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Sector summary
Source: Company,ENAM Research
Source: ENAM Research, Bloomberg
Relative Performance
Indian Fertilizer SectorIndia Research
July 3, 2007
Relative Performance
Source: ENAM Research, Bloomberg
Lead Analyst: Jagdishwar [email protected] (+91 22 6754 7605)
Associate: Ravindra [email protected] (+91 22 6754 7627)
Company Price Mkt cap(Rs.) (USD. bn) FY06 FY07 FY06 FY07 FY06 FY07 FY06 FY07 FY06 FY07
Chambal Fertilizers 36 337 5.4 2.8 6.8 12.5 26.9 13.0 20.3 16.0 2.0 2.1
Coromandel Fertilizers 82 232 6.9 7.9 11.9 9.1 21.3 21.3 18.9 20.7 1.9 2.3
Gujarat Narmada Valley Fertilizers 112 365 19.7 21.0 5.1 5.0 28.7 25.0 32.8 32.3 4.6 4.3
Godavari Fertilizers 105 75 8.2 15.4 11.0 6.7 28.6 41.8 13.8 19.0 2.3 4.6
Gujarat State Fertilizers 178 316 33.2 35.2 5.4 4.9 23.3 20.1 20.2 18.4 5.1 5.1
Nagarjuna Fertilizers 24 246 1.4 0.7 NA 19.9 3.5 1.7 5.5 5.6 - -
Zuari Industries 167 110 16.8 41.3 13.3 3.4 17.5 23.7 9.6 12.6 2.3 2.9
DPS (Rs)EPS (Rs.) P/E (x) RoE (%) RoCE (%)
406080
100120140160
Jun-06 Dec-06 Jun-07
Chambal Coromandel
GNFC Sensex
Bullish in the Long Term050
100
150
200
Jun-06 Dec-06 Jun-07Godavari Gujarat StateNagarjuna Zuari IndusSensex
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Table of contents
Slide No.
Investment Summary 3
Global Scenario 9
Indian Scenario 15
India Poised to change 20
Government Imperatives 25
Changing Landscape: Re-rating in the offering? 28
Annexures 32
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Investment Summary
Indian scenario: Situation set to improve Regulated industry with little incentives for efficiency or capacity additions
Growing fertilizer consumption leading to rising imports with almost no domestic capacity addition
Domestic prices not aligned with rising international prices
But rising promoter stakes, inspire confidence
Regulatory changes: Need of the hour Surmounting subsidies
Additional supply of natural gas, a key feedstock for Urea
Government imperatives: Decontrolling the sector in a phased manner
Incentivizing domestic capacity addition
Huge profit/ re-rating potential for urea companies in de-regulated scenario Rising fertilizer demand, driven by consumption in developing countries
Tight supply with new capacities added near the market place or sources of feedstock Global stock prices/ M&A activity at premium valuations
How to choose companies:` Cost competitive Companies located near gas pipelines
` Dynamic entrepreneurs and shareholder orientation
` High ROE companies utilizing cash efficiently either in expansion or diversification
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Urea: Profit Potential Scenario
Urea: Profit Potential in Regulated & Unregulated Scenario
Urea Profit Potential
Source: FAI, ENAM Research
17%
3,086
7,698*
4,612
2,510
2,102
$2.6
2,8205,5576,6708,228Profit (Rs/ Ton)
16%31%37%46%ROCE (%)
10,0207,2836,1704,612Cost of Production
3,9883,2402,9362,510Conversion Cost (Rs/Ton)
12,84012,84012,84012,840Selling Price (Rs/Ton) (International Prices)
4,043
$5.0
3,234
$4.0
2,102
$2.6
Cost of Feedstock (Rs/Ton)
Cost of Natural Gas assumed ($/mmbtu)
6,032
$7.5
0
3,000
6,000
9,000
12,000
15,000
$2.60 $2.60 $4.00 $5.00 $7.50
(Rs/ ton)
Cost of Feedstock Conversion Cost (NG) Conversion Cost (Electricity) Admin. Charges Profit
Huge profit potential but NG availability & industry deregulation hold the key!
International Urea selling price ~$305/ton
Source: FAI, ENAM Research, * Selling price inclusive of subsidy component
Pricepaid byfarmer
SubsidyComponent
Current Scenario
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Global fertilizer stock performance
Acquirer Yara Yara Coromandel
Target Kemira FERTIBRAS SA Godavari Fert
% Stake Acquired 30% 52% 5%
Mkt Cap (USD mn) 1,259 182 109
ROE (%) 10 13 29
P/E multiple (x) (12 months trailing) 15.7 10.8 18.6
Global M&A Activities
Source: Bloomberg,, ENAM Research
Source: Bloomberg,, ENAM Research
Company Country Mkt. Cap 1year 2year ROE P/E (x) EV/EBIDTA(x)
($ bn) Ret. (%) Ret. (%) (%) CY07E CY08E CY07E CY08E
Yara Norway 9.2 129 109 29.2 13.0 13.4 9.3 9.5
Mosaic US 17.6 162 169 (3.9) 54.2 19.7 22.0 11.4
Potash Corp Canada 24.6 177 195 25.7 27.0 23.4 15.8 14.1Agrium US 6.0 103 105 2.7 17.2 15.6 8.8 8.4
Terra US 2.2 285 327 (0.2) 19.0 19.8 7.5 9.0
CF Industries US 3.3 318 288 4.4 21.0 24.1 7.5 8.6
K+S AG Germany 6.1 102 158 26.2 22.5 19.3 10.3 9.2
Re-rating potential in the de-regulated scenario
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Industry Actions: Signaling confidence
Rising Promoter Stake : Signalling Confidence
(%)
40
42
44
46
48
50
2002 2003 2004 2005 2006 2007
Expanding Market Cap & Multiples(Rs mn)
0
40,000
80,000
120,000
160,000
2002 2003 2004 2005 2006 2007
(x)
0
4
8
12
16
Market Cap P/E (RHS)
Steady performance by industryplayers
Creeping promoter stakes inspire
confidence in the sector
(%)
0
20
40
60
80
100
120
FY00 FY01 FY02 FY03 FY04 FY05
(Rs bn)
0
3
6
9
12
RoCE (RHS) Subsidy Spending
Operating Profit
Urea Industry: Financial Snapshot
Source: Bloomberg, ENAM Research
Promoters increasing their stakes : A positive sign
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Local regulations: Poised to change
Rising demand: Rising at a CAGR of 14% and
no supply adds to meet the same. Rising demand
met by costly imports
Rising demand: Rising at a CAGR of 14% and
no supply adds to meet the same. Rising demand
met by costly imports
Deregulation of industry by offering incentives to
domestic capacity additions
Deregulation of industry by offering incentives to
domestic capacity additions
Surmounting subsidies:
Rapidly increasing (~20% CAGR) and have now
reached ~15% of fiscal deficit
Surmounting subsidies:
Rapidly increasing (~20% CAGR) and have now
reached ~15% of fiscal deficit
Decontrolled pricing
Dual subsidy regime Direct subsidies to poor
farmers
Incentives offered to export
Decontrolled pricing
Dual subsidy regime Direct subsidies to poor
farmers
Incentives offered to export
Huge natural gas availability in future: Huge
supply potential
Huge natural gas availability in future: Huge
supply potential Assuring undisrupted supply of natural gas for
fertilizer units
Assuring undisrupted supply of natural gas for
fertilizer units
Catalyst for ChangeCatalyst for Change ImperativesImperatives
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How to select companies?
3
3
3
2
3
GSFC
3
3
3
3
3
Godavari
2
2
3
3
3
GNFC
3
2
3
3
3
Coromandel
3
3
3
3
3
Chambal
Increasing stakes of promoters
Earnings Expansion
(Fertilizers volume growth orefficiencies)
Entrepreneurship(Proxy = Diversification into higher
RoE businesses)
Investor Friendliness
(Proxy = Dividend Payout > 25%)
Proximity to gas supply
(Units lying near the existing/
planned gas pipeline)
Criteria for Selection
32
23
32
22
33
ZuariNagarjuna
Buy a basket: High ROE companies utilizing cash efficiently either inexpansion or diversification
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Global Scenario
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(US$/ Bushel)
0
2
4
6
8
10
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Wheat Corn Soyabean
Rising global food grain demand
Global food grain demand expectedto outpace supply
Visible through consistently falling
inventories in the past decade
Prices of base crops are rising
Limited land along with increasing
population are conducive to fertilizer
demand growth
(mn tonnes)
1,700
1,800
1,900
2,000
2,100
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0
10
20
30
40
Grain Inventory (RHS)
Global grain balance
Source: Bloomberg, ENAM Research
Global Population & Fertile Land
(Acres/ Person)
0.0
0.3
0.6
0.9
1.2
1.5
1965 1980 1990 2000 2010E 2020E
0
2
4
6
8
10(bn)
Arable Land Population (RHS)
Source: Agrium,Yara, ENAM Research
115 days inventory
57 days inventory
Consumption
Production
Grain price
Source: Agrium,Yara, ENAM Research
Food grain demand rising on the back of population growth
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Fertilizers: Inevitable component for grains
Fruit&Vege
tables
6%
Rice
17%
Wheat
18%
Other
cereals
7%
Cotton
3%
Corn
17%
Other
32%
Fertilizer consumption: Across food products
Source : Yara, ENAM Research
Source: Farm Management Pocketbook John Nix 2004
Yield Improvement
Source: Winter wheat yield data; Long term trial, Broadbalk, Rothamsted (since 1856).
0
200400
600
800
1,000
1,200
0 50 100 150 200 250 300
Fertilizer application, Kg N/ha
(Euro/Hect)
Grains & fertilizer price movement($/ tonnes)
050
100
150200
250
300350
400
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
($/ bushel)
0.0
1.0
2.0
3.0
4.0
Urea Price Corn Price (RHS)
Breakup: Grain production costs
Cost Breakup Total Cost Variable Cost
Fertilizer 10% 12%
Labour 19% 23%
Sprays 13% 16%
Seed 5% 6%General overhead exp. 10% 12%
Power & Machinery 26% 31%
Rental Value 17% -
Total 100% 100%
Source : Yara, ENAM Research
Fertilizer: Integral component of grain production
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Fertilizers: Global Demand Scenario
Global consumption on the rise Growing at a CAGR of 3 5%
Developing countries, especially India &
China, are witnessing rapid growth
(mn tonnes)
0
40
80
120
160
200
1961 1971 1981 1991 2001 2006
N P K
CAGR: 3.7%
Global Fertilizer Consumption
Source: FAI, Capitaline, ENAM Research
(mn tonnes)
0
20
4060
80
100
120
1961 1971 1981 1991 2001 2006
N P K
Developing Countries
(mn tonnes)
0
20
40
60
80
100
120
1961 1971 1981 1991 2001 2006
N P K
Developed Countries
CAGR 7.7%
V/s
China and India
a/c for ~40% &20% of globalconsumption,respectively
Fertilizer Consumption:
India and China: The main demand drivers
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Global Fertilizers: Supply & Capacity Additions
Fertilizer Supply Trends Production is shifting towards regions with low cost
natural gas supply and/ or growing demand
Units in the North American and EU region have been
forced to shut down with increased cost of feedstock
Capacity addition Mainly in demand centersand natural gas hubs China (demand driver) and the Middle East (natural gas
reserves) are witnessing major capacity additions
Source :Fertecon, Agrium ENAM Research
Urea Capacity Addition Breakup
(mn tonnes)
0
2
4
6
8
10
2007 2008 2009
155
160
165
170
175
180
China NG Resources
Others Capacities (RHS)
Global Urea Capacity Utilization
70
75
80
85
90
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
(%)
India
China
Growing markets
Oman: $ 1Saudi Arabia: $0.75
Iran: $1.25
Russia: $1.45
USA: $6.75 China: $5.80
Trinidad: $1.65
Germany: $7.70
Brazil: $3.70
N. Gas Resources
(mn tonnes)
Market places and resource rich regions adding capacities
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India V/s China
India has one of the lowest levels offertilizer consumption
China enjoys better yield per hectare
with greater fertilizer consumption
Better yield per hectare leads to lower
dependence on fertilizer imports for
China
India: Low Consumption/ Hectare
(Kg/Hectare)
0
50100
150
200
250
300
China
France
Pakistan
Brazil
USA
World
India
India v/s China: Yield Comparison
(mn tonnes)
0
2
46
8
10
12
14
India China
20
22
24
26
28
30
Imports % of Total Consumption (RHS)
India v/s China: Fertilizer Imports
Source: CRIS Infac, ENAM Research
(Tons/Ha)
0
1
2
3
4
India China
India: Huge potential for fertilizer demand growth
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Indian Scenario
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Indian Fertilizer Industry: A Snapshot
SizeSize
Globally, the 3rd largest consumer
12% of global consumption
Size of ~20 mn tonnes, tilted in favor of Urea due to pricing advantage and raw
material availability
Globally, the 3rd largest consumer
12% of global consumption
Size of ~20 mn tonnes, tilted in favor of Urea due to pricing advantage and raw
material availability
StructureStructure Regulated industry with controls on input, output and pricing
Subsidized with capped returns
Regulated industry with controls on input, output and pricing
Subsidized with capped returns
ComparablesComparables Low consumption per hectare
One of the lowest food grain yield per hectare
Low consumption per hectare
One of the lowest food grain yield per hectare
SegmentsSegments N (Urea) Feedstock largely used is Natural Gas (66%) and Naphtha (29%) P (DAP) Largely produced with imported raw material Rock Phosphate
K (MOP) Largely imported
N (Urea) Feedstock largely used is Natural Gas (66%) and Naphtha (29%)
P (DAP) Largely produced with imported raw material Rock Phosphate
K (MOP) Largely imported
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Indian Fertilizer Industry: An Overview
Steady Demand Growth 3-5% in the past
20 years
Nearly self sufficient in Urea (N). A large
part of MOP (K) & P (DAP) demand is metthrough imports due to urea pricing
advantage and unavailability of inputs for
K&P production
Consumption tilted in favor of N against an
ideal ratio of 4:2:1 in turn leading to soil
deterioration
Fertilizer Consumption - India
(mn tonnes)
0
5
10
15
20
25
1950-51
1960-61
1970-71
1980-81
1990-91
2000-01
2006-07
N P K
Fertilizer Production and Imports
0%
20%
40%60%
80%
100%
1951-52
1960-61
1970-71
1980-81
1990-91
2000-01
2006-07
N P K
Consumption Ratio
CAGR13.6%
(mn tonnes)
0
5
10
15
20
25
1980-81
1990-91
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
N P Import
Note: Import largely K. Urea import on a rise recently
Price/tonRs 4,500
Price/ton>Rs7,000
Price/tonRs 4,830
Dependenceon importgrowing dueto domesticsupply
constraints
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Fertilizer Prices on an upswing
Indian companies are currently operating
almost at full capacity with no significant
greenfield urea capacity-adds since 99-00
Dependence on imports has been growing
in the recent past. Rising demand has not
been matched by capacity additions
Urea prices: Local v/s International
0
50
100
150
200
250
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
($/ ton)
Intl. Urea Price Regulated Urea Price
Source: FAI, Capitaline, ENAM Research
($/MMBTU)
0
2
4
6
8
10
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
Intl. Gas Price APM Gas Price (India)
Natural Gas Price : Controlled v/s International
Capacity Utilization: Indian Industry(mn tonnes)
10.0
10.5
11.0
11.5
12.0
12.5
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
(%)
80
85
90
95
100
105
110
Total capacity Utilisaion (RHS)
Regulated and international urea prices : The gap is widening
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Focus area should be players with expansion plans & smart cash utilization
Urea: Regulatory framework
Selling prices fixed at Rs 4,830/ ton
Assured post tax return of 12% on
capital employed compensated by way of
subsidies
Natural gas made available tomanufacturers at subsidized prices
Delay in subsidy payments leading to
working capital crunch
Urea Economics: Feedstock Natural Gas
Source: FAI, ENAM Research, Note: * Gas under APM of $2.6/MMBTU, ^ Including electricity input
0
2,000
4,000
6,000
8,000
10,000
Feedstock Cost Cost of
Conversion
RoCE 12%
(Rs/ ton)
MRP Rs 4,830/ton
Company Realization
Gas price of USD2.6 /mmbtu
Subsidycomponent
Urea Economics Feedstock ComparisonNaptha Based(~30%)($/ton)Energy Input(INR/ton)
70
188
75
11237
25
51*
733,0009^1,010Conversion Cost (b )
371,500-1,500Other Overheads ( c )
18,852
23,682
3,600
20,082
15,582
(INR/ton)
-
-
-
-
20
mmbtu
4904,612Total Op Cost (d = a+b+c)
883,086Assured return ( e)
460
578
380
($/ton)
2,868
7,698
2,102
Subsidy
Cost + Return (e - d)
Feedstock (a)
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India: Poised to change
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Fertilizer Demand: Expected to remain firm
Fertilizer demand likely to remain firm Rising food grain demand with an increasing
population and limited acreage to translate into
additional fertilizer needs
There is no perfect substitute for chemical
fertilizers due to limitations of organic fertilizers in
terms of quality as well as availability
Additional land for farming is unavailable
thus improving fertilizer consumption
Source: Broadbalk, Rothamsted , ENAM Research
India : Low Consumption/ Hectare
(Kg/Hectare)
0 50 100 150 200 250 300
China
France
Pakistan
Brazil
USA
World
India
Source: CRIS Infac, ENAM Research
Yield response (monetary value) to N fertilizer rate
Source: FAO/IBGE, MB Associates, EMBRAPA
India: Minimum potential farm land
0 50 100 150 200 250 300
India
CanadaChina
Argentina
EU
USA
Russia
Brazil (mn ha)
Used Potential
Potential toincrease
acreage: Zero
0
200
400
600
800
1,000
1,200
0 50 100 150 200 250 300
Fertilizer application, Kg N/ha
(Euro/Hect)
Rising population and limited acreage fuelling fertilizer demand growth
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Subsidy Burden: Mounting at a rapid pace
Fertilizer subsidy as a percentage of fiscaldeficit is ~15% and is mounting
Fertilizer subsidy burden on the rise Subsidies increasing at a rapid pace
Subsidy spending (including the concession on P &K)touched Rs 22.5 bn in FY07, growing at a CAGR of
20% in last 5 years
Share of fertilizer subsidies as a percentage of total
explicit subsidy spending has increased alarmingly
Rising fertilizer imports Currently, costly urea being imported instead of
incentivising cheaper domestic production
Subsidy spending on imported urea increasing at a
rapid pace
A large portion of P & K is being imported due to theunavailability of raw material
Urea Subsidy Spending
04080
120160200240280
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08E
(Rs bn)
Indigenous Urea Imported Urea P&K
Source: FAI, ENAM Research
(%)
01020
304050
6070
Food
Fertilizers
Petroleum
Export
Railways
Interest
Other
Explicit Subsidy Spending
CAGR 12%
Source: NIPFP, FAI, ENAM Research
Rising subsidy burden expected to force policy changes
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Relatively cheap pricing of gas is critical!
Natural gas availability? Increased availability of natural gas is likely
to ensure undisrupted supply of natural gas
for fertilizer units
Increased domestic supply likely to soften
natural gas prices
Government intervention and private
investments in the sector remain integral to
pricing decisions
($/mmbtu)
0
2
4
6
8
10
APM R-LNG Spot
Comparative gas prices
Source: FAI, ENAM Research
Natural gas
Air
DAP /MAP
Urea
Rock
Ammoniaplant
NH3
Phosphoricacid plant
H2PO4
CO2
Source: CRIS Infac, ENAM Research
Profit Potential: Urea & DAP
Urea DAP
Natural Gas Cost ($/mmbtu) 2.6 2.6
Natural Gas Requirement/ton 27.1 7.7Natural Gas Cost as a % of total Cost 62.7% 6.9%
Total Cost of Manufacturing (Rs/Ton) 4,612 13,000
International Selling Price (Rs/Ton) 12,840 17,742
Manufacturing Process : Urea & DAP
Source: YARA, ENAM Research
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Natural Gas: Huge supplies in the offing
Domestic supply expected to increasemanifold with natural gas discoveries in the
Krishna Godavari basin and the Mahanadi
delta
Cross border pipelines expected to furtherincrease natural gas availability in the
country
53 49 45 49 510
50
100
150
200
250
300
FY07 FY08E FY09E FY10E FY11E
(mmscmd)
ONGC OILJoint Venture Gas Reliance KG BasinONGC/GSPC KG Bas Qatar LNG
CBM
Domestic Suppliers
0%
10%
20%
30%
40%
50%
Power
Fertilizers
Petrochem
CityGas
LPGEtc
Sponge
Iron
Other
(mmscmd)Natural Gas: Current Demand Pattern
Source: FAI, ENAM Research
Source: CRIS Infac, ENAM Research
95
300
0
50
100
150
200
250
300
FY06 FY12
(mmscmd)
Gas Supply
Domestic Gas supplies
CAGR: 21%
Huge supply likely with new discoveries
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Government Imperatives
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Vicious cycle of subsidy
Deficit: Limitedlocal capacity
addition
Disaster :Mountingsubsidies
Surmountingsubsidy: Growing
import volumes & risingurea prices
ControlledROI
Incentivizinglocal supply :
Decontrol in a
phased manner
Breaking the vicious subsidy cycle
Government signalingpolicy changes
Incentives offered to industry
for operating above installed
capacity levels
Naphtha and LSHS unitsordered to convert to natural
gas within a period of two to
three years
Decontrol in a Phased
Manner? Direct subsidy to farmers
` Rural India benefiting from
government support (See
annexure 1 & 2)
` Market driven agro pricing
Dual subsidy regime
Market forces
Decontrol: Likely to break the vicious circle
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Government Actions?
Incentivising domestic production Steps conducive to increment in domestic production arelikely to be offered
Urea units operating above full capacity utilization
currently allowed to retain a portion of additional profits
Pricing Possibilities Dual subsidy regime
` Limiting subsidy only to small and medium farmers
` Providing cap of 120 kg of subsidized fertilizers for 2 acres or
lesser farmland, expected to benefit the industry
Deregulation of industry` Huge room for profits in deregulated scenario with prices
being determined by market forces
Exports - Is it possible??` Cheaper gas availability (compared to global spot prices) and
conversion cost advantage likely to enable export of fertilizers
(mainly N) to developed nations
0
3,000
6,000
9,000
12,000
15,000
$3.00 $4.00 $5.00
(Rs/ton)
Cost of Feedstock Conversion Cost (NG)Conversion Cost (Electricity) Admin. Charges
Profit
Urea Profit Potential
Source: FAI, ENAM Research
10,6439,5307,97211,48310,3708,812Selling Price (Rs/ Ton)
3,3603,3603,3604,2004,2004,200EBITDA
8008008001,0001,0001,000Depreciation @ 5%
7,2836,1704,6127,2836,1704,612Cost of Production
2,560
$2.6
3,200
$5.0
3,200
$4.020,000
3,200
$2.6
Greenfield 16% ROCE
EBIT
Cost of Natural Gas assumed ($/ mmbtu)Capital Cost (Rs/ ton)
2,5602,560
$5.0$4.016,000
Brownfield 16% ROCE
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How to choose companies?
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Cos near the proposed pipeline: Set to gain
Naphtha based producersordered to convert to gas
Existing urea producers likely
to get undisrupted gas supply
Units located near the
proposed gas pipeline set to
gain
Co. Name Near Existing Near Proposed
Pipeline Pipeline
Chambal Fert Partly YesCoromandel Fert No YesGujarat Narmada Valley Fert Yes YesGodavari Fert No YesGujarat State Fert Yes YesNagarjuna Fert No YesZuari Indust No Yes
Location of Mfg. Facility
Bhatinda
A1 BLOCK,
MYANMAR
NFL
NFL
CHAMBAL
GSFC
GNFC
RCF
RCF
ZACL NFCL
NFLINDO GULF
Urea Mfg. facility
Existing Lines
Proposed Pipelines
Turkmenisthan
Iran
Proposed Crossborder Pipelines
DAP/ MOP Mfg.facility
Godavari
Coromandel
Coromandel
Source: GAIL, ENAM Research
Source: GAIL, ENAM Research
Will reduction in gas cost be a pass through??
i i C i f S
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Fertilizer Companies: Performance Snapshot
Period DPS(Rs) DividendPayout (%) DividendYield (%) RoE(%) Fert. Non-Fert. ExistingPipeline ProjectedPipeline
Chambal Fertilizers & Chemicals Ltd FY05 2 50 5.3 44 80 20
Main Product: Urea & Ammonia FY06 2 38 5.5 27 83 17
Diversification: Fibers, Shipping FY07E 2 74 5.9 13 75 25 Partly Yes
Coromandel Fertilisers FY05 2 30 2.4 37 100 -
Main Product: Ammonia Phosphate Fertilisers FY06 2 28 2.4 21 100 -Diversification: None FY07E 2 29 3.2 21 100 - No Yes
Gujarat Narmada Valley Fertilizers Co Ltd FY05 4 28 4.3 26 4 96
Main Product: Urea, Ammonium Nitro Phosphate FY06 5 23 4.6 29 12 88
Diversification: Chemical Business FY07E 4 20 4.1 25 16 84 Yes Yes
Godavari Fertilisers & Chemicals Ltd FY05 1 21 1.4 42 100 -
Main Product: DAP & Complex Fertilizers FY06 2 28 2.5 29 100 -Diversification: None FY07E 5 30 4.4 42 100 - No Yes
Gujarat State Fertilisers FY05 2 10 1.1 27 34 66
Main Product: Fertilizers - Urea, DAP, NPK FY06 5 15 2.8 23 43 57
Diversification: Chemical Business FY07E 5 15 3.0 20 38 62 Yes Yes
Nagarjuna Fertilizers & Chemicals FY05 - NA - 1 100 -
Main Product: Urea, Ammonia FY06 - NA - 4 100 -
Diversification: None FY07E - NA - 2 100 - No Yes
Zuari Industries Ltd FY05 2 NA 2.7 (2) 47 53
Main Product: Urea, Ammonia, Compund Fert.s FY06 2 14 1.0 17 54 46
Diversification: None FY07E 3 7 2.1 24 84 16 No Yes
Op. Profit Manufacturing Location
Source: Company, ENAM Research
Co.s with high RoEs and healthy payout are attractive opportunities
F ili C i F d l
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Fertilizer Companies: FundamentalsCompany Period Net Sales
(Rs mn)
EBITDA
(Rs mn)
Adj. PAT
(Rs mn)
FDEPS
(Rs)
ROCE
(%)
RoE
(%)
PE
(X)
EV/
EBITDA (X)
Chambal Fertilizers & Chemicals Ltd FY05 29,149 5,448 1,730 4 35 44 9.4 5.1
(CMP: 36) FY06 28,652 5,783 2,237 5 20 27 6.8 4.1
(MCap: USD337mn) FY07E 29,470 4,601 1,158 3 16 13 12.5 4.8
Coromandel Fertilisers FY05 15,251 1,491 716 6 35 37 12.6 7.6
(CMP: 82) FY06 18,469 1,807 878 7 19 21 11.9 8.0(MCap: USD232mn) FY07E 20,655 2,181 1,007 8 21 21 9.1 5.6
Gujarat Narmada Valley Fertilizers Co Ltd FY05 18,226 4,035 2,267 15 26 26 6.5 4.7
(CMP: 112) FY06 21,476 5,027 3,060 20 33 29 5.1 3.6
(MCap: USD365mn) FY07E 27,393 5,763 3,265 21 32 25 5.0 3.2
Godavari Fertilisers & Chemicals Ltd FY05 11,936 503 171 5 26 42 15.3 10.0
(CMP: 105) FY06 15,185 683 261 8 14 29 11.0 10.7
(MCap: USD75mn) FY07E 18,005 1,169 493 15 19 42 6.7 6.8
Gujarat State Fertilisers FY05 26,066 4,385 1,321 17 31 27 9.7 5.4
(CMP: 178) FY06 28,307 5,520 2,644 33 20 23 5.4 4.5
(MCap: USD316mn) FY07E 33,187 4,869 2,803 35 18 20 4.9 4.2
Nagarjuna Fertilizers & Chemicals FY05 12,664 3,027 128 0 11 1 - -(CMP: 24) FY06 14,529 3,042 654 1 5 4 - -
(MCap: USD246mn) FY07E 18,152 3,079 317 1 6 2 19.9 6.3
Zuari Industries Ltd FY05 28,816 1,027 (23) (1) 14 (2) NA 11.7
(CMP: 167) FY06 35,690 1,450 495 17 10 17 13.3 13.4
(MCap: USD110mn) FY07E 36,132 2,456 1,216 41 13 24 3.4 NA
Source: Company, ENAM Research
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Annexures
A 1 G t di l i iti ti
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Infrastructurespending:Bharat Nirman
ScientificKnow how
HigherIncome
HigherSpending
Higher RiskAppetite
Increasedinvestments
HigherProductivity
Virtuous Cycleof Prosperity
Ruralconnectivity
Regulatory
changes
CommodityExchanges
Access tocredit, microfinance,insurance
Private sectorparticipationon the rise
Annex.1: Govt. spending on rural initiatives Bharat Nirman: The most ambitious rural
plan in India (~USD40bn) Roads: ~USD11bn for rural road connectivity
Telephony: 67,000 villages to get phones by end-07
Irrigation & Water supply: Addl. Irrigation of 10mn
ha and clean water for 56,000 habitations (~USD21bn)
Rural Housing: >1.5mn houses to be constructed
every year for next 4 yrs (~USD3.2bn)
Electricity: For >125,000 villages (USD3.8bn)
Credit: Agri credit to double in next 3 yrs.
Bank lending was up 35% in the last 2 yrs ~2.2mn SHGs given credit link of ~USD2.5bn
Corporate participation: RIL, ITC, & Bharti
etc. giving a fillip to contract farming
Resurgence of rural India : Job growth in rural areas was higher at 3.3% v/s
1.7% for urban enterprises
Rural enterprises grew 5.5%, i.e double the growth
rate during last 2 decades
Rising rural incomes!
A 2 R l tilt i t li i
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Annex.2: Rural tilt in government policies
Amendments by the Government to give impetus to Agriculture & encouragetrade in perishable goods
Farmers will not need a license to hold commodities
A free market for Essential commodities
Pan India (To Be
Banned)
Essential Commodities Act
No need for farmers to sell to registered intermediaries
Farmers can sell to highest bidder
Move towards Information Driven markets
14 States
(Already Banned)
APMC Act
Allow warehouse receipts to become negotiable
instruments
Lead to greater banks lending due to mitigation of default
risk
Pan IndiaWarehouse Receipt Act
Integrate 16 laws governing food industry into one.
Remove conflicts between existing laws
Pan IndiaIntegrated Food Law
Reduce tax evasion
Increase tax/ GDP ratio
Pan IndiaVAT
Move from highly subsidised products to market demandTo be phased outMinimum Support Price (MSP)
BenefitsStatusAct
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