloan requirements...

[email protected]



Valuations

Shipping Business

For valuing shipping business, we have used the NAV methodology. Four of its tankers areless than five year old and one is more than five years old. Current asset values of theseships are at very low level due to lower freight rates in the market.

Current asset value:Less than 5 years old– USD48mnMore than 5 years old – USD35mn

At current rates, shipping is not adding substantially to the profit. In our valuations estimates,we expect shipping division to contribute just enough to take care of its interest cost andhence no addition to net profit.

Fertiliser Business

The existing business of CFCL should generate an earnings of Rs5.7 in FY11. Benefitsfrom de-bottlenecking are linked with international price of Urea with floor and ceiling ofUSD250 and USD425.

Taking most conservative scenario, we should have an EPS of Rs7.3 in FY11E, which cango up to Rs9.9 depending on the prevailing international Urea prices.

Recommendations

At CMP of Rs52, CFCL is trading at 7.2x and 4.8x of P/E and EV/EBITDA respectively forFY11 estimates of Rs7.3. With expected favourable development in Urea business, werecommend ‘BUY’ for the stock with a target price of Rs73 in a time horizon of 18 months.

Concerns

There should be a regular supply of gas and no further requirement of liquid fuels

Losses from textile and decreasing day rates in shipping business can negativelyimpact profitability

Diversification into unrelated business (power generation) remains a concern

Value/ share from shipping business

Source: Platou, PINC Research

Asset Value (Rs mn) 10,896

Term loan for ships (Rs mn) 10,628

NAV (Rs mn) 268

No of shares (mn) 416

NAV/ share (Rs) 0.6

Discount to NAV 70%

Value per share (Rs) 0.5


250 275 300 325 350 375 400 425De-bottlenecking (Energy Saving) 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8

De-bottlenecking (Excess Production) 0.8 1.2 1.6 1.9 2.3 2.7 3.1 3.5

Others 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7

Total EPS 7.3 7.6 8.0 8.4 8.8 9.2 9.5 9.9

Urea Realisation, USD / MT —>Earnings sensitivity with Urea prices for FY11E

Shipping business doingbreakeven at current rates...

We initiate coverage with a‘BUY’ recommendation anda target price of Rs73...

33


P/E Band Median PE Vs Daily PE

Year Ended March (Figures in Rs mn)

[email protected]

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Income Statement FY07 FY08 FY09 FY10E FY11ENet Sales 29,470 32,056 55,974 45,270 47,645 Growth (%) (4.4) 8.8 74.6 (19.1) 5.2 Operating Profit 4,514 5,016 6,530 7,334 8,004 Other income 586 311 728 550 620 EBITDA 5,101 5,328 7,259 7,884 8,625 Growth (%) 3.7 4.5 36.3 8.6 9.4 Depreciation 2,126 2,458 2,817 3,080 3,136 EBIT 2,975 2,870 4,443 4,804 5,489 Interest paid 993 960 1,254 1,217 1,082 PBT (before E/o items) 1,983 1,910 3,189 3,587 4,407 Tax prov ision 689 756 1,027 1,148 1,410 E/o Income / (loss) 87 726 82 - - Net Profit 1,402 2,375 2,256 2,458 3,022 Adjusted net profit 1,315 1,165 2,175 2,458 3,022 Growth (%) (11) (11) 87 13 23 Basic EPS (Rs) 3.4 5.7 5.4 5.9 7.3 Adj Dil EPS (Rs) 3.2 2.8 5.2 5.9 7.3 Growth (%) (10.9) (11.4) 86.7 13.0 22.9

Cash Flow Statement FY07 FY08 FY09 FY10E FY11EPre-tax profit 1,826 3,119 3,270 3,587 4,407 Depreciation 2,181 2,458 2,817 3,080 3,136 Total tax paid (940) (1,071) (1,357) (1,148) (1,410) Chg in w orking capital (4,485) 1,010 5,105 (4,024) 1,184 Other items 949 (60) 2,379 667 462 Cash from oper. (a) (469) 5,456 12,214 2,162 7,778 Capital ex penditure (7,729) (4,163) (10,630) (4,253) (300) Chg in inv estments 6 1,128 (3,916) (250) (250) Other items (35) 32 512 550 620 Cash flow from inv. (b) (7,759) (3,002) (14,034) (3,953) 70 Free cash flow (a+b) (8,228) 2,454 (1,820) (1,792) 7,848 Equity raised/ (repaid) - 1,092 6 - - Debt raised/ (repaid) 10,492 (1,322) 5,746 2,000 (4,500) Interest Paid (982) (1,372) (1,238) (1,217) (1,082) Div idend (incl. tax ) (854) (879) (871) (877) (877) Other items 8 80 2 - - Cash flow from fin. (c) 8,663 (2,400) 3,645 (93) (6,458) Net chg in cash (a+b+c) 436 54 1,826 (1,885) 1,390

Balance Sheet FY07 FY08 FY09 FY10E FY11EEquity Share Capital 4,162 4,162 4,162 4,162 4,162 Reserves & surplus 4,990 7,528 8,681 10,262 12,408 Shareholders' funds 9,152 11,690 12,843 14,425 16,570 Total Debt 20,154 18,545 25,038 27,038 22,538 Minority interest 22 1 2 (17) (42) Def tax / pay ment liability 4,497 3,822 3,281 3,281 3,281 Capital Employ ed 33,825 34,058 41,164 44,727 42,347 Net fix ed Assets 25,102 26,527 34,037 35,210 32,374 Cash & Cash Eq. 1,392 1,445 3,271 1,386 2,776 Net other current assets 7,114 5,862 664 4,689 3,505 Inv estments 218 223 3,193 3,443 3,693 Total assets 33,825 34,058 41,164 44,727 42,347

Key Ratios FY07 FY08 FY09 FY10E FY11EOPM (%) 15.3 15.6 11.7 16.2 16.8 Net margin (%) 4.8 7.4 4.0 5.4 6.3 Div idend y ield (%) 3.5 3.5 3.5 3.5 3.5 Net debt/ Equity (x ) 2.2 1.6 2.0 1.9 1.4 Net w orking capital (day s) 88.5 (9.5) (102.8) (40.5) (46.2) Asset turnov er (x ) 0.9 0.9 1.4 1.0 1.1 ROCE (%) 10.4 8.5 11.8 11.2 12.6 RoE (%) 14.7 11.2 17.7 18.1 19.5 EV/Net sales (x ) 1.4 1.2 0.8 1.0 0.9 EV/EBITDA (x ) 7.9 7.3 6.0 6.0 4.8 PER (x ) 16.5 18.6 10.0 8.8 7.2 Price/Book (x ) 2.4 1.9 1.7 1.5 1.3

34

STOCK DATA


Market Cap Rs29.8bnBook Value per share Rs86.6Eq Shares O/S (FV Rs2) 139.9mnFree Float 35.8%Avg Traded Value (6 mnths) Rs19mn52 week High/Low Rs214/74Bloomberg Code CRIN INReuters Code CORF.BO

COROMANDEL INTERNATIONAL LTD.

Coromandel International (CIL), a subsidiary of EID Parry - aMurugappa group company, is one of the largest manufacturers ofcomplex fertilisers in India. With strong negotiating power and efficientinventory management, CIL proved its mettle in highly volatile pricescenario in FY09. Along with fertilisers, the company is increasing itspresence in the fast growing pesticide and specialty nutrient business.

Among biggest beneficiary with change in fertiliser policy

Government's support for higher usage of non-Nitrogen nutrients by loweringMRPs and changing policy pro manufacturers, should benefit CIL the mostin listed space, as it is the 2nd largest manufacturer of phosphatic andcomplex fertilisers after IFFCO. Realisations linked with international pricesshould further add to profitability of the company.

Strong tie-ups for raw material

Due to non-availability of indigenous raw materials for phosphorous and potashnutrient, robustness of any complex and phosphatic manufacturer is decidedwith the tie-ups they have for sourcing raw materials. CIL is one of the mostwell positioned company due to strong tie-ups with international players like,Foskar, GCT, ICL and Mitsubishi for sourcing raw materials.

Capacity addition and foray into non-subsidy business

CIL's Tunisian JV (along with GSFC and GCT) is setting up a 380k MT p.a.Phosphoric acid plant. This will cater to a planned capacity addition of~450k MT p.a. of complex fertilisers at Kakinada commencing productionfrom end of FY11. CIL has set up a JV with SQM, Chile, for manufacturingWater Soluble Fertilizers at Kakinada, AP. It has formed Coromandel BrasilLimitada, Brasil in FY09 to tap export opportunity in Brazil.

VALUATIONS AND RECOMMENDATION

CIL is well positioned with its inherent strength of strong tie ups and ongoingexpansion of complex fertilisers and high growing pesticide and specialtyfertilisers. At the CMP of Rs213, CIL trades at a P/E of 6.7x, EV/EBIDTA of4.0x its estimated FY11E EPS of Rs31.7. We maintain our 'BUY with arevised target price of Rs285 on a time horizon of 18 months.

PERFORMANCE (%)

1M 3M 12MAbsolute 20.7 12.7 34.2Relative 9.5 (3.7) 2.3

12 October 2009



Company UpdateBUY


TOP SHAREHOLDERS

BSE Sensex : 16,643



KEY RATIOS

FY07 FY08 FY09 FY10E FY11ENet Sales 20,665 37,573 93,750 59,022 70,118YoY Gr. (%) 11.6 81.8 149.5 (37.0) 18.8Op. Profits 1,994 4,128 6,521 4,818 6,059OPM (%) 9.6 11.0 7.0 8.2 8.6Adjusted Net Profit 1,167 2,101 4,718 3,559 4,439YoY Gr. (%) 22.4 80.0 124.6 (24.6) 24.7

Dil. EPS (Rs) 8.3 15.0 33.7 25.4 31.7ROCE (%) 16.6 26.3 32.6 20.0 21.8RoE (%) 23.1 31.2 47.0 26.2 26.2PER (x) 25.5 14.2 6.3 8.4 6.7EV/Net sales (x) 2.1 1.8 1.9 0.6 0.5EV/EBDITA (x) 13.3 8.4 4.8 5.2 4.0

-

75

150

225

300


CFL BSE Rebased

Name % holding

LIC Of India 1.36

IDFC Premier Equity Fund 1.33

Hdfc Growth Fund 1.02

35

Coromandel International Ltd.

[email protected]

BACKGROUND

Coromandel International Ltd. (CIL), incorporated in 1964 is a leading fertiliser manufacturingcompany. CIL is a subsidiary company of Murugappa group company’s EID Parry (India)Limited, which holds 62.9% equity in the company. CIL produces wide range of fertilisers,pesticides and specialty nutrients. The company is also engaged in the rural retail businessin the State of Andhra Pradesh through its ‘Mana Gromor Centres’ (MGC).

Post acquisition of Godavari fertilisers, combined fertilisers production capacity of CIL is3.3mn MT p.a. (DAP-0.8mn, SSP-0.13mn and complex fertilisers-2.3mn). Its manufacturingfacilities are at Kakinada & Vizag in Andhra Pradesh and Ennore & Ranipet in Tamilnadu.

CIL is also present into high-margins, high-growth pesticide and specialty nutrient business.Production facilities are located at Ranipet (Tamilnadu), Thane (Maharashtra), Ankleshwar(Gujarat) and Jammu.


Government intention and policy to support growth

Skewed usage of nutrients

Due to comparatively lower cost of Urea and lack of knowledge among farmers, proportionof usage of different nutrients were highly skewed towards Nitrogen (Urea) in the past. Thisresulted in deficiency of other primary and secondary nutrients in soil over the period anddeteriorated the land fertility. Analyzing the situation, Fertiliser Ministry in 2008, came upwith policy of pricing of complex fertilisers based on nutrient content. This move hasresulted in reduction of MRP of complex fertilisers in the range of 15-25%, where as theprice of plain vanilla fertilisers like Urea and DAP remain unchanged. CIL with capacity of~2.3mn MT p.a. of complex fertilisers is expected to gain significantly from this step, asgrowth in complex fertilisers will be higher as compared to Urea in the coming years.

Fertiliser policy incentives

Almost 50% of P nutrients and 100% of K nutrients are imported. This made governmentto change fertiliser policy in 2008 to bring domestic players at par with international players.Linking the fertiliser’s prices with international price for subsidy calculations was a keymove favouring the domestic players. This move has removed the scope of limited profitabilityfor Indian players like CIL and should motivate for further expansion in complex fertiliserspace.

Strong tie-ups for sourcing raw materials

Despite having high dependency on imports and emphasis on higher usage of complexfertilisers, capacity utilisation for complex fertilisers has always been very low. Even formarket leaders like CIL, capacity utilisation has been in the range 60-70%. As discussedearlier, India is not self sufficient in any of the raw materials (Ammonia, Rock phosphate,Phosphoric acid, Potash, Suphur) used for the manufacturing of complex fertilisers. Insuch scenario, linkages for raw materials determine the fertiliser manufacturer’s strengthand future revenue visibility.

CIL has strong tie-ups with its raw material providers. The company sources phosphoricacid from FOSKAR, Groupe Chimique Tunisian (GCT), Israel Chemicals Ltd (ICL) and


Largest private manufacturerof phosphatic and complexfertilisers...

Reduced MRP of complexfertilisers should increaseusage...

Strong tie-ups for rawmaterials keep CIL ahead ofits peers...

36


[email protected]

others. Long-term agreement is in place with Mitsubishi for sourcing Ammonia. CIL has~14% stake in FOSKAR and providing technical assistance to them. Out of total produceof Phosphoric acid by FOSKAR, CIL is the largest buyer with ~1/3rd share, and thuscommand a good bargaining power.

Capacity addition of complex fertiliserCIL along with GSFC and GCT is forming a JV “TIFERT” in Tunisia, which will produce 0.36mn MT p.a. of phosphoric acid. Total project cost is estimated at USD 550mn with CILcontribution towards 15% of equity stake. Total produce of 0.36mn MT of Phosphoric acidwill be divided into CIL and GSFC with 50% each. The plant is expected to be commissionedby FY11.

To use the increased availability of Phosphoric acid post TIFERT, CIL is adding capacity of0.45mn MT p.a. of complex fertilisers (along with DAP) at Kakinada. It is expected to startproduction from FY11 end and will lead to a significant increase in top line and bottom lineof CIL as the total production capacity will increase by ~14%.

In an attempt to make strategic investments aimed at securing uninterrupted supply ofphosphoric acid, CIL has set up a 50:50 JV along with Getax Ocean Trades Pte Ltd ofSingapore, “Coromandel Getax Phosphates Pte Ltd” in Singapore with an initial investmentof USD 0.5 mn from CIL. The JV will explore the opportunities for rock phosphate mining/sourcing.

Higher contributions from non-subsidy business

CIL has forayed into high-margins, high-growth pesticide and specialty fertiliser businessvia organic and inorganic route. This business is independent of government subsidy andhas higher margins of ~30%.

The company has technical tie-ups with multinationals like Dupont, BASF, FMC, Otsuka,etc for marketing their products in India. Rural retail business of CIL, ‘Mana Gromor Centres’(MGC) should provide marketing network and we believe that this business should grow ata CAGR of 20% in future and should contribute significantly in CIL’s earnings in the future.

CIL is setting up a JV with SQM, Chile, for manufacturing Water Soluble Fertilizers atKakinada, AP. It has also invested Rs10.5mn towards equity in Coromandel Brasil Limitada,Brasil in FY09 with the aim of greater export opportunity in the Latin American Markets.

Robust Financials

Subsidy contribution to decrease

Extraordinary rise in prices of fertilisers and raw materials during 2008, resulted in fertilisercompanies making outstanding revenues and profits in FY09. However, the surge inprofitability of companies were at the cost of subsidy burden to the government. CIL’s netsales grew by 150% to Rs93.8bn with subsidy contribution of 77%. This led to net profitrising by 125% in FY09. After corrections in raw material prices, we believe that goingforward FY09 scenario is unlikely to repeat. We expect net sales to de-grow by 37% inFY10 and further increase by 19% in FY11 driven by volume growth. Subsidy contributionin total sales should come down to sub 60% with operating profit per MT likely to stabiliseat ~Rs2,100.


Additional capacity of0.45mnMT p.a. to becommissioned by FY11...

Robust growth in highmargins non-subsidybusiness...

37

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8.68.27.0

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8.17.8

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45.0

60.0


ROCE ROE OPM


[email protected]

Margins to remain impressive

CIL with its effective working capital management and foray into high margins businesshas always given excellent returns to shareholders. Going forward also, we believe operatingmargins to be in the range of 8-9% and ROCE above 20%. With higher generations of cashflow from operations, there should be no further debt requirement for ongoing capex andROE to be above 25% in the coming years.

Valuations

Government emphasis on higher usage of complex fertilisers and higher dependency onimports for P and K nutrients foretell bright future for efficient complex fertiliser manufacturesin India. CIL with its strong tie-ups for raw material sourcing is better placed amongst itspeers. Ongoing expansions and outlook for non-subsidy business also augur well for thefuture earnings of the company. We believe CIL to post profit of Rs3.6bn and Rs4.4bn inFY10 and FY11 respectively, which translates into an EPS of Rs25.4 and Rs31.7 for FY10and FY11 respectively.

Declining subsidy contribution


Better Margins



Best returns in the fertiliseruniverse...

Non subsidy revenue toincrease...

38


–

Recommendation

At the CMP of Rs213, CIL trades at a P/E of 6.7x, EV/EBIDTA of 4.0x its estimated FY11EPS of Rs31.7. We maintain our ‘BUY’ recommendation for the stock; however, withpositive intrinsic and extrinsic factors, we have upgraded our target price to Rs285, whichis 9x PER of FY11 estimates on a time horizon of 18 months.

Concerns

Dependency on imports for availability of raw materials

Huge volatility in raw material prices

Delays in ongoing expansions


We maintain our ‘BUY’recommendation with atarget price of Rs285...

39




[email protected]

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Jul-04 Nov -05 Feb-07 Jun-08 Sep-090

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Daily PE Median PE

Income Statement FY07 FY08 FY09 FY10E FY11ENet sales 20,665 37,573 93,750 59,022 70,118 Growth (%) 11.6 81.8 149.5 (37.0) 18.8 Operating Profit 1,994 4,128 6,521 4,818 6,059 Other operating income - - - - - EBDITA 2,154 4,560 8,587 6,944 8,326 Growth (%) 33.3 107.0 58.0 (26.1) 25.8 Depreciation 399 522 562 583 611 Other income 160 432 2,066 2,126 2,266 EBIT 1,755 4,038 8,025 6,361 7,715 Interest paid 320 699 876 885 885 PBT (before E/o items) 1,435 3,339 7,149 5,475 6,829 Tax prov ision 486 1,238 3,140 1,916 2,390 E/o Income / (loss) 189 - 1,586 - - Net profit 1,167 2,101 5,595 3,559 4,439 Adjusted net profit 1,167 2,101 4,718 3,559 4,439 Growth (%) 22.4 80.0 124.6 (24.6) 24.7 Diluted EPS (Rs) 8.3 15.0 33.7 25.4 31.7 Growth (%) 22.4 80.0 124.6 (24.6) 24.7

Cash Flow Statement FY07 FY08 FY09 FY10E FY11EPre-tax profit 1,435 3,339 8,735 5,475 6,829 Depreciation 399 522 562 583 611 Total tax paid (571) (1,124) (3,238) (1,916) (2,390) Chg in w orking capital (315) (293) (7,392) 1,773 (1,412) Other items 278 809 1,491 (1,241) (1,381) Cash flow from oper. (a) 1,226 3,254 159 4,675 2,257 Capital ex penditure (294) (421) (1,161) (650) (250) Chg in inv estments (135) (1,683) (1,490) (280) - Other inv esting activ ities 194 34 991 2,126 2,266 Cash flow from inv. (b) (235) (2,070) (1,661) 1,196 2,016 Free cash flow (a+b) 991 1,184 (1,502) 5,871 4,274 Equity raised/(repaid) - - - - - Debt raised/(repaid) 983 (775) 7,082 - - Chg in Minorities int. - - - - - Div idend (incl. tax ) (246) (351) (1,529) (655) (655) Other financing activ ities (295) (682) (870) (885) (885) Cash flow from fin. (c) 443 (1,807) 4,683 (1,540) (1,540) Net chg in cash (a+b+c) 1,434 (624) 3,181 4,331 2,733

Balance Sheet FY07 FY08 FY09 FY10E FY11EEquity capital 254 280 280 280 280 Reserves & Surplus 5,257 7,675 11,840 14,744 18,528 Shareholders' funds 5,511 7,955 12,120 15,024 18,808 Minorities interest - - - - - Deferred Tax Liability 713 825 795 795 795 Total debt 5,493 10,431 17,708 17,708 17,708 Capital Employed 11,718 19,210 30,622 33,526 37,311 Net fix ed assets 3,873 7,402 7,966 8,033 7,672 Cash & cash Eq. 1,695 1,072 4,253 8,584 11,317 Net other current assets 4,034 10,018 16,195 14,422 15,834 Inv estments 2,115 718 2,208 2,488 2,488 Total assets 11,718 19,210 30,622 33,526 37,311

Key Ratios FY07 FY08 FY09 FY10E FY11EOPM(%) 9.6 11.0 7.0 8.2 8.6 Net margin (%) 5.6 5.6 5.0 6.0 6.3 Div idend y ield (%) 0.9 1.6 1.9 1.9 1.9 Net debt/Equity (x ) 0.7 1.2 1.1 0.6 0.3 Net Working Capital (day s) 92.7 86.6 44.0 50.0 52.0 Asset turnov er (x ) 1.2 1.1 0.7 1.8 1.9 ROCE (%) 16.6 26.3 32.6 20.0 21.8 ROE (%) 23.1 31.2 47.0 26.2 26.2 EV/Net sales (x ) 2.1 1.8 1.9 0.6 0.5 EV/EBITDA (x ) 13.3 8.4 4.8 5.2 4.0 PER (x ) 25.5 14.2 6.3 8.4 6.7 Price/Book (x ) 4.9 3.7 2.5 2.0 1.6

40

STOCK DATA


Market Cap Rs7.9bnBook Value per share Rs91.1Eq Shares O/S (FV Rs10) 88.2mnFree Float 57.4%Avg Traded Value (6 mnths) Rs39mn52 week High/Low Rs111/40Bloomberg Code DFPC INReuters Code DPFE.BO

DEEPAK FERTILISERS AND PETROCHEMICALS

Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL) is inthe business of chemicals, fertilisers and specialty retailing. DFPCL isa leading manufacturer of mining and industrial chemicals with a setof niche products in portfolio. Fertilisers segment, lackluster so far, islikely to revive with positive fertiliser policy and availability of naturalgas in India.

Niche products portfolio

Chemical business that contributed ~91% to PBIT in FY09 has mix ofproducts where DFPCL has made a niche for itself. The company is thelargest manufacturer of Technical Prilled Ammonium Nitrate in India, whichis used in mining and construction industries. In Isopropyl Alcohol, it is thefirst company to manufacture at a large scale where most of the requirementsare met through imports.

Gas availability to boost earnings

DFPCL is well connected to the national gas grid to receive gas from multiplesources like KG Basin, ONGC and others. Once regular gas supply starts,the company should be able to increase its capacity utilisation for Ammonia& Methanol and eventually profitability will improve.

Capex - High margin business

Additional capacity of 300k MT p.a of Ammonium Nitrate at Taloja plant witha capex of Rs6bn, is expected to be commissioned in FY11. Withcommissioning of 450 MT p.d. Nitric acid facility in Aug’09, DFPCL hasbecome one of the largest producers of Nitric acid in Asia.

VALUATIONS AND RECOMMENDATION

Expected favourable fertiliser policy, capex plans & increased availability ofgas, augurs well for DFPCL. At the CMP of Rs89, DFPCL is trading at aPER of 5.9x and EV/EBITDA of 4.1x FY11E. We maintain our 'BUY'recommendation for DFPCL with an increased target price of Rs114, whichimplies a P/E of 7.5x FY11 earnings. Stock also provides an additional supportwith a dividend yield of 4.4%.

PERFORMANCE (%)

1M 3M 12MAbsolute 11.1 2.2 24.9Relative 0.8 (12.6) (4.8)

12 October 2009



Company UpdateBUY


TOP SHAREHOLDERS

BSE Sensex : 16,643


KEY RATIOS

FY07 FY08 FY09 FY10E FY11ENet Sales 8,331 10,409 13,881 13,398 15,519YoY Gr. (%) 48.0 24.9 33.4 (3.5) 15.8Op. Profits 1,437 1,745 2,482 2,342 2,708OPM (%) 17.2 16.8 17.9 17.5 17.5Adjusted Net Profits 939 1,030 1,521 1,226 1,335YoY Gr. (%) 40.1 9.7 47.6 (19.4) 8.9

Dil. EPS (Rs) 10.5 11.4 16.9 13.9 15.1ROCE (%) 19.9 20.0 24.4 17.7 16.5ROE (%) 15.4 15.0 19.8 14.5 14.3PER (x) 8.4 7.8 5.3 6.4 5.9EV/ Net Sales (x) 1.0 0.9 0.8 0.9 0.9EV/ EBDITA (x) 4.8 4.5 3.5 4.3 4.1


0

40

80

120

160

Oct-08 Jan-09 Apr-09 Jul-09 Sep-09

Deepak Fert BSE (Rebased)

Name % holding

Tempetion Mutual Fund 2.88

Uti Dividend Yield Fund 2.34

Franklin India Smaller Companies Fund 1.63

SBI MF - Magnum Comma Fund 1.36

Robust Marketing Services Pvt Ltd 1.18

41

Deepak Fertilisers and Petrochemicals Corporation Ltd.

[email protected]


BACKGROUND

Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL), a Pune-based company,was founded in 1979 as Ammonia manufacturer. Later in 1992, the company startedproduction of various mining & industrial chemicals and complex fertilisers. DFPCL is thelargest manufacturer of Technical Prilled Ammonium Nitrate in India with capacity of 132kMT p.a. and the only large scale manufacturer of Iso Propyl Alcohol in India with capacityof 70k MT p.a. It has carved out a niche for itself in these chemicals with significantpresence. The company has production capacity of 0.23mn MT p.a. of Nitro-phosphatefertilisers and 25k MT p.a. of Sulphur Bentonite (specialty fertilisers). The company’smanufacturing unit is located at Taloja (Maharashtra).

DFPCL’s recent foray is into specialty retailing with Ishanya, India’s largest Design Centreand Specialty Mall for interiors and exteriors in Pune. It has an area of 5.5lacs sq.ft and ishome to 52 product and service categories in interiors and exteriors. It saw footfalls of1.5mn with over 35% conversions in FY09.

BUSINESS DETAILS

The company has mainly three lines of business,

Chemicals (Mining & Industrial)

Agribusiness (Complex fertilisers, specialty fertilisers)

Specialty Retailing (Ishanya)

Chemical’s business is the major contributor in the company’s operations with contributionof 58% and 91% respectively in Net sales and PBIT. Fertiliser’s business remains laggardso far, mainly due to issues regarding availability of raw materials and government policies,which is likely to improve in the coming years. Under its fertiliser’s business, DFPCLmarkets a host of traded products to offer the complete basket to its customers.

Segment Contribution (%)

Net Sales Mix (%)


PBIT Mix (%)

Fertilisers40

Chemicals58

Reality1 Others

2

Fertilisers7

Chemicals91

Others1 Reality

1

42


[email protected]



Chemicals product portfolio – Blended with niche products

DFPCL is a leading producer of mining and industrial chemicals in India. This segmentcontributes ~60% of total net sales and is further diversified with different products fordifferent industries. Around 3/4th of its segment revenues come from Ammonium nitrate,Iso-propyl alcohol and Nitric acid, where the company has made a niche for its product inthe market.

Ammonium Nitrate (AN)

AN is mainly used in mining and construction industries. Indian government is poised tobring GDP back on 8-9% growth trajectory. Emphasis on construction & mining industryand sequentially better IIP numbers augur well for the demand of Ammonium nitrate inIndia. Prominence on electricity generation in 11th Five-Year Plan should lead to higherdomestic coal production and hence more usage of AN. DFPCL is the largest manufacturerof Technical Prilled AN in India (Capacity: 132k MT p.a.) and fetch higher realisationscompared to its peers, as most of the manufacturers prepare AN in liquid form.

Isopropyl Alcohol (IPA)

IPA is used as specialty chemicals in manufacturing of paints, inks, rubber chemicals, fueladditives and pharmaceutical industry. DFPCL is the first company to manufacture IPA atlarge scale (capacity: 70k MT p.a.), as most of the demand is met through imports. Withsoftened crude oil prices, realisation of IPA is likely to improve as Propylene (main rawmaterial) prices are directly linked with crude price. DFPCL is the first company in theworld to obtain US Pharmacopoeia certification for IPA and this entail future demand of itsproduct in the global pharmaceutical industry.

Capacity addition of High margin product

Ammonium Nitrate (AN)

Currently one-third of Ammonium Nitrate’s requirement in India is met through lower qualitygrade imports substitutes. DFPCL augmented its technical AN capacity to 132k MT from90k MT p.a. in FY09. It further plans to raise its capacity of Ammonium Nitrate by 300k MTp.a. at Taloja plant with a capex of Rs6bn (D/E-2/1), which is expected to be commissionedby Oct’10.

DFPCL entered in a 51:49 JV with Yara International ASA (YIA), a Norway based companyin Q3FY08 to invest in the 0.3 mn mtpa AN plant at Paradip in Orissa. YIA is the globalleader in ammonia, specialty and bulk fertilizers and Ammonium Nitrate (AN), industrialgases and other diversified chemical and pollution control products. Even after due diligence,the JV did not materialise due to global melt down in FY09. It will be a positive surprise ifYara shows interest in the ongoing expansion at Taloja.

Nitric Acid

Nitric acid facility with 450 MT p.d. got commissioned in Aug’09 and now DFPCL is amongthe largest producer of Nitric acid in Asia.

Largest manufacturer ofprilled Ammonium Nitrate...

US Pharmacopoeiacertification for IPA...

Capacity addition shouldimprove topline andprofitability significantly...

43


[email protected]


Higher gas availability to boost top-line and profitabilityDFPCL is well connected to the national gas grid with its Dahej-Uran pipeline, to receivegas from multiple sources like KG Basin, ONGC and others. Due to lower availability ofgas, Methanol’s share in the total portfolio has reduced significantly in the last two years.

DFPCL’s gas requirement is about 0.9-1 mmscmd for full utilisation of its capacities asagainst current receipt of ~0.4 mmscmd from GAIL. Post RIL KGD6, gas scenario shouldimprove and once regular gas supply starts, company will be able to increase its capacityutilisation, which decreased from ~80% in FY05 to ~12% in FY09 and eventually profitabilitywill improve.

Agribusiness – yet to turnaround

Contribution of fertiliser’s business in the total portfolio has been on decreasing trend forDFPCL. This segment has hardly made positive PBIT in the last couple of years. Credit forcontribution of ~7% to PBIT in FY09 goes to exceptional rise in prices of fertilisers.

We believe that going forward, there is significant scope of improvement in this segmentdriven by internal and external factors, however, availability of Phosphoric acid on continuousbasis remains a concern for the company.

Methanol contribution's in Net sales


Manufactured fertiliser's contribution in Net sales


0%

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40%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

0%

10%

20%

30%

40%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Availability of gas shouldincrease capacityutilisation...

44


[email protected]


Supporting extrinsic factors:

Higher availability of natural gas in IndiaPositive changes in fertiliser policy,

Linking complex fertiliser prices with international pricesEmphasis on usage of nutrients other than NitrogenReduction in MRP of complex fertilisers

Supporting Intrinsic factors:Capacity utilisation at only 25%Commissioning of Ammonia tank (capacity: 15k MT) at JNPT is over and now companyshould be able to limit its exposure to highly volatile ammonia prices

Other positive development in this segmentSpecialty FertiliserCommissioning of Sulphur Bentonite plant (25k MT p.a.) at Taloja, which is a specialtyfertiliser and has a robust growth in demand.Export of fruits & fresh produceDFPCL has initiated ‘Mahadhan Saarthie’ to tap the retail growth in rural India. It utilizesits existing relationships with farmers for procuring fresh produce and selling it to exporters.Under this model, it has entered into an alliance with ITC for exporting grapes to Europe.Ishanya MallIshanya mall, the design centre and specialty mall for interiors and exteriors is making itsmark in western Maharashtra. It has more than 5000 brands and has a footfall of 1.5mnwith 35% conversion in FY09. Revenue from the segment is growing steadily with ~20%PBIT margins in FY09. As per the management, current utilisation level of ~55% expectedto reach ~90% by the end of FY10.Robust financialsPositive cash flow from operationsDFPCL has generated positive cash from operations in the last five years and we believecash generation of ~Rs2bn each in next two years. Net sales are likely to remain flat inFY10 due to sharp reduction in realisations of fertilisers and methanol and then grow at~16% in FY11 driven by volume growth.

Cash Generation (Rs mn)


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600

1,200

1,800

2,400

FY05 FY06 FY07 FY08 FY09 FY10E FY11E0

4,000

8,000

12,000

16,000

Cashflow from operation Net Profit Net Sales

Policy changes & softenedraw material prices shouldimprove fertiliser’sproduction...

History of positive cash flowfrom operations...

45

0

7

14

21

28


ROCE ROE OPM


[email protected]


Healthy Margins

With higher operating margins of ~20%, DFPCL has given robust returns in the past.Going forward we believe ROCE and ROE in the range of 15%-20% even with all plannedcapex. Being conservative, we have taken OPM flat in our estimates, which is likely toimprove with higher availability of natural gas.

Valuations

Expected favourable fertiliser policy, capex plans & increased availability of gas, augurswell for DFPCL. We expect net profit of to be Rs1.2bn and Rs1.3bn in FY10 and FY11respectively, which translates into an EPS of Rs13.9 and Rs15.1 respectively.

Recommendation

At the CMP of Rs89, DFPCL is trading at a P/E of 5.9x and EV/EBITDA of 4.1x FY11E.We maintain our ‘BUY’ recommendation with an increased target price of Rs114, whichimplies a P/E of 7.5x FY11E earnings. Stock also provides additional support with a dividendyield of 4.4%.

Concerns

Availability of natural gas at lower price

Huge volatility in raw material prices

Delays in ongoing expansions

Lower turnaround for Ishanya mall

Margins (%)


We maintain our ‘BUY’recommendation with a targetprice of Rs114...

Strong margins to continue...

46




[email protected]

6X

8X

10X

12X


0

60

120

180

240

May -04 Sep-05 Jan-07 May -08 Sep-09

4X

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10

15

20

May -04 Sep-05 Jan-07 May -08 Sep-09

Daily PE Median PE

Income Statement FY07 FY08 FY09 FY10E FY11ENet sales 8,331 10,409 13,881 13,398 15,519 Growth (%) 48.0 24.9 33.4 (3.5) 15.8 Operating Profit 1,437 1,745 2,482 2,342 2,708 Other operating income 113 190 240 245 255 EBDITA 1,800 2,149 3,082 2,867 3,263 Growth (%) 32.1 19.4 43.4 (7.0) 13.8 Depreciation 391 447 524 606 747 Other income 250 214 360 280 300 EBIT 1,409 1,702 2,558 2,261 2,517 Interest paid 115 159 405 510 610 PBT (before E/o items) 1,294 1,543 2,153 1,751 1,907 Tax prov ision 355 512 632 525 572 E/o Income / (loss) (10) (28) (33) - - Net profit 929 1,003 1,487 1,226 1,335 Adjusted net profit 939 1,030 1,521 1,226 1,335 Growth (%) 16.5 7.9 48.3 (17.5) 8.9 Diluted EPS (Rs) 10.5 11.4 16.9 13.9 15.1 Diluted EPS Growth (%) 16.5 7.9 48.3 (17.5) 8.9

Cash Flow Statement FY07 FY08 FY09 FY10E FY11EPre-tax profit 1,294 1,515 2,120 1,751 1,907 Depreciation 391 447 524 606 747 Total tax paid (344) (501) (542) (525) (572) Chg in w orking capital (723) (6) (793) 34 (380) Other items 38 102 412 231 311 Cash from oper. (a) 655 1,557 1,720 2,096 2,012 Capital ex penditure (1,716) (2,172) (2,343) (2,850) (2,500) Chg in inv estments 185 699 (153) - 200 Other items (1) 131 431 280 300 Cash flow from inv. (b) (1,532) (1,342) (2,066) (2,570) (2,000) Free cash flow (a+b) (877) 216 (346) (474) 12 Equity raised/ (repaid) - - - - - Debt raised/ (repaid) 1,477 241 2,584 200 1,000 Interest Paid (130) (151) (339) (510) (610) Div idend (incl. tax ) (301) (308) (328) (413) (406) Other items (46) (48) (282) (1) (1) Cash flow from fin. (c) 1,001 (266) 1,635 (724) (17) Net chg in cash (a+b+c) 124 (50) 1,289 (1,197) (5)

Balance Sheet FY07 FY08 FY09 FY10E FY11EEquity Share Capital 882 882 882 882 882 Reserves & surplus 5,473 6,106 7,149 7,962 8,891 Shareholders' funds 6,355 6,988 8,031 8,844 9,773 Total Debt 3,253 3,494 6,078 6,278 7,278 Net Deferred tax liability 658 617 651 651 651 Capital Employed 10,265 11,099 14,759 15,772 17,701 Net fix ed Assets 6,271 7,997 9,727 11,971 13,725 Cash & Cash Eq. 1,075 641 1,690 493 488 Net other current assets 1,529 1,361 1,893 1,859 2,239 Inv estments 1,372 1,087 1,444 1,444 1,244 Misc Ex p 19 12 5 5 5 Total Assets 10,265 11,099 14,759 15,772 17,701

Key Ratios FY07 FY08 FY09 FY10E FY11EOPM (%) 17.2 16.8 17.9 17.5 17.5 Net margin (%) 11.2 9.6 10.7 9.2 8.6 Div idend y ield (%) 3.4 3.9 4.5 4.5 4.5 Net debt/ Equity (x ) 0.5 0.5 0.8 0.7 0.7 Net w orking capital (day s) 85.2 58.7 67.4 68.3 70.2 Asset turnov er (x ) 0.9 1.0 1.1 0.9 0.9 ROCE (%) 19.9 20.0 24.4 17.7 16.5 RoE (%) 15.4 15.0 19.8 14.5 14.3 EV/Net sales (x ) 1.0 0.9 0.8 0.9 0.9 EV/EBITDA (x ) 4.8 4.5 3.5 4.3 4.1 PER (x ) 8.4 7.8 5.3 6.4 5.9 Price/Book (x ) 1.2 1.1 1.0 0.9 0.8

47

STOCK DATA


Market Cap Rs14.6bnBook Value per share Rs37.9Eq Shares O/S (FV Rs10) 428.2mnFree Float 64.7%Avg Traded Value (6 mnths) Rs564mn52 week High/Low Rs47/13Bloomberg Code NFCL INReuters Code NGFR.BO

NAGARJUNA FERTILISERS

Nagarjuna Fertilisers and Chemicals Ltd (NFCL) is one of the largestUrea producers in south India with production capacity of 1.2mn MTp.a. The company's proximity to RIL KG basin provides an ensuredsupply of natural gas. NFCL is also engaged in marketing ofmicronutrients and specialty fertilisers in association with recognizedinternational players. NFCL is diversifying its business by forayinginto refinery business with partners like Tata Petrodyne.RIL KG basin to improve marginsNFCL has received ~1.55mmscmd of natural gas in the first allocation fromRIL KG D6. Availability of low cost gas is likely to reduce production cost by~20%, which should lead to significant improvement in operating margins.Non-usage of liquid fuels will also result in lower working capital requirementsand result in higher profitability.

De-bottlenecking to boost profitabilityNagarjuna Fertiliser will get IPP benefit for added capacity of ~0.2mn MT ofUrea post de-bottlenecking, which will provide an EPS of Rs0.8 to Rs3.1,depending on the existing international Urea prices. Along with capacityaddition, there will be ~0.45Gcal/ MT of energy saving (EPS of Rs1.1) thatwill be completely retained by the company.

NOCL - Future revenue generatorNagarjuna Oil Corporation Ltd (NOCL), a 51% subsidiary of NagarjunaFertilisers & Chemicals Ltd, is putting up a 6mnMT p.a. petroleum refinery atCuddalore, Tamil Nadu. Refinery would process 1.25 lacs barrels per dayand has high complexity factor, to take advantage of processing heavy andsour crude oil.

VALUATIONS AND RECOMMENDATIONAvailability of natural gas and de-bottlenecking should increase profits by4.3x in FY11 from Rs324mn in FY09. At CMP of Rs34, NFCL is trading at10.4x and 9.1x of P/E and EV/EBITDA respectively for FY11 estimated EPSof Rs3.3. We initiate coverage on NFCL with a 'BUY' recommendation andSOTP price target of Rs47 (10x PER for fertiliser business and Rs14 forNOCL with GRM of USD6.5/bbl against management guidance of USD8.5/bbl) with a time horizon of 18 months.

PERFORMANCE (%)

1M 3M 12MAbsolute 1.1 (17.0) 20.7Relative (8.3) (29.0) (8.0)

12 October 2009



Initiating CoverageBUY


TOP SHAREHOLDERS

BSE Sensex : 16,643


KEY RATIOS

FY07 FY08 FY09 FY10E FY11ENet Sales 18,152 21,936 23,719 18,742 21,205YoY Gr. (%) 24.9 20.8 8.1 (21.0) 13.1Op. Profits 2,799 3,034 3,286 3,665 4,689OPM (%) 15.4 13.8 13.9 19.6 22.1Adjusted Net Profit 317 225 324 736 1,394YoY Gr. (%) 22.4 (29.1) 44.1 126.9 89.5



Name % holding

Saveri Chemicals Pvt.Ltd. 2.66

Sundaram Bnp Paribas Mutual Fund 1.39

Life Insurance Corporation Of India 1.34

Credit Suisee (Singapore) Limited 1.23

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15

30

45

60


Nagarjuna Fert BSE Rebased

48

Nagarjuna Fertilisers and Chemicals Ltd

BACKGROUND

Incorporated in 1985, Nagarjuna Fertilisers and Chemicals Ltd (NFCL) is one of the largestUrea producers in south India. Along with production, the company is also engaged in themarketing of primary and wide range of micronutrients & specialty fertilisers. NFCL hascurrent production capacity of 1.2mn MT p.a. for Urea at Kakinada, Andhra Pradesh.NFCL has association with international players like Haifa Chemicals Ltd, Israel and Yara,Norway for importing and marketing water-soluble specialty fertilisers. The company isalso engaged in the business of Micro Irrigation solutions.

NFCL has an added advantage of location due to its proximity to RIL KG basin, whichensures regular supplies of natural gas at lower transportation cost against its peers.Taking full advantage of assured gas availability post RIL KG development, NFCL is de-bottlenecking its existing plant to increase production capacity by 0.18mn MT and reducingenergy consumptions by ~0.45Gcal/MT, which has got commissioned in Sept’09.

BUSINESS DETAILS

Nagarjuna Fertilisers has three lines of businesses,

Urea manufacturing

Marketing of primary, secondary and specialty fertilisers

Micro irrigation solution

NFCL has two subsidiaries,

Jaiprakash Engineering and Steel Company ltd (JESCO): NFCL in attempt to diversifyits business entered into steel through JESCO. However, it did not materialised due toissues regarding partners and lack of funds. Currently nothing significant is happening inJESCO and hence we have excluded it from our valuations.

Nagarjuna Oil Corporation Limited (NOCL): It is a 51% subsidiary of NFCL and iscurrently involved in developing a Petroleum Refinery project at Cuddalore, Tamilnadu.This venture was delayed initially due to lack of business partners, however, things gatheredspeed post involvement of the Tata Group (Tata Petrodyne) with a 30% equity holding inthe company. NOCL has achieved financial closure for Rs32bn and project is expected tobe commissioned by FY12. We have included NOCL in our valuations and it is dealt indetail in later part of the report.

[email protected]


Diversification into unrelatedbusinesses...

49


RIL KG Gas to improve profitability

Nagarjuna Fertilisers has received 1.55 mmscmd of natural gas in the first allocation of15.4 mmscmd gas from RIL KG basin to fertiliser companies. Cost of RIL gas for NFCL isUSD5.34/mmbtu (including transportation), lowest among fertiliser companies due to itsproximity to RIL KG basin.


Post availability of natural gas from RIL, the company has switched completely from highercost fuels like Naphtha and LSHS to gas. This will result in reduction in production cost to~20% and improvement in margins. Non-usage of liquid fuels will also result in lowerworking capital requirements and result in higher profitability. With usage of higher gases,plants operating efficiency will improve and result in better operating margins for thecompany.

Capacity Addition

Favourable government policy of linking increased Urea production to international priceand availability of natural gas post RIL KG development have motivated many fertilisercompanies going for debottlenecking. NFCL is also increasing its capacity through de-bottlenecking. Urea production is likely to reach 1.58mn MT p.a. from current productionof 1.38mn MT p.a.

Impact of De-bottlenecking to boost top-line and bottom-line

NFCL will be doubly benefited from de-bottlenecking with excess production linked withinternational price and reduction in energy consumption of the new as well as the existingcapacities. As per current guidelines, NFCL will be eligible for IPP for excess productionover 1.4mn MT. Benefit will be to the extent of 85% of international price with collar andcap of USD250 and USD425 respectively.

Energy consumption post debottlenecking should reduce to ~5.2Gcal/MT of Urea. Thiswill result in reduction of ~0.45Gcal/MT. As per current policy, the company will retain thisbenefit. Plant got commissioned after de-bottlenecking from Oct’09.


[email protected]

Profits due to Energy reductionNet Sales 2,160 Rs mn

Energy cost 952 Rs mn

Other Expenses 40 USD / MT

Other Expenses 346 Rs mn

Operating profit 862 Rs mn

OPM % 39.9

Depreciation 150 Rs mn

PBIT 712 Rs mn

Interest cost 220 Rs mn

PBT 492 Rs mn

Tax 167 Rs mn

PAT 325 Rs mn

No of shares 428 mn

EPS 0.8 Rs





Tax Paid 246 Rs mn

PAT 477 Rs mn

No of shares 428 mn

EPS 1.1 Rs


Profits due to capacity addition


Capacity above cut-off to linkwith IPP...


50

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736

324225317

295

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6,000


Cashflow from op. (Rs mn) Operating Profit / MT Net Profit (Rs mn)

Improving Financials

Margins to expand

Last two years saw exceptional volatility in prices of fertilisers and raw materials. Due tosignificant rise in international prices of fertilisers during ’08, companies having substantialtrading volumes saw peak revenues in FY09. We expect NFCL net sales to decrease by21% YoY in FY10, which should later increase by 13% in FY11.

As discussed earlier, availability of more gases and de-bottlenecking exercise will improveoperating margins significantly from ~14% to ~20+% level. ROE will increase by 4x inFY11 from its FY09 level. However, ROCE should remain flat due to increasing capex for51% subsidiary NOCL (discussed later).

Positive cash flow from operations

With operating profit per MT of Urea increasing to 1.5x and PAT becoming 4x in FY11 (fromFY09), there should be significant cash flow generation for the company. Better workingcapital management with no usage of Naphtha and LSHS will also reduce the interest costburden drastically for NFCL and lead the higher profitability.


[email protected]

Margins to improve


Exponential growth in profitability



Availability of more gasshould improve margins...

51


[email protected]

Nagarjuna Oil Corporation Ltd. (NOCL) – a Growing Cash-Cow

Nagarjuna Oil Corporation Limited, a 51% subsidiary of Nagarjuna Fertilisers & ChemicalsLtd, is putting up a 6mnMT p.a. petroleum refinery at Cuddalore, Tamil Nadu. This is arelocated unit of Mobil Refinery from Woerth, Germany with new balancing units. It wouldprocess 1.25 lacs barrels per day. As per management, the Refinery with high complexityfactor is designed to take advantage of processing heavy and sour crude oil and productsthat will meet Indian and International specifications.

Total capex for the project will be Rs47.9bn with equity contribution of Rs15.9bn. Financialclosure has been achieved for Rs32bn under consortium of 16banks led by IDBI and projectwork has started. Plant is expected to be commissioned by end of FY11 and NOCL hasplans to increase Refinery capacity to 15mnMT p.a. by FY15.

Equity Partners - NOCL

Nagarjuna Fert. Tata Petrodyne TNIDC Cuddalore Port Co. Udhe, Germany

51% 30% 5% 10% 4%

Assumption for revenue projections for NOCL:

GRM of USD6.5/bbl against management guidance of USD8.5/bbl

Considering delay in execution and commencement from FY13

Crude price of USD60/bbl

Repayment of all loans in the first seven years

Interest cost of 10%

Discount rate of 16% and terminal growth of 0.5%


GRM-Indian Refineries (Complexity wise), USD/ bbl


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4.0

8.0

12.0

16.0

FY07 FY08 FY09 FY10 FY11E FY12E

av erage High Medium Low

Refinery business - A futurerevenue generator...

52


[email protected]

Circled portion is the most likely value of NOCL per share of Nagarjuna Fertilisers in FY11.Taking the most conservative scenario, we have taken the minimum contribution of Rs14/share of NFCL from NOCL in our valuations.

Valuations

We are adopting SOTP methodology for valuing fertiliser business and the upcoming refinerybusiness of its subsidiary NOCL.

Fertiliser Business

Current existing facilities of NFCL should generate earnings of Rs1.4 in FY11. Upcomingdevelopment of de-bottlenecking should be commissioned by Oct’09 and will contributefull year in FY11. Benefits from de-bottlenecking are linked with international price of Ureawith floor and ceiling of USD250 and USD425.

Earnings estimates (Rs / share) for FY11E

DCF Valuations - NOCL FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E

PAT 1,185 2,886 3,737 5,226 6,502 9,480 10,969 11,820 13,096 14,798

Dep 2,036 2,036 2,036 2,036 2,036 2,036 2,036 2,036 2,036 2,036

Net Capex (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000)

Ch in Work Cap (5,951) (1,831) (916) (1,602) (1,373) (3,204) (1,602) (916) (1,373) (1,831)

Ch in Debt (6,000) (6,000) (6,000) (6,000) (6,000) (6,000) (5,000) - - -

FCFE (10,730) (4,909) (3,143) (2,340) (835) 312 4,403 10,940 11,759 13,003

PV @ FY11 (7,974) (3,145) (1,736) (1,114) (343) 110 1,343 2,877 2,666 2,541


Sensitivity of NOCL's value / share of Nagarjuna Fertilisers in FY11E

Oth

er E

xpen

ses

GRM (USD/bbl)

6.0 6.5 7.0 7.5 8.0 8.51.0 12 20 28 36 44 52

1.1 11 19 27 34 42 50

1.2 9 17 25 33 41 48

1.3 8 16 23 31 39 47

1.4 6 14 22 30 37 45

1.5 5 12 20 28 36 44

1.6 3 11 19 26 34 42

1.7 1 9 17 25 33 40Source: PINC Research

Earnings estimates (Rs / share) for FY11EUrea Realisation, USD / MT


250 275 300 325 350 375 400 425De-bottlenecking (Excess Production) 0.8 1.1 1.4 1.8 2.1 2.4 2.8 3.1

De-bottlenecking (Energy Saving) 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1

Earlier Capacity 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4

Total EPS 3.3 3.6 3.9 4.3 4.6 4.9 5.3 5.6


Higher IPP for Urea willincrease profitabilitysignificantly...

53


[email protected]

Taking most conservative scenario, we have taken earnings from fertiliser business to beRs3.3 in FY11E, which can go up to Rs5.6 depending on prevailing international Ureaprices.

NOCL Valuations

As discussed earlier, in conservative scenario, NOCL is delivering a value of Rs14 pershare of NFCL in FY11E.

Recommendation

At CMP of Rs34, NFCL is trading at 10.4x and 9.1x of P/E and EV/EBITDA respectively forFY11E EPS of Rs3.3. With 10x PER for fertiliser business and Rs14 for NOCL in FY11,we recommend a ‘BUY’ for NFCL with a target price of Rs47 for a time horizon of 18months.

ConcernsThere should be regular supplies of natural gas and no further requirements of liquidfuelsDiversification into unrelated business (Refinery) remains a concern

Undue delay in expansion projects


We initiate coverage witha ‘BUY’ recommendation anda target price of Rs47...

54


P/E Band EV/EBITDA Band


[email protected]

10X15X20X


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Income Statement FY07 FY08 FY09 FY10E FY11ENet sales 18,152 21,936 23,719 18,742 21,205 Growth (%) 24.9 20.8 8.1 (21.0) 13.1 Operating Profit 2,799 3,034 3,286 3,665 4,689 Growth (%) (2) 8 8 12 28 Other income 280 198 120 45 65 EBDITA 3,079 3,232 3,406 3,710 4,754 Growth (%) 1 5 5 9 28 Depreciation 1,241 1,202 1,210 1,308 1,372 EBIT 1,838 2,031 2,196 2,402 3,382 Interest paid 1,378 1,630 1,693 1,287 1,270 PBT (before E/o items) 460 401 503 1,115 2,112 Tax prov ision 143 176 179 379 718 E/o Income / (loss) - - - - - Net profit 317 225 324 736 1,394 Adjusted net profit 317 225 324 736 1,394 Growth (%) 22.4 (29.1) 44.1 126.9 89.5 Diluted EPS (Rs) 0.7 0.5 0.8 1.7 3.3 Growth (%) (52.6) (29.1) 44.1 126.9 89.5

Cash Flow Statement FY07 FY08 FY09 FY10E FY11EPre-tax profit 460 401 503 1,115 2,112 Depreciation 1,241 1,202 1,210 1,308 1,372 Total tax paid (470) (389) (396) (379) (718) Chg in w orking capital 2,145 535 942 (290) 814 Other items 1,344 1,630 1,693 1,242 1,205 Cash flow from oper. (a) 4,721 3,380 3,952 2,996 4,785 Capital ex penditure (1,960) (1,923) (7,116) (8,000) (8,000) Chg in inv estments 23 353 - - - Other inv esting activ ities 1 - - (355) (335) Cash flow from inv. (b) (1,936) (1,570) (7,116) (8,355) (8,335) Free cash flow (a+b) 2,784 1,810 (3,164) (5,359) (3,550) Equity raised/(repaid) 0 375 0 - - Debt raised/(repaid) (1,908) 241 3,680 6,500 6,000 Interest Paid (1,370) (1,624) (1,667) (1,287) (1,270) Div idend (incl. tax ) (16) (12) 0 (0) (0) Others 41 53 2,357 - - Cash flow from fin. (c) (3,254) (967) 4,371 5,212 4,730 Net chg in cash (a+b+c) (469) 843 1,206 (146) 1,180

Balance Sheet FY07 FY08 FY09 FY10E FY11EEquity capital 4,652 4,652 4,652 4,652 4,652 Reserves & Surplus 13,063 12,395 12,124 12,860 14,253 Shareholders' funds 17,715 17,047 16,776 17,512 18,905 Deferred Tax Liability 2,249 1,966 1,812 1,812 1,812 Total debt 15,536 16,721 19,250 25,750 31,750 Minority Interest 0 0 2,848 2,848 2,848 Capital Employed 35,500 35,734 40,686 47,921 55,315 Net fix ed assets 30,330 29,556 33,114 39,806 46,433 Cash & cash Eq. 926 1,950 2,953 3,097 3,463 Net other current assets 335 2 2 2 2 Ex p pending allocation 3,909 4,226 4,617 5,017 5,417 Total assets 35,500 35,734 40,686 47,921 55,315

Key Ratios FY07 FY08 FY09 FY10E FY11EOPM(%) 15.4 13.8 13.9 19.6 22.1 Net margin (%) 1.7 1.0 1.4 3.9 6.6 Div idend y ield (%) 0.0 0.0 0.0 0.0 0.0 Net debt/Equity (x ) 0.9 1.0 1.2 1.5 1.7 Net Working Capital (day s) (71.7) (50.1) (71.1) (90.0) (90.0) Asset turnov er (x ) 0.5 0.6 0.6 0.4 0.4 ROCE (%) 6.4 7.5 8.1 7.6 8.2 ROE (%) 1.8 1.3 2.0 4.4 7.9 EV/Net sales (x ) 1.6 1.4 1.3 2.0 2.0 EV/EBIDTA (x ) 9.6 9.4 9.3 10.3 9.1 PER (x ) 45.9 64.7 44.9 19.8 10.4 Price/Book (x ) 0.8 0.9 0.9 0.9 0.8

55

STOCK DATA


Market Cap Rs35.9bnBook Value per share Rs30.3Eq Shares O/S (FV Rs10) 551.7mnFree Float 7.5%Avg Traded Value (6 mnths) Rs124mn52 week High/Low Rs90/25Bloomberg Code RCF INReuters Code RSTC.BO

RASHTRIYA CHEMICALS AND FERTILISERS LTD

Rashtriya Chemicals and Fertilisers Ltd (RCF), with a capacity of 2mnMT p.a. of Urea is one of the largest PSUs contributing ~10% of thecountry's total Urea production. Rising fertiliser subsidy burden,discovery of huge reserve of natural gas in India and government'semphasis on self-sufficiency in fertiliser production, augurs well forthe growth of fertiliser sector and RCF being one of the largest playersand with 92.5% of government's stake is likely to benefit the most.RIL KG basin to change the dynamicsRCF has received ~3mmscmd of natural gas in the first allocation from RILKG D6. Availability of more gas has resulted in resumption of Trombay Ureaunit (0.33mn MT p.a.) that was closed for the last 8 years and switch fromcostlier fuel like Naphtha and LSHS to natural gas should result in improvementof operating margins.

De-bottlenecking to boost profitabilityRCF is increasing its Urea capacity at Thal unit by 0.27mn MT. Productionabove cut-off limit will be linked to IPP and provides possibility of significantupsides in earnings. De-bottlenecking will further lead to saving of ~0.4Gcal/MT of Urea for the whole unit, which will be completely retained by RCF asper current policy.

Key contender for brownfield expansionPost availability of gas, there will capacity addition through brown-fieldexpansion and resumption of sick units. RCF, with PSU status is ahead inthe race to grab this opportunity. RCF is already part of the team for resumptionof sick units of FCI. Brown-field expansion will create a blue-sky scenario forRCF, as Urea realisations will be linked to the international prices.

VALUATIONS AND RECOMMENDATIONAt CMP of Rs65, RCF is trading at P/E and EV/EBITDA of 13.6 and 7.8respectively for FY11E EPS of Rs4.8. De-bottlenecking and brown-fieldexpansion should generate an additional EPS of Rs2.5 to Rs10.7 dependingon the prevailing international Urea prices. We initiate coverage with a 'HOLD'recommendation for the stock with a price target of Rs73. However anyfavourable policy change regarding expansion, increase in international pricefor Urea or any development regarding the commercial usage of large landbank at Chembur (Not valued in our estimates) will be the positive triggers.

PERFORMANCE (%)

1M 3M 12MAbsolute 4.0 (10.7) 45.2Relative (5.6) (23.7) 10.6

12 October 2009



Initiating CoverageHOLD


TOP SHAREHOLDERSName % holding

Tata Mutual Fund 0.07

Birla Sun life Mutual Fund 0.04

BSE Sensex : 16,643


KEY RATIOS

FY07 FY08 FY09P FY10E FY11ENet Sales 34,880 51,403 83,660 59,655 64,260YoY Gr. (%) 14.5 47.4 62.8 (28.7) 7.7Op. Profits 2,801 2,885 4,042 4,057 4,820OPM (%) 8.0 5.6 4.8 6.8 7.5Adjusted Net Profit 1,487 1,582 2,116 2,113 2,644YoY Gr. (%) 22.4 6.3 33.8 (0.1) 25.1



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[email protected]

Rashtriya Chemicals and Fertilisers Ltd

BACKGROUND

Rashtriya Chemicals and Fertilisers Ltd (RCF) is one of the largest PSUs engaged in theproduction and marketing of nitrogenous & complex fertilisers and industrial chemicals.RCF was formed in 1978 after reorganisation of Fertilizer Corporation of India into fivecompanies. RCF, a wholly owned PSU until ’92, later, 7.5% of the equity has beendisinvested to Financial Institutions, Public etc.

The company has its manufacturing facilities at Trombay (Mumbai) and Thal (Raigadh) inMaharashtra. RCF has production capacity of 2mn MT p.a. for Urea (1.7mn at Thal and0.33 mn at Trombay) and 0.65mn MT p.a. for complex fertilisers. The company also produceschemicals like Methanol, Ammonia, Sodium Nitrate, Ammonium Nitrate etc. RCF shutdownits Urea manufacturing plant at Trombay in 2001 due to shortage of natural gas, howeverproduction has resumed in ’09 post natural gas availability from RIL KG basin.

BUSINESS DETAILS

RCF has three lines of business

Fertilisers manufacturing (Urea and complex fertilisers)

Manufacturing host of industrial chemicals

Trading of fertilisers (DAP, MOP and Urea)

Fertiliser companies irrespective of not having manufacturing facilities for fertilisers of alltypes of primary nutrients (N, P and K), try to project themselves as one-stop shop for allkind of fertilisers. This results in significant portion of trading sales in the fertiliser company’stop-line.

Segment Contribution

Net Sales Mix (%)


PBIT Mix (%)

Trading31

Chemicals10

Fertiliser59

Trading10

Chemicals50

Fertiliser40


Among the largest Ureamanufacturing PSU...

[email protected]



RIL KG Gas to boost top-line and bottom-line

As per first allocation of 15.4 mmscmd gas from RIL KG basin to fertiliser companies,RCF has received 0.95 mmscmd and 2.1 mmscmd of gas respectively for its Trombay andThal plant. Cost of RIL gas for RCF including transportation is USD 5.87 per mmbtu.

Resumed Urea facility at Trombay

Urea production facility at Trombay was shut in ’01 due to nonavailability of natural gas.Post allocation of gas from RIL KG basin in 2009, RCF has restarted Urea production atTrombay. This will lead to production of additional 3.3 lacs MT of Urea from this facility,which will add to ~Rs 3bn to top-line.


With availability of natural gas, RCF has switched completely from higher cost fuels likeNaphtha and LSHS to gas. This will result in lower production cost and improvement inmargins. Average cost of production of Urea has reduced from ~Rs11,500 per MT in FY09to ~Rs8,500 currently. This will result in lower working capital requirement and result inhigher profitability. With usage of more gas, plant’s operating efficiency should improveand result in better operating margins for the company.

De-bottlenecking to increase profitability

Capacity Addition

Availability of Gas is the major concern for Urea plants in India. Post assurance of gasfrom RIL KG basin, RCF is increasing its existing Urea production capacity at Thal throughdebottlenecking. Realisation of excess Urea produced will be linked with internationalprice to the extent of 85% of IPP with a bottom and cap of USD250 and USD425 per MT ofUrea respectively.

Details of De-bottleneckingNet Sales 3,240 Rs mnEnergy cost 1,841 Rs mnOther Expenses 40 USD/ MTOther Expenses 518 Rs mnOperating profit 880 Rs mnOPM % 27.2Depreciation 188 Rs mnPBIT 693 Rs mnInterest cost 275 Rs mnPBT 418 Rs mnTax 142 Rs mnPAT 276 Rs mnNo of shares 552 mnEPS (Rs) 0.5 Rs

Project Cost 5.0 Rs bn

D/ E 2:1

Loan 3.3 Rs bn

Average cost 8.25%

Production 0.27 mn MT p.a.

Energy consn 6.1 Gcal/ MT

Energy cost 5.87 $/ mmbtu

Urea realisation 250 $/ MT

Rs-USD 48

Time line 18-20 months



Capacity above cut-off to belinked with IPP...

Resumption of Ureaproduction at Trombay...

[email protected]


Energy Reduction

Along with capacity addition of 0.27mn MT of Urea p.a., debottlenecking will also reducethe overall energy consumption for the Urea plant at Thal. Post debottlenecking, energyconsumption is expected to reduce from the current level of ~6.5 Gcal/ MT to ~6.1 Gcal/MT. Energy saving of ~0.4 Gcal/MT on the capacity of 2.0mn MT Urea will result in substantialprofitability for RCF. As per current Urea policy, benefits of energy saving arrived fromdebottlenecking is retained with the company for the first five years without any sharingwith the government.

Brownfield Expansion creating Blue-sky scenario

As discussed earlier, India is highly dependent on imports to meet its fertiliser’s requirement.Government of India is looking at all possibilities to become self-sufficient in fertilisersproduction and to reduce its subsidy burden. Although the company has not yet formallyannounced, but looking at the present situation of fertiliser industry, we are sure that therewill be brown-field capacity expansion for Urea in the coming years and RCF is ahead inthe pack to reap its benefit.

Factors favuoring RCF for brown-field expansion

Raw material availability

Key for any Urea manufacturer is the availability of natural gas. RCF is well connected withthe existing gas pipe network. Currently 100% of its energy requirement is met throughnatural gas. Post RIL KG development and categorisation of gas to fertiliser industry onfirst priority, augurs well for the sector.

Government Support

RCF being a PSU company (Govt. stake-92.5%) has higher interference of Fertiliser ministryin decision making as compared to its peers. Government emphasizing on self-sufficiencywill take policy measures to increase domestic production of fertilisers. We feel that RCFwill be among the first fertiliser company to take any action regarding brown-field expansiondue to high government stake and most likely to receive capital infusion by the governmentin the beginning. This can also lead to a likely situation of dilution or sale of Govt’s stakein RCF to the extent of 10-15%.

Benefit from reduction in energy consumption






Tax Paid 304 Rs mn

PAT 590 Rs mn

No of shares 552 Rs mn

EPS 1.1 Rs



RCF is ahead in race forrevival of sick Urea units...

[email protected]


Cost advantage compared to peers

RCF has 1.7mn MT p.a. Urea plant operating at ~110% capacity utilisation at Thal. Thisway RCF has all technical and marketing expertise to handle new brown-field facility.Ample land is also available at Thal facility. This way, brown-field expansion at RCF-Thalwill save cost of extra land along with saving due to sharing of utilities and supportingdepartments.

We can observe the cost advantage that RCF will have as compared to new plant, from theabove numbers. Cost of first plant for Chambal Fertilisers and Tata Chemicals were~Rs12.7bn and ~Rs14.7bn. However, for the same capacity plant commissioned afterthree years, the cost of brown-field expansion for IFFCO was only ~Rs9.5bn and ~Rs11.9bn.

This way, RCF will have a cost benefit of 15-20% as compared to greenfield players if itgoes for brown-field expansion.

Project cost for Urea plantsCompany Plant Feedstock Sector Year of Capacity Project

commissioning (mn MT p.a.) cost (Rs million)

Chambal Fert Kota I NG Private 1993 0.87 12,670

Tata Chemicals Babrala NG Private 1994 0.87 14,797

IFFCO Aonla II NG Co-op 1996 0.87 9,547

IFFCO Phulpur II NG Co-op 1997 0.87 11,900

Source: Crisil Research, PINC Research

Profits from brown-field expansionNet Sales 13,200 Rs mn

Energy cost 6,395 Rs mn

Other Expenses 30 USD / MT

Other Expenses 1,584 Rs mn

Operating profit 5,221 Rs mn

OPM % 39.6

Depreciation 1,260 Rs mn

PBIT 3,961 Rs mn

Interest cost 2,310 Rs mn

PBT 1,651 Rs mn

Tax 561 Rs mn

PAT 1,090 Rs mn

RCF stake 534 Rs mn

No of shares 552 mn

EPS (Rs) 1.0 Rs

Project cost 42 Rs bn

Debt: Equity 2:1

Debt 28 Rs bn

Equity 14 Rs bn

Production-Urea 1.1 Mn MT p.a.

Cost of loan 8.25%

Energy consumption 5.2 Gcal/ MT

Energy cost 5.87 $ / mmbtu

Urea realisation 250 $ / MT

Rs-USD 48

Time-line 38-40 months

Govt. stake in Equity 51%

7.14 Rs bn

RCF stake in Equity 49%

6.86 Rs bn



Brown-field expansion hassignificant potential due toIPP linkages...

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[email protected]


Cash flow from operations (Rs mn)


Margins (%)


Strong financialsCash flow from operations

With MRP fixed for all fertilisers, subsidy from government contributes significantly tofertiliser companies’ top-line. Very often, irregularities in subsidy disbursement led to higherreceivables in the balance sheet. Fertiliser bonds in place of cash subsidy also createdifficulties in managing working capital for the companies. Along with subsidy problems,due to usage of Naphtha in the absence of natural gas leads to higher inventory and againexert pressure on the working capital.

It can be seen in the chart below that cash flow from operations before working capital hasalways been positive (~Rs3bn) for RCF but including working capital it has been veryvolatile. Going forward, we believe that regular availability of RIL KG gas and cash subsidywill lead to better working capital management and consequently significant cash flowfrom operations in the coming years.

Margins to improve

Better working capital management along with improvement in operating efficiency postRIL gas should help RCF post better operating margins in the years to come and will resultin healthier returns to shareholders.


More natural gas shouldimprove operating margins...

Ease in working capitalshould reduce short termloan requirements...

[email protected]



250 275 300 325 350 375 400 425De-bottlenecking (Excess Production) 0.5 0.9 1.3 1.7 2.1 2.4 2.8 3.2

De-bottlenecking (Energy Saving) 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1

Brown-field Expansion 1.0 1.7 2.5 3.3 4.1 4.8 5.6 6.4

Total EPS 2.5 3.7 4.9 6.0 7.2 8.3 9.5 10.7

Urea Realisation, USD / MT —>Extra EPS from the upcoming developments

Huge land bank: A Dark horse – Not yet valued

RCF has huge surplus land at its Thal and Trombay unit. Excess land at Thal will be usedfor brown-field expansion for 1.1 mn MT p.a. Urea plant (discussed in earlier part of thereport).

Total land bank at Trombay unit is 600-700 acre. This unit is located in Chembur-nearMumbai and hence is considered a hot property. However, there are lot of hindrances inthe usage of this land for commercial purpose.

Surplus land available in patches and not in a stretch

As per the current government instructions, land has to be used for industrial oremployee’s residential purpose

With these constraints, we feel that chances of selling these land or its usage for commercialpurpose are very remote in the near future and hence, we have not valued the option valueof land bank in our estimates. However, any positive guidelines from government for usageof these lands will increase earnings manifold due to its prime location.

Valuations

Resumption of Urea plant at Trombay unit and complete switch from Naphtha to Naturalgas will result in better profitability for RCF. We believe the current operating businessshould yield an EPS of Rs3.8 and Rs4.8 in FY10E and FY11E respectively.

On-going developments of debottlenecking at RCF should start contributing to earningsfrom FY12 onwards. Profitability from these projects is linked with international price ofUrea and after full-blown implementation of these projects; it should contribute EPS in therange of Rs2.5 to Rs10.7.

Recommendation

At CMP of Rs65, RCF is trading at P/E and EV/EBITDA of 13.6 and 7.8 respectively forFY11E EPS of Rs4.8. Most conservative scenario from ongoing developments shouldyield an EPS of Rs2.5, which can go up to Rs10.7 in the most optimistic scenario. Werecommend ‘HOLD’ for the stock with a price target of Rs73. However, any favourablepolicy change regarding expansion or increase in international price for Urea will result inincrease in profitability for the company.

ConcernsThere should be regular supplies of natural gas and no further requirements of liquidfuelsFirm allocation of natural gas for future projects

Being a PSU, Involvement in revival of sick Urea units without any further incentive


Huge land bank at Chembur(Mumbai) - Sitting on thegold mine...

We initiate coverage with a‘HOLD’ recommendation anda target price of Rs73...

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[email protected]

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Balance Sheet FY07 FY08 FY09P FY10E FY11EEquity capital 5,517 5,517 5,517 5,517 5,517 Reserves & Surplus 8,986 9,872 11,214 12,552 14,422 Shareholders' funds 14,503 15,389 16,731 18,069 19,939 Deferred Tax Liability 1,670 1,661 1,661 1,661 1,661 Total debt 9,552 12,435 17,400 9,900 8,900 Capital Employed 25,725 29,485 35,792 29,630 30,500 Net fix ed assets 11,353 11,688 11,675 11,782 11,858 Cash & cash Eq. 2,305 493 841 2,633 2,561 Net other current assets 12,035 13,691 19,663 11,603 12,469 Inv estments 2 3,597 3,597 3,597 3,597 Misc Ex p 30 15 15 15 15 Total assets 25,725 29,485 35,792 29,630 30,500

Key Ratios FY07 FY08 FY09P FY10E FY11EOPM(%) 8.0 5.6 4.8 6.8 7.5 Net margin (%) 4.3 3.1 2.5 3.5 4.1 Div idend y ield (%) 1.5 1.5 1.8 1.8 1.8 Net debt/Equity (x ) 0.7 0.8 1.0 0.5 0.4 Net Working Capital (day s) 170.6 120.1 90.0 69.0 68.0 Asset turnov er (x ) 1.4 1.7 2.3 2.0 2.1 ROCE (%) 13.8 11.7 12.7 11.2 15.5 ROE (%) 10.6 10.6 13.2 12.1 13.9 EV/Net sales (x ) 1.2 0.9 0.6 0.7 0.7 EV/EBIDTA (x ) 11.8 12.2 10.8 9.7 7.8 PER (x ) 24.1 22.7 16.9 17.0 13.6 Price/Book (x ) 2.5 2.3 2.1 2.0 1.8

Income Statement FY07 FY08 FY09P FY10E FY11ENet sales 34,880 51,403 83,660 59,655 64,260 Growth (%) 14.5 47.4 62.8 (28.7) 7.7 Operating Profit 2,801 2,885 4,042 4,057 4,820 Growth (%) 41 3 40 0 19 EBDITA 3,654.3 3,915.0 4,872.9 4,456.5 5,419.5 Growth (%) (16) 21 (19) (52) 50 Depreciation 754 832 866 893 923 Other income 853.7 1,030.2 831.1 400.0 600.0 EBIT 2,900 3,083 4,007 3,563 4,496 Interest paid 488 663 749 545 490 PBT (before E/o items) 2,412 2,421 3,257 3,019 4,007 Tax prov ision 925 839 1,141 906 1,362 E/o Income / (loss) - - - - - Net profit 1,487 1,582 2,116 2,113 2,644 Adjusted net profit 1,487 1,582 2,116 2,113 2,644 Growth (%) 22 6 34 (0) 25 Diluted EPS (Rs) 2.7 2.9 3.8 3.8 4.8

Cash Flow Statement FY07 FY08 FY09P FY10E FY11EPre-tax profit 2,412 2,421 3,257 3,019 4,007 Depreciation 753 870 866 893 923 Total tax paid (618) (895) (1,141) (906) (1,362) Chg in w orking capital (3,787) (1,712) (5,971) 8,059 (865) Other items 511 695 (82) 145 (111) Cash flow from oper. (a) (729) 1,378 (3,071) 11,210 2,592 Capital ex penditure (1,742) (1,211) (853) (1,000) (1,000) Chg in inv estments - (3,600) 0 0 0 Other inv esting activ ities 19 91 831 400 600 Cash flow from inv. (b) (1,723) (4,720) (22) (600) (400) Free cash flow (a+b) (2,452) (3,342) (3,093) 10,610 2,192 Equity raised/(repaid) - - - - - Debt raised/(repaid) 5,180 2,872 4,965 (7,500) (1,000) Interest Paid (459) (697) (749) (545) (490) Div idend (incl. tax ) (629) (645) (775) (775) (775) Cash flow from fin. (c) 4,092 1,530 3,441 (8,819) (2,264) Net chg in cash (a+b+c) 1,640 (1,812) 348 1,791 (72)

63

A N N E X U R E S

[email protected]

CUT-OFF AND TARGET PRODUCTION FOR RECEIVING IPP BASED PRICING FOR UREA UNITS


Name of Fertiliser Reassessed Urea Highest rate Max. achieved Cut off for revamp Target prod. forUnits Capacity of prod. prod. for 330 days capacity receiving IPP

achieved (2003-04 to 2006-07) based price

mn MT/ yr 2003-07 MT/day mn MT/ yr mn MT mn MT

Group-I: Pre-1992 gas

1 BVFCL - Namrup-III 0.32 855 0.26 0.30 0.35

2 IFFCO-Aonia-I 0.86 2783 0.92 0.92 0.96

3 Indo-Gulf-Jagdishpur 0.86 3000 0.99 0.99 1.04

4 Kribhco-Hazira 1.73 5335 1.76 1.76 1.90

5 NFL - Vijaipur-I 0.86 2731 0.90 0.90 0.95

Group-II: Post-1992 gas

1 NFCL-Kakinada-I 0.57 2173 0.72 0.72 0.75

2 CFCL Gadepan-I 0.86 2862 0.94 0.94 0.99

3 TCL-Babrala 0.86 2901 0.96 0.96 1.01

4 KSFL-Shahjahanpur 0.86 2757 0.91 0.91 0.96

5 NFCL-Kakinada-II 0.60 2083 0.69 0.69 0.72

6 IFFCO-Aonia-II 0.86 2776 0.92 0.92 0.96

7 NFL - Vijaipur-II 0.86 2731 0.90 0.90 0.95

Group-III: Pre-1992 naphtha

1 SFC-Kota0.38 1158 0.38 0.38 0.42

2 IFFCO-Phulpur-I 0.55 1764 0.58 0.58 0.61

3 MCFL-Managalore 0.38 1228 0.41 0.41 0.43

4 MFL-Madras 0.49 1480 0.49 0.49 0.54

5 SPIC-Tuticorin 0.62 2036 0.67 0.67 0.71

6 ZIL-Goa 0.40 1330 0.44 0.44 0.46

Group-IV: Post-1992 naphtha

1 IFFCO-Phulpur-II 0.86 2864 0.95 0.95 0.99

2 CFCL-Gadepan-II 0.86 2731 0.90 0.90 0.95

Group-V: FO/LSHS

1 GNVFC-Bharuch 0.64 2050 0.68 0.68 0.71

2 NFL-Bhatinda 0.48 1548 0.51 0.51 0.54

3 NFL-Bhatinda 0.51 1589 0.52 0.52 0.56

4 NFL-Panipat 0.51 1629 0.54 0.54 0.56

Group-VI: Mixed feedstock

1 GSFC-Baroda 0.37 1155 0.38 0.38 0.41

2 IFFCO-Kalol 0.54 1707 0.56 0.56 0.60

3 RCF-Thal 1.71 5363 1.77 1.77 1.88

Total 19.46 20.64 20.70 21.90

Source: FAI

Annexure - I

[email protected]

ENERGY NORMS FOR UREA UNITS DURING STAGE-III OF NEW PRICING SCHEME


S No. Urea Unit Energy (Gcal/ MT Urea)

Group-I: Pre-1992 gas

1 BVFCL - Namrup-III 12.6882 IFFCO-Aonia-I 5.6903 Indo-Gulf-Jagdishpur 5.5344 Kribhco-Hazira 5.9525 NFL - Vijaipur-I 5.952

Group-II: Post-1992 gas

1 NFCL-Kakinada-I 5.7122 CFCL Gadepan-I 5.6213 TCL-Babrala 5.4174 KSFL-Shahjahanpur 5.7125 NFCL-Kakinada-II 5.7126 IFFCO-Aonia-II 5.5227 NFL - Vijaipur-II 5.712

Group-III: Pre-1992 naphtha

1 SFC-Kota 7.8472 IFFCO-Phulpur-I 7.5843 MCFL-Managalore 7.3564 MFL-Madras 8.3375 SPIC-Tuticorin 7.3826 ZIL-Goa 7.308

Group-IV: Post-1992 naphtha

1 IFFCO-Phulpur-II 5.8832 CFCL-Gadepan-II 5.678

Group-V: FO/LSHS

1 GNVFC-Bharuch 7.9892 NFL-Bhatinda 9.5173 NFL-Bhatinda 10.2214 NFL-Panipat 9.654

Group-VI: Mixed feedstock

1 GSFC-Baroda 6.9352 IFFCO-Kalol 6.6073 RCF-Thal 6.938

Source: FAI

Annexure - II

[email protected]

RIL KG D6 NATURAL GAS ALLOCATED TO FERTILISER PLANTS (OUT OF FIRST 40MMSCMD)


HBJ Pipeline MMSCMD

National Fertiliser 0.65

Chambal Fertiliser 1.15

IFFCO-Aonla 1.75

IFFCO-Phulpur 0.52

KRIBH-Shah 0.978

Tata-Babrala 0.88

Indo gulf-Jagdishpur 0.48

SriramFert-kota 0.62

7.028

Non HBJ line

KRIBH-Hazi 1.37

GSFC-Varodra 0.72

RCF-Trombay 0.95

RCF-Thal 2.1

Nagarjuna Fertiliser 1.55

GNFC 0.342

IFFCO-Kalol 1.3

8.332

TOTAL 15.36

Source: FAI

Annexure - III

Price per mmbtu:

Companies on HBJ pipeline USD 6.21

Companies Non-HBJ pipeline

AP USD 5.34

Maharashtra USD 5.87

Gujarat USD 5.87

[email protected]

PIPELINE CONNECTIVITY PLAN (AS PROVIDED BY GAIL AND MOPNG)


S.No. Proposed pipeline Agency for Fertilizer unit proposed Expectedconnecting Plants to be connected Year of connectivity

Naphtha based plants

1 Dhabol, Bangalore. GAIL ZIL, Goa 2009-10

2 Kochi-Mangalore-Bangalore GAIL MFCL, Mangalore 2010-11.

3 Kochi-Mangalore-Bangalore(Also from Kochi LNG Terminal) GAIL FACT,Cochin 2009-10.

4 Kakinada-Tuticorin via Chennai RIL SPIC, Tuticorin MFL, Chennai 2009-10

Fuel Oil/LSHS based plants

5 Dadri-Bawana-Nangal GAIL NFL- Nangal, Panipat, Bhatinda 2009-10

Closed units

6 Spur on Kakinda to Uran via RIL FCI, Ramagundam 2009-10

Hyderabad

7 Spur from the following pipeline : GAIL FCI, Sindri 2009-10

Jagdishpur-Haldia FCI, Gorakhpur

HFC, Barauni

HFC, Durgapur

HFC, Haldia

8 Spur from Kakinada-Haldia Pipeline RIL FCI,Talcher

Source: FAI

Annexure - IV

[email protected]

PRODUCTION CAPACITY FOR DAP AND COMPLEX FERTILISERS


Company Products Installed Capacity (mn MT)

CFL DAP/Complex 3.1

DFCL Complex 0.3

FACT Complex 0.6

GNFC ANP 0.1

GSFC DAP/Complex 0.9

IFFCO DAP/Complex 4.3

MFL DAP/Complex 0.8

PPL DAP/Complex 0.7

RCF Complex 0.4

SPIC DAP/Complex 0.6

TCL DAP/Complex 0.7

ZIL DAP/Complex 0.7

Source: FAI, PINC Research

Annexure - V

69

T E A M

EQUITY DESK

Gealgeo V. Alankara Head - Institutional Sales [email protected] 91-22-6618 6466

Sailav Kaji Head Derivatives & Strategist [email protected] 91-22-6618 6344

Anil Chaurasia [email protected] 91-22-6618 6483

Alok Doshi [email protected] 91-22-6618 6484

Sundeep Bhat [email protected] 91-22-6618 6486

Gagan Borana [email protected] 91-22-6618 6485

Amar Margaje [email protected] 91-22-6618 6327

Ashok Savla [email protected] 91-22-6618 6400

Raju Bhavsar [email protected] 91-22-6618 6301

Manoj Parmar [email protected] 91-22-6618 6326

Hasmukh D. Prajapati [email protected] 91-22-6618 6325

Pratiksha Shah [email protected] 91-22-6618 6329

Gaurang Gandhi [email protected] 91-22-6618 6400

Hemang Gandhi [email protected] 91-22-6618 6400

Ketan Gandhi [email protected] 91-22-6618 6400

SALES

DEALING

DIRECTORS

COMPLIANCE

Rakesh Bhatia Head Compliance [email protected] 91-22-6618 6400


70

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