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Industry ReportIndustry : Fertilise
Fertiliser Industry
Change for good
Manish Mahawar ([email protected])+91-22-6632 2239
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Fertiliser Industry
2 October 16, 2008
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors
should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor
in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report.
Contents
Page No.
Fertiliser Industry ................................................................................... 3
Steady demand.........................................................................................4
Decontrolling of fertiliser...will boost the returns ...............................................7
KG basin gas...will reduce subsidy and add profit ...............................................8
Valuation ................................................................................................9
COMPANIES
Tata Chemicals ....................................................................................... 11
Chambal Fertilisers and Chemicals ............................................................... 27
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Fertiliser Industry
Fertiliser demand is expected to grow at a CAGR of 3-4% on the back of rising
demand for food-grains. Demand for fertilisers is rising worldwide. However
India's Government-regulated fertiliser industry is facing supply constraints due
to non-promotion of the investment fertiliser policy. During the year, Government
has partially de-controlled the sector by linking subsidy with the import parity
price (IPP). It has resulted in the commencement of new capacities by way of
de-bottlenecking/revamp of urea plants over a short span of time. However,
the sector is facing shortage of gas and this situation will ease out only when KG
basin gas will be available. Rising input cost has increased the subsidy burden of
the Government from Rs360bn in FY08 to Rs1250bn (expected) in FY09;
disbursement of the whole subsidy in cash is quite uncertain.
Steady demand: We believe that demand for fertiliser will grow at a CAGR
of 3-4% on the back of rising food demand. The increase in the demand for
food was owing to the reduced land under cultivation (because of
urbanization), diversion of calories from food to fuel and increasing demand
due to rising income in the developing countries.
Decontrolling of fertiliser will boost the returns: Government has
decontrolled phosphatic (DAP) as well as partially decontrolled urea during
the year. Decontrolling of urea will boost the EBIT to 36% (15%-20% as earlier
assuming delivered cost of gas at US$7/mmbtu. Hence, companies will get
higher than regulated PAT i.e.12%. Chambal Fertilisers and Chemicals
(CFCL's) 7.7% and Tata Chemicals (TCL's) 10.1% existing production fall undeIPP regime, while de-bottlenecking will add EPS of Rs4.5 and Rs0.6 in TCL
and CFCL, respectively in FY10.
KG basin gas will reduce the subsidy and add profit: Fertiliser industry is
facing a shortage of natural gas as against the total requirement of
42.9mmscmd in FY09. Hence, KG basin gas is crucial for the fertiliser sector
because Government has given priority to the sector for allocation of gas.
KG basin gas is expected to be available by Q4FY09. We believe that with
the availability of KG basin gas, subsidy burden of the Government wil
reduce substantially. Also, depending upon the gas pricing, bottom-line of
the companies that are going for expansion could shoot up further.
Initiating coverage: We are POSITIVE on the sector on the basis of the
consumption-based growth, positives in urea policy and availability of KG
basin gas. We are initiating coverage on TCL and CFCL with BUY ratings on
the back of positives in the new urea policy, de-bottlenecking of urea plant
and other growth avenues. Both the stocks are trading at an attractive
valuation and having a dividend yield of 4-5%.
Industry ReportOctober 16, 2008
India Fertiliser Index
Source: Bloomberg, PL Research
Stock Performance
1M 6M 12M
50
70
90
110
130
150
170
190
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
SENSEX Index (21.7) (34.9) (44.5)
Fertiliser Index (37.2) (42.4) (36.6)
Tata Chemicals (39.0) (49.5) (44.6)
Chambal Fert. (23.3) (17.2) (7.1)
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Fertiliser Industry
4 October 16, 2008
Steady demand
Fertiliser sector is consumption-based growth sector and directly linked with
the one of the basic necessities of life i.e. food. Global food prices have increased
very sharply and the reasons for that are many. Reduced land under cultivationdue to urbanization, diversion of calories from food to fuel and increasing demand
due to rising income in developing countries like India and China are some of
them. As per CRISIL, fertiliser demand will grow at a CAGR of 3-4% over the next
three years.
Global Wheat Price
Source: Food and Agriculture Organization (FAO), International Fertiliser Association
(IFA)
Global Fertilizer Consumption
Source: Food and Agriculture Organization (FAO), International Fertiliser Association
(IFA)
100
120
140
160
180
200
220
FY00 FY01 FY02 FY03 FY04 FY06 FY07 FY08
US$/Tonne
0
20
40
60
80
100
120
140
160
180
200
FY00 FY01 FY02 FY03 FY04 FY06 FY07 FY08E FY09E
(mt
onnes)
Urea DAP MOP Total
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Fertiliser Industry
October 16, 2008 5
One of the ways to improve food availability is to improve yield by increasing
the use of fertilisers. In the last few years, very few additional capacities of
fertilisers have come up and as a result, the demand-supply gap is widening.
Also, the prices of fertilisers too have shot up. China, India and USA are the
major consumer of fertilisers. Given the fact that India consumes around 15-18% of global fertiliser production, we believe that India will be the key
determinant of global fertilizer prices, going forward.
Global Fertilizer Prices
Source: IFA and FAI
Due to non-promotion of the new investment in the fertiliser policy in India, no
major capacity has come up in the last decade. The demand-supply gap is
widening every year and there is an increase in the import of fertilisers. With
increasing input costs as well as increased consumption, the Government's subsidy
bill has been mounting.
Import of Fertilizers in India
Source: FAI
0
500
1,000
1,500
2,000
2,500
2004 2005 2006 2007 Feb-08 Aug-08
US
$/Tonne
Urea DAP Ammonia Phosphoric Acid
0
500
1,000
1,500
2,000
2,500
3,000
FY01 FY02 FY03 FY04 FY05 FY06 FY07
U
S$/Tonne
Urea DAP MOP
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Fertiliser Industry
6 October 16, 2008
Subsidy
Source: FAI
In 2008-09, the Government is expecting the fertiliser subsidy bill at Rs1250bn
as against Rs360bn provided in the Budget 2008. Government will soon release
subsidy of Rs220bn and Rs320bn in two tranches in cash and also assure that the
balance subsidy of Rs710bn will be paid in cash. This move has given some relief
to the fertiliser companies. However, the balance amount of subsidy disbursement
of Rs710bn is quite uncertain. Government has issued bonds of Rs.75bn in FY08
which were en-cashed at 10-15% discount. Hence, issue of subsidy bond in the
future will affect the profitability of the companies.
0
200
400
600
800
1,000
1,200
1,400
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E
(Rsbn)
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Fertiliser Industry
October 16, 2008 7
Decontrolling of fertiliser...will boost the returns
Government has fully de-controlled phosphatic fertiliser and partially de-
controlled urea by introducing the much awaited IPP-linked investment policy.
There has been no change in the existing policy for urea (NPS-III), whereasadditional incentives will be for higher utilization/revamp/Brownfield and
Greenfield projects in the new investment policy. The policy provides for an IPP
benchmark with floor and ceiling price of US$250/tonne and US$425/tonne,
respectively, for additional production (beyond existing production) of urea.
Basis of Selling Price
Investment Mode Selling Price Conditions
Revamp 85% of IPP Any improvement in the capacity of existing plants through investment up to Rs10bnin the existing ammonia urea production and subject to the above-mentioned flooand ceiling prices. Will start production of additional capacities within four years onnotification.
Expansion 90% of IPP Setting-up of a new ammonia urea plant in the premises of existing plants. Capexshould not exceed Rs30bn subject to above-mentioned floor and ceiling prices. Wilstart production of additional capacities within five years on notification.
Revival/ Brownfield Projects 95% of IPP Revival of Hindustan Fertilisers Corporation (HFCL) and Fertiliser Corporation of India(FCIL) plants. No cap for investment in the Brownfield projects. Subject to abovementioned floor and ceiling prices. Will start production of additional capacities withinfive years on notification.
Greenfield Projects Not decided Pricing would be at a discount on IPP and decided on a bidding process after firmingup of locations of proposed new plants. The floor and ceiling will be decided at thetime of bidding.
Source: Ministry of Fertiliser
The new policy considers only non-APM gas for new investment. All APM gas wil
be allocated towards production in the existing plants. The floor and ceiling
prices are recommended based on the feedstock price of US$4.88 per MMBTU
which is the price of RIL gas plus estimated taxes. In case of any sharp increase
(more than double the current price) in the price of feedstock in the future, the
floor and ceiling prices will have to be adjusted to take care of the increased
cost of production. Further, the above will be reviewed after five years keeping
in view the prevailing gas prices and investment costs.
We believe that a departure from cost plus 12% post-tax return in new investment
policy is POSITIVE for the sector, as price of expanded urea production has been
partly de-controlled with the floor and ceiling price. We believe that new urea
investment policy will give at-least 36% of EBIT (15%-20% as earlier) assuming
delivered cost of gas at US$7/mmbtu. Companies will get higher than regulated
PAT as earlier i.e.12%. CFCL's 7.7% and TCL's 10.1%. Existing production will fall
under the IPP regime, while de-bottlenecking will add EPS of Rs4.5 and Rs0.6 in
TCL and CFCL, respectively in FY10.
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Fertiliser Industry
8 October 16, 2008
KG basin gas...will reduce subsidy and add profit
The fertiliser industry is facing a shortage of natural gas as against tota
requirement of 42.9MMSCMD in FY09. Hence, KG basin gas is crucial for the
fertiliser sector because the Government has given priority to the sector forallocation of gas. This gas is expected to be available by Q4FY09. We believe
that with the availability of the KG basin gas, subsidy burden of the government
will substantially reduce. Also, depending on the gas pricing, bottom-line of the
companies that are going for expansion, could shoot up further.
Requirement of gas for the fertilizer sector is expected to increase in the years
to come. Gas is required not only for meeting the current shortfall being faced
by the existing gas based urea units but also on account of conversion of Naphtha
and FO/LSHS based units to NG/LNG, de-bottlenecking of existing urea units,
setting up of new and expansion of existing urea units and revival of closed urea
units of HFCL and FCI. As per the New Pricing Scheme (NPS) - III, all non-gasbased urea units will be converted to gas till FY10. Under the above scenario,
the total requirement of gas for the fertiliser sector by the end of XI Plan period
is expected to be 76.3 MMSCMD. The break-up of gas requirement year wise and
the corresponding production capacity of urea are given below:
Gas demand
FY08 FY09 FY10 FY11 FY12
Urea Production Capacity (In Lac Tonnes) 226.2 226.2 259.9 329.4 329.4
Gas Demand (MMSCMD) 41.0 42.9 55.9 76.3 76.3
Source: Ministry of Petroleum and Natural Gas
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Fertiliser Industry
October 16, 2008 9
Valuation
We are initiating the coverage on TCL and CFCL with BUY rating on the back of
positives in the new urea policy, de-bottlenecking of urea plant and other growth
avenues. Both the stocks are trading at attractive valuation and having dividendyield of 4-5%.
Peer Comparison
CMP Equity MCap EPS (Rs) PE (x) Div. EV/EBITDA (x) P/BV (x)
(Rs) (m) (Rs m) FY08 FY09E FY08 FY09E Yld. (%) FY08 FY09E FY08 FY09E
Chambal Fertilizers 47 416.2 19,603 4.0 9.6 11.8 4.9 3.8 6.3 3.7 1.7 1.3
Tata Chemicals 167 243.5 40,647 19.6 34.5 8.5 4.8 5.2 8.4 3.8 1.1 0.9
Zuari Industries* 180 29.4 5,299 33.3 46.9 5.4 3.8 1.7 5.8 5.4 0.8 0.6
Coromandel* 123 139.9 17,208 14.4 19.0 8.5 6.5 2.8 4.3 9.2 2.2 1.6
Potash Corp*# 106 316.4 33,476 3.4 12.5 31.1 8.4 0.3 11.2 5.7 5.6 4.3Mosaic*# 44 443.9 19,626 4.7 11.8 9.5 3.8 0.0 4.4 2.4 2.9 1.7
CF Industries*# 65 56.3 3,637 6.6 16.6 9.8 3.9 0.1 2.3 1.7 3.1 1.7
Agrium Inc*# 43 158.0 6,840 3.3 9.7 13.3 4.5 0.3 6.0 3.7 2.2 1.6
Source: Company Data, PL Research * Bloomberg Estimates # Y/e Dec
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Fertiliser Industry
10 October 16, 2008
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Tata Chemicals
TCL is a key beneficiary of the new investment policy of urea. We believe thatTCL's top-line and bottom-line will grow with the two years CAGR (FY08A-FY10E)
of 28.2% and 24.2%, respectively on the back of the positives in the new ureapolicy, de-bottlenecking of the urea plant, skyrocketing phosphoric acid pricesand addition in the natural soda ash capacities.
Incentive to higher utilization in new policy...enhances earnings in FY09
and FY10: We believe that the company's 10.1% of FY09 and FY10 productionwill be eligible for IPP. We expect that a positive move in the policy will giveincremental PAT of Rs413m (EPS - Rs1.7) in FY09 and FY10.
De-bottlenecking...right step at the right time: TCL is going for de-bottlenecking of the urea plant which will add 3.4lac tonnes (39.3% of existingcapacity). We believe that de-bottlenecking will boost the PAT by Rs157m(EPS - Rs0.6) in FY09 and Rs1,091m (EPS - Rs4.5) in FY10 on the back of IPP
linked urea policy.
IMACID JV...Its rock-eting: Spurting phosphoric acid prices will improvethe profitability of Indo Maroc Phosphore SA (IMACID) substantially. We expectthat IMACID will add a PAT of Rs1,935m (EPS - Rs7.9) in FY09, assumingphosphoric acid prices at US$1800/tonne
Addition in natural soda ash capacity...a safe play: Post the acquisition ofGCIP, TCL's natural soda ash capacity increased from 14% to 59%. We believethat GCIP will add PAT of Rs1,242m (EPS - Rs5.1) in FY09, while the newsoda ash plant in Kenya will run at the capacity of 50% in FY09.
Valuation: At the CMP of Rs167, TCL is trading at 4.8x at its FY09Econsolidated EPS of Rs34.5 and 5.5x at its FY10E consolidated EPS of Rs31.2
We recommend BUY the stock with a price target of Rs242 (potential upside- 44.7%) based on 8x of FY10E earning.
Key Financials (Y/e March) FY07 FY08 FY09E FY10E
Revenue (Rs m) 58,036 60,232 100,304 99,057
Growth (%) 44.6 3.8 66.5 (1.2
EBITDA (Rs m) 10,909 9,850 18,373 16,529
PAT (Rs m) 5,080 4,769 8,404 7,355
EPS (Rs) 20.9 19.6 34.5 30.2
Growth (%) 17.3 (6.1) 76.2 (12.5
Net DPS (Rs) 7.1 8.7 12.1 10.6
Profitability & Valuation FY07 FY08 FY09E FY10E
EBITDA margin (%) 18.8 16.4 18.3 16.7
RoE (%) 19.8 12.8 19.0 15.1
RoCE (%) 24.6 11.5 21.9 21.1
EV / sales (x) 1.0 1.4 0.7 0.6
EV / EBITDA (x) 5.3 8.4 3.8 3.6
PE (x) 8.0 8.5 4.8 5.5
P / BV (x) 1.6 1.1 0.9 0.8
Net dividend yield (%) 4.2 5.2 7.2 6.3
Source: Company Data; PL Research
Price Performance (RIC: TTCH.BO, BB: TTCH IN)
Source: Bloomberg, PL Research
Rating BUY
Price Rs167
Target Price Rs242
Implied Upside 44.7%
Sensex 10,581
(Prices as on October 16, 2008)
Trading Data
Market Cap. (Rs bn) 40.6
Shares o/s (m) 2,435.4
Free Float 70.7%
3M Avg. Daily Vol (000) 245.1
3M Avg. Daily Value (Rs m) 67.5
Major Shareholders
Promoters 29.3%
Foreign 12.7%
Domestic Inst. 28.1%
Public & Others 29.9%
Stock Performance
1M 6M 12M
Absolute (39.0) (49.5) (44.6)
Relative (17.3) (14.6) (0.1)
Source: Company Data; PL Research
Company ReportOctober 16, 2008
150
200
250
300
350
400
450
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
(Rs)
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Tata Chemicals
12 October 16, 2008
Investment Highlights
Incentive to higher utilization in new policy...enhancesearnings in FY09 and FY10
Government has partially decontrolled urea in the new investment policy by
linking the subsidy with IPP, subject to floor and ceiling price of US$250/tonne
and US$425/tonne, respectively. IPP will be applicable to the production beyond
the benchmark that is specified by the Government. Hence, production by way
of higher utilization/revamp/Brownfield projects/Greenfield projects, but
beyond the benchmark will be eligible for IPP. TCL will be eligible for 85% of IPP
We believe that the company's 10.1% of FY09 and FY10 production will be eligible
for IPP based on FY08 production level (123.8%) and subject to minimum
production of one million tonnes of urea (target production specified by the
Government) . We expect that a positive move in the policy will give incrementa
PAT of Rs413m (EPS - Rs1.7) in FY09 and FY10 (Assuming delivered cost gas at
US$7 per mmbtu).
Policy benefit on existing production (Rs m
Remarks
EBIT based on IPP
Sales (In Tonnes) 112,978 Assuming company will maintain the capacity utilization level (123.8%) of FY08and will achieve the target production of one million tonne as per policy. Hence10.1% of total production fall under IPP.
Sales Realization US$425@Rs42/US$(Rs/T) 17,850 Assuming IPP of urea shouldn't fall below US$500/Tonne.
Sales 2,017
EBIT 38.1% Assuming delivered cost of gas at US$7/mmbtu.EBIT 768
EBIT based on Normal Pricing
Sales (In Tonnes) 112,978
Sales Realization 10,048
Sales 1,135
EBIT 15.0%
EBIT 170
Incremental EBIT 598
Interest - TCL had total debt of Rs23,452.8m in standalone books, in which Rs19,070m takenfor acquisition of GCIP. Hence, we are not considering the interest cost.
PBT 598
Tax (185)
PAT 413
Equity 2,435
Incremental EPS 1.7
Source: PL Research
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Tata Chemicals
October 16, 2008 13
Our estimates are based on the assumption that IPP of urea is at US$500 per
tonne and delivered cost of gas is at US$7 per mmbtu. We have made a sensitivity
analysis on IPP at different price levels and delivered cost of gas at US$8 per
mmbtu.
Sensitivity analysis (Rs m
Higher Utilization at 123.8% IPP at US$
Gas @ US$8 450 400 350
Sales (In Tonnes) - Eligible for IPP 112,978 112,978 112,978 112,978
Sales Realization (85% of IPP @Rs42/US$) 17,850 16,065 14,280 12,495
Sales 2,017 1,815 1,613 1,412
EBIT % at IPP 33.2% 31.2% 22.6% 11.6%
EBIT % at normal case 15.0% 15.0% 15.0% 15.0%
Incremental EBIT due to higher utilization 367 294 123 (48)
Tax (114) (91) (38) 15
PAT 253 203 85 (33)
Equity 2,435 2,435 2,435 2,435Incremental EPS (Rs) 1.0 0.8 0.3 (0.1)
Source: PL Research
De-bottlenecking...right step at the right time
TCL is going for de-bottlenecking of its urea plant with a capex of Rs2bn which
will add 3.4lac tonnes (39.3% of the current installed capacity) and will come
on stream by December 2008. Funding of capex of Rs2bn will be done through
internal accruals. De-bottlenecking of urea will be benefited by the IPP-linked
urea policy. We believe that de-bottlenecking will boost the PAT by Rs157m (EPS
- Rs0.6) in FY09 and Rs1,091m (EPS - Rs4.5) in FY10 (Assuming delivered cost of
gas is at US$7 per MMBTU).
Earning through de-bottlenecking (Rs m
Particulars 2008-2009E 2009-2010E Remarks
Sales (In Tonnes) 51,000 250,000 Assuming that the company will achieve the target productionof 1.94m tonne as per policy and 15% & 73.5% utilization inFY09 and FY10, respectively.
Sales Realization US$425 @ Rs42/US$ 17,850 17,850 Assuming IPP of urea shouldn't fall below US$500/Tonne
Sales 910 4,463
EBIT 38.1% 38.1% Assuming delivered cost of gas at US$7/mmbtu.
EBIT 347 1,700
Interest (120) (120) Total Capex - Rs2bn.Funding of the capex is through interna
accruals but we are considering the opportunity cost.PBT 227 1,580
Tax (70) (490)
PAT 157 1,091
Equity 2,435 2,435
Incremental EPS 0.6 4.5
Source: PL Research
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Tata Chemicals
14 October 16, 2008
Further, our estimates are based on the assumption that IPP of urea is at US$500
per tonne and delivered cost of gas is at US$7 per MMBTU. We have made a
sensitivity analysis on IPP at different price levels and delivered cost of gas at
US$8 per MMBTU.
Sensitivity analysis
Particulars Gas @ US$8
2008-2009E 2009-2010E
Sales 910 4,463
EBIT (%) 33.2% 33.2%
EBIT 302 1,482
Interest (120) (120)
PBT 182 1,362
Tax (56) (422)
PAT 126 939
Equity 2,435 2,435
Incremental EPS (Rs) 0.5 3.9Source: PL Research
Sensitivity analysis (Rs m
Particulars 2008-2009E 2009-2010E
IPP @US$ 450 400 350 450 400 350
Sales (In Tonnes) 51,000 51,000 51,000 250,000 250,000 250,000
Sales Realization (85% of IPP @Rs.42/US$) 16,065 14,280 12,495 16,065 14,280 12,495
Sales Realization (In US$) 382.5 340 297.5 382.5 340 297.5
Sales 819 728 637 4,016 3,570 3,124
EBIT (%) 31.2% 22.6% 11.6% 31.2% 22.6% 11.6%
EBIT 256 165 74 1,253 807 362
Interest (120) (120) (120) (120) (120) (120)PBT 136 45 (46) 1,133 687 242
Tax (42) (14) 14 (351) (213) (75)
PAT 94 31 (32) 782 474 167
Equity 2,435 2,435 2,435 2,435 2,435 2,435
Incremental EPS (Rs) 0.4 0.1 (0.1) 3.2 1.9 0.7
Source: PL Research
IMACID JV...Its rock-eting
Spurting phosphoric acid prices will improve the profitability of IMACID
substantially. We expect that IMACID will add a PAT of Rs1,935m (EPS - Rs7.9) in
FY09. We assume that the phosphoric acid prices will remain at US$1800/tonne
which is on a conservative basis because IMACID has contracted at US$2300/
tonne in Q2FY09. IMACID posted PAT of Rs830m (1.7x of FY08 PAT) in Q1FY09
itself. IMACID has repaid all the debt in FY08; thus, becoming a debt-free
company.
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Tata Chemicals
October 16, 2008 15
We have made a sensitivity analysis of phosphoric acid prices for FY10 because
we are confident that in FY09, IMACID will achieve the EPS of Rs7.9. Our estimates
for FY10E are based on the phosphoric acid price at US$1500/tonne.
Sensitivity analysis (Rs mPhosphoric Acid Price US$ per Tonne 1,000 1,100 1,300 1,500 1,800
Sales 6,014 6,615 7,818 9,021 10,825
EBITDA 1,503 1,654 1,955 2,255 2,706
EBITDA Per Tonne (Rs) 10,500 11,550 13,650 15,750 18,900
Depreciation (287) (287) (287) (287) (287)
EBIT 1,216 1,367 1,667 1,968 2,419
Tax (243) (273) (333) (394) (484)
PAT 973 1,093 1,334 1,574 1,935
Equity 2,435 2,435 2,435 2,435 2,435
EPS (Rs) 4.0 4.5 5.5 6.5 7.9
Source: PL Research
Addition in natural soda ash capacity...a safe play
Post the acquisition of GCIP, TCL's natural soda ash capacity has increased from
14% to 59%. Cost of manufacturing natural soda ash is half of synthetic soda
ash. We believe that GCIP will add EPS of Rs5.1 in FY09, while TCL has set up a
new natural soda ash plant of 3.5lac tonnes in Kenya in FY08, This plant is
poised to run at a capacity of 50% and produce 2lac tonnes in FY09.
TCLs soda ash installed capacity
Source: Company Data, PL Research
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY07 FY08 FY09E FY10E
(mT
onnes)
India - Synthetic BMGL - Synthetic BMGL Kenya - Natural GCIP - Natural
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Tata Chemicals
16 October 16, 2008
We believe that TCL's inorganic chemicals' consolidated EBIT margin will improve
from 9.3% in FY08 to 15.7% in FY09 due to acquisition of GCIP, where the margins
are higher than other plants. Further, we have considered the consolidated EBIT
margin to 10.5% in FY10 mainly on account of 15% dip in the soda ash realization
in our estimate. Soda ash is an energy-intensive commodity and we believe thatsoda ash price could cool-off in FY10 due to a new capacity coming up in China
and due to softening of the energy cost.
We have made the sensitivity analysis by declining the price of soda ash by 10%
and 20%, respectively in FY10.
Sensitivity Analysis
Current - 15% decline 10% decline 20% Decline
EBIT 12,269 13,442 11,096
% Decline -9.6% 9.6%
PBT 10,499 11,672 9,326
% Decline -11.2% 11.2%
PAT 7,355 8,258 6,598
% Decline -12.3% 10.3%
EPS 30.2 33.9 27.1
% Decline -12.3% 10.3%
Source: PL Research
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Tata Chemicals
October 16, 2008 17
Worst and best case scenario
We are showing the worst and best case scenario of TCL's FY09E and FY10E EPS,
assuming the soda ash and urea prices are stable.
Worst and Best Case (Rs
Worst Case Best Case
FY09E FY10E FY09E FY10E
Base Case 34.5 30.2 34.5 30.2
Less: EPS due to higher utilization of Urea 1.7 1.7 1.7 1.7
Less: EPS due to de-bottlenecking of Urea 0.6 4.5 0.6 4.5
Less: EPS contribution by IMACID 0.0 6.5 0.0 6.5
32.2 17.6 32.2 17.6
Add: EPS due to higher utilization of UreaWorst Case - Gas price at US$8/mmbtuBest Case - Gas price at US$7/mmbtu 1.0 1.0 1.7 1.7
Add: EPS due to de-bottleneckingWorst Case - Gas price at US$8/mmbtuBest Case - Our estimate is on best case. 0.5 3.9 0.6 4.5
Add: EPS contribution by IMACIDWorst Case- Phosphoric Acid at US$1000/ tonneBest Case - Phosphoric Acid at US$1800/tonne 0.0 4.0 0.0 7.9
33.7 26.5 34.5 31.7
FY09E Chng FY10E Chng
Worst Case 33.7 -2.3% 26.5 -12.4%
Base Case 34.5 30.2Best Case 34.5 0.0% 31.7 4.9%
Source: PL Research
PE Band
Source: PL Research
0
50100
150
200
250
300
350
400
450
Apr-99
Oct-99
Apr-00
Oct-00
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
4 7 10 13 Price (Rs)
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Tata Chemicals
18 October 16, 2008
Soda ash industry
Global soda ash demand in 2007 grew to 47.1m tonnes from 44.3m tonnes in
2006, an overall growth of 6.3%. Of this, China's share grew to 15.9m tonnes
from 14.3m tonnes, representing a growth of 10.7%. Russia witnessed a growthof 4.5% over the same period. At the regional level, soda ash demand in Asia and
the Middle East increased by 11.4%, from 22m tonnes in 2006 to 24.5m tonnes in
2007. These markets account for 89% of the growth in global demand.
Soda ash is an important industrial chemical used in the manufacture of glass,
detergents, dyes, silicates and other chemicals. Much of the global demand was
driven by the emerging markets like China, India, Russia and Latin America,
where growth is linked to rising income levels and growing urbanization. The
latter drives infrastructure growth. While the improving quality of life, for a
larger population base leads to a greater demand for automobiles, detergents
and dyes, the growth in building construction has led to an increase in theglobal demand for glass. As the growth rate in the emerging economies of China
India, East Europe and Latin American countries is expected to be above 8% per
annum, the current growth trends in soda ash demand will continue.
The world capacity of both synthetic and natural soda ash is about 48m tonnes.
Around 90% of the world production of soda ash comes from Europe, US and
Asia. During 2007, the global production of soda ash increased marginally from
42m tonnes to 43m tonnes. The soda ash industry is experiencing significant
cost pressures due to the soaring prices of various commodities like oil, coal
and coke. These rising costs have led to international soda ash spot prices
increasing from US$215/T in April 2007 to US$ 325/T in March 2008 on a costand freight (C&F) India basis.
Given the low per capita consumption of soda ash in India (2.7 kg), when
compared to countries like China (9.8 kg) and USA (22 kg) and the sustained
higher economic growth in the country, there is clearly a scope for consumption-
driven growth in the soda-ash business. Soda ash demand in India in FY07 was
around 2.2m tones, driven primarily by the growing demand from float glass
manufacturers, who cater to the construction and auto sectors. Custom duties
on soda ash imports have been gradually reduced from 15% in 2005-06 to 7.5% in
2007-08, while imports have also become cheaper. TCL continues to remain
cost competitive and the acquisition of Brunner Mond Group Ltd (BMGL) and
GCIP has placed TCL in a better position to face global competition because of
the access to cheaper natural soda ash. Domestic demand for soda ash continues
to grow at around 5%.
Soda ash prices (ex-factory)
Source: CRISIL
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
Apr'97
Feb'98
Dec'98
Oct'99
Aug'00
Jun'01
Apr'02
Feb'03
Dec'03
Oct'04
Aug'05
Jun'06
Apr'07
Feb'08
(Rs/Tonne)
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Tata Chemicals
October 16, 2008 19
Business Overview
Tata Chemicals is basically categorised into two segments:
Inorganic Chemicals
Inorganic chemical consists of soda ash, salt, cement, sodium bicarbonate and
other chemical products. Inorganic chemical constitutes around 54% of
consolidated sales, while soda ash constitutes 43%. TCL has maintained its
leadership position in the domestic market with a market share of 32% in FY08.
Globally, the company has a total soda ash capacity of 5.5m.
Fertilizers
TCL has its presence across all the three key agro-nutrients, namely nitrogen
(N), phosphorous (P) and potassium (K). Given the nature of the Government
regulations, the sale of fertilisers is localized to certain geographical regions
within India. The fertilizer business is focused in the areas of North and East
India. TCL's product portfolio comprises of nitrogenous fertilizers (urea) and
phosphatic fertilizers (DAP and complexes) representing 37.4% and 46.4%
respectively of the total fertiliser revenues, while potassic fertilizer (MOP) which
is imported, accounts for 6.6%.
Segmental breakup
Sales EBIT
Source: Company Data, PL Research
0
20,000
40,000
60,000
80,000
100,000
120,000
FY07 FY08 FY09E FY10E
(Rsm)
Inorganic Chemicals Fertilizers
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY07 FY08 FY09E FY10E
(Rsm)
Inorganic Chemicals Fertilizers
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Tata Chemicals
20 October 16, 2008
Global Operations
Brunner Mond: BMGL is wholly owned subsidiary of TCL acquired in December
2005 for Rs8bn. BMGL has plants in England, Holland and Kenya with the tota
capacity of 2m tones. This acquisition made TCL, the world's third largest sodaash and sodium bio-carbonate producer. Magadi, Kenya is the second largest
natural soda ash producer in the world.
IMACID: TCL bought one-third stake in IMACID in FY06 for Rs1.7bn. IMACID is an
equal JV between Office Cherifien de Phosphates (OCP) - the world's largest
producer of rock phosphate and phosphatic fertilizers, CFCL and TCL. Investment
was made primarily to secure supplies of phosphoric acid for producing DAP and
NPK composite fertilizers at Haldia.
GCIP: TCL acquired GCIP in FY08 for US$1bn. GCIP has 75% subsidiary named
General Chemical Soda Ash Partners Inc (GCSAP). GCSAP has natural soda ashplants in US with the total capacity of 2.5m tonnes. TCL has an access to 75% of
GCSAP's cash flow. This acquisition made TCL, the world's second largest soda
ash player after Solvay.
Capex Plan
Capacity Expansions Current Expended Capex Exp. Time(Tonnes) (Tonnes) (Rs m)
Urea Babrala 864,600 1,204,600 2,000 FY09
Soda Ash - Mithpur 917,700 1,200,000 FY10
Salt - Mithpur 550,550 700,000 FY10
Cement - Mithapur 440,000 600,000 FY10
Sodium Biocarbonate - Mithpur 70,000 1,200,000 2,000 FY10
Source: Company Data
TCL will add further 7lac tonnes soda ash (4.5 lac tonne natural + 2.5 lac synthetic
of additional capacity in all the locations by way of de-bottlenecking of plants
in the next 18-30 months. TCL is investing Rs500m and Rs1250m in bio-fuel and
distribution business, respectively. TCL will fund the capex through internal
accruals and if required, than by sale of investment (TCL have total quoted
investments of Rs1987.9m in FY08). Distribution business will be funded through
both debt and equity.
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Tata Chemicals
October 16, 2008 21
New Initiative
Bio-fuel: TCL is setting up a fully integrated, commercial scale plant for ethano
production (from sweet sorghum) with a capacity of 30,000 kilo litres per day in
Nanded, Maharashtra. Plant will be operational by Q3FY09 and total capex wouldbe Rs50 crore.
Distribution centre: TCL has entered into 50:50 JV with Total Produce Plc,
Ireland for sourcing and distributing fresh fruits and vegetables. In the distribution
business, TCL will acquire land and setup the storage centre. The company wil
purchase fruits and vegetables from farmers and after separating the scrap,
will sell the same to the retailers. In the initial years, TCL is focusing on reducing
the wastage and scrap. Total capex for TCL and Total Produce Plc. would be
around Rs2-2.5 bn. On a pilot basis, the company had started its first centre at
Ludhiana in May 2008 and the second centre will be soon coming up at Kalyan,
Mumbai by March 2009. The company is planning to open around 45 centres inthe coming 4-5 years throughout the country in various stages.
R&D Centre: TCL has setup a R&D centre at Pune with a staff capacity of 28
scientists and aims to recruit 150 scientists over the next three years. The
company will leverage its bio and nanotechnology business to change its revenue
mix over the next five years.
Tata Kisan Sanchar (TKS): TCL has setup around 613 TKS centres in the North
and East of the country to supply the agri-inputs, including TCL's fertilizers that
provides a variety of solutions that meets the farmer's needs. TKS' initiatives
extend to farm management services, advice on crops and farming practices,
information on prices of their produce, farm credit, storage, crop insurance
and a variety of other things.
Inorganic Growth
Soda ash facility at Tanzania: TCL is entering into a 50:50 JV with the Tanzania
Government for setting up a natural soda ash plant with the capacity of 0.5m
tonnes. But the JV is currently withheld due to environmental issues in Tanzania
Acquisition: TCL is looking for further acquisition or setting-up the urea plants
in Bangladesh and the middle-east countries or another soda ash facility in
China and US.
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Tata Chemicals
22 October 16, 2008
Key Risks and Concerns
Local levies
The threat of imports has increased in the recent past, with the lowering ofcustoms duty and abolishment of anti-dumping duty (abolished in January 2005)
As per international agreements, custom duty is required to be brought down to
zero. Import duty of 35% in FY01 has come down to 7.5% in FY08; this has
resulted in an increase in the imports, from 0.049m tonnes in FY01 to 0.25m
tonnes in FY08.
Delay in the payment of subsidy
Delay in the payment of subsidy or issuance of subsidy bond of fertilizer by the
Government could cause serious financial burden to TCL.
Delay in de-bottlenecking of urea plant
Any delay in the de-bottlenecking of the project could postpone the revenue
and profitability of the company.
Availability of natural gas
Natural gas is the cheapest feedstock for urea. However, due to the shortage of
this gas, TCL is using naphtha to manufacture urea. Going ahead, usage of naptha
instead of natural gas will adversely affect the profitability of company.
Sharp fall in commodity prices
TCL is in the commodity business and commodity prices are falling from the
peak. Hence, any sharp fall in the commodity prices could lead to an adverse
impact on the company.
Forex liabilities
Sharp depreciation of rupee against US dollar could affect the profitability of
TCL because the company has foreign currency loans. We have not consideredthese losses in our estimate.
Pension Fund Liabilities
TCL has pension fund liabilities in UK and US which are mainly invested in these
markets. Hence, a sharp fall in the global market could impact the profitability
of TCL. We have not considered these losses in our estimate.
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Tata Chemicals
October 16, 2008 23
Financials
Key Assumptions
Y/e March FY07 FY08 FY09E FY10E
Soda Ash - IndiaSales (Tonnes) 721,946 680,200 728,000 837,204
Sales Realization (Rs) 10,445 12,147 12,147 10,325
EBIT (%) 24.2 22.1 21.0 19.0
Soda Ash - BMGL
Sales (Tonnes) 1,568,000 1,629,000 1,750,000 1,890,000
Sales Realization (Rs) 10,510 10,724 10,724 9,116
EBIT (%) 11.2 (3.4) 4.7 1.8
Soda Ash - GCIP
Sales (Tonnes) 1,905,000 1,905,000
Sales Realization (Rs) 7,350 6,248
EBIT (%) 24.1 10.7
Salt
Sales (Tonnes) 496,802 479,697 467,968 512,803
Sales Realization (Rs) 6,649 7,527 8,600 8,600
EBIT (%) 24.2 22.1 21.0 19.0
Urea
Sales (Tonnes) 1,016,886 1,043,047 1,121,308 1,320,308
Sales Realization (Rs) 8,492 10,017 11,189 12,193
EBIT (%) 9.6 13.1 10.2 12.5
DAP
Sales (Tonnes) 278,493 225,564 275,000 275,000
Sales Realization (Rs) 16,368 17,760 34,000 34,000
EBIT (%) 9.6 13.1 10.2 12.5
IMACID - Phosphoric Acid
Sales (Tonnes) 120,469 140,410 143,190 143,190
Sales Realization (Rs) 22,748 20,904 75,600 63,000
EBIT (%) 10.7 18.1 22.3 21.8
Source: Company Data, PL Research
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Tata Chemicals
24 October 16, 2008
Income Statement (Rs m
Y/e March FY07 FY08 FY09E FY10E
Sales
Inorganic Chemicals 30,534 32,330 49,482 46,486
Fertilizers 27,503 27,901 50,823 52,571Total 58,036 60,232 100,304 99,057
Growth (%) 3.8 66.5 (1.2)
EBIT
Inorganic Chemicals 5,549 3,005 7,748 4,866
As % of Sales 18.2 9.3 15.7 10.5
Fertilizers 2,621 3,706 6,500 7,403
As % of Sales 9.5 13.3 12.8 14.1
Total 8,170 6,712 14,248 12,269
EBIT Margin (%) 14.1 11.1 14.2 12.4
Unallocated Income 255 633 - -
Interest (944) (461) (2,370) (1,770)
PBT 7,481 6,884 11,879 10,499
PBT Margin (%) 12.9 11.4 11.8 10.6
Tax (2,401) (2,115) (3,475) (3,144)
Tax Rate (%) 32.1 30.7 29.3 29.9
PAT before exceptional Items 5,080 4,769 8,404 7,355
PAT Margin (%) 8.8 7.9 8.4 7.4
Exceptional Items - 4,875 - -
PAT 5,080 9,644 8,404 7,355
Source: Company Data, PL Research
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Tata Chemicals
October 16, 2008 25
Balance Sheet (Rs m
Y/e March FY07 FY08 FY09E FY10E
Source of Funds
Equity Capital 2,152 2,341 2,435 2,435
Share Premium 1,819 6,524 8,617 8,617Profit & Loss/ General Reserve 21,748 28,320 33,282 37,625
Networth 25,718 37,185 44,335 48,678
Total Debt 18,642 48,505 39,494 29,494
Deferred Tax Liability 2,337 2,695 2,695 2,695
Deferred Capital Grants 211 148 148 148
Total 46,908 88,532 86,671 81,014
Application of Funds
Net Fixed Assets 30,561 33,712 29,727 28,766
Goodwill on Consolidation 7,632 46,492 46,492 46,492
Investments 7,753 4,174 4,174 4,174
Inventories 6,352 9,302 12,095 15,020Sundry Debtors 9,665 11,999 13,195 16,386
Cash & Bank 1,545 6,767 10,383 10,597
Loans & Advances 2,582 6,215 6,215 6,215
Sundry Creditors (8,428) (15,214) (15,394) (19,117)
Acceptances/ Other Liabilities (2,654) (4,121) (6,182) (9,273)
Provisions (8,135) (10,800) (14,040) (18,252)
Working Capital 926 4,148 6,272 1,576
Miscellaneous Expenses 37 5 5 5
Total 46,908 88,532 86,671 81,014
Source: Company Data, PL Research
Cash Flow (Rs mY/e March FY07 FY08 FY09E FY10E
Cash from operating activities 12,103 14,783 14,020 16,525
Cash from investing activities (8,340) (41,572) (140) (3,300)
Cash from financing activities (3,382) 32,011 (10,264) (13,012)
(Dec)/Inc in cash 380 5,223 3,616 213
Opening Cash 1,165 1,545 6,767 10,383
Closing Cash 1,545 6,767 10,383 10,597
Source: Company Data, PL Research
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Tata Chemicals
26 October 16, 2008
Key Ratios
Y/e March FY07 FY08 FY09E FY10E
Growth Ratio (%)
Sales 44.6 3.8 66.5 (1.2)
EBITDA 35.3 (9.7) 86.5 (10.0)PAT 17.3 (6.1) 76.2 (12.5)
EPS 17.3 (6.1) 76.2 (12.5)
Asset Based Ratio (%)
RoCE/RoI 24.6 11.5 21.9 21.1
RoE/RoNW 19.8 12.8 19.0 15.1
Gearing
Debt/Equity 0.7 1.3 0.9 0.6
Per Share (Rs)
EPS 20.9 19.6 34.5 30.2BV 105.6 152.7 182.0 199.9
DPS 7.1 8.7 12.1 10.6
CEPS 56.0 53.3 92.4 85.4
Margins (%)
EBIT 14.1 11.1 14.2 12.4
PAT 8.8 7.9 8.4 7.4
Tax Rate 32.1 30.7 29.3 29.9
Dividend Payout 33.9 44.3 35.0 35.0
Velocity (Days)
Debtors 54.5 65.6 60.0 60.0Inventories 41.9 47.4 55.0 55.0
Valuations (x)
P/E 8.0 8.5 4.8 5.5
P/CEPS 3.0 3.1 1.8 2.0
P/BV 1.6 1.1 0.9 0.8
M.Cap/Sales 0.7 0.7 0.4 0.4
EV/EBITDA 5.3 8.4 3.8 3.6
EV/Sales 1.0 1.4 0.7 0.6
Source: Company Data, PL Research
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Chambal Fertilisers and Chemicals
CFCL is the key beneficiary of the new investment policy of urea. We believe
that CFCL's top-line and bottom-line will grow with the three years CAGR (FY07A
FY10E) of 15.8% and 57.4%, respectively on the back of positives in the newurea policy, partial de-bottlenecking of urea plant, skyrocketing phosphoric acid
prices and addition in ships portfolio.
Incentive to higher utilization in the new policy...adds the bottom-line
We believe that the company's 7.7% of FY09 and FY10 production will be
eligible for IPP. We expect that a positive move in the policy will give
incremental PAT of Rs507m (EPS - Rs1.2) in FY09 and FY10.
Partial de-bottlenecking...eligible for IPP: CFCL is going for a partial de
bottlenecking of the urea plant which will add 1.34lac tonnes. We believe
that de-bottlenecking will boost the PAT by Rs270m (EPS - Rs0.6) in FY10 on
the back of IPP linked urea policy.
IMACID JV...commodity story: Spurting phosphoric acid prices will improve
the profitability of IMACID substantially. We expect that IMACID will add PAT
of Rs1,935m (EPS - Rs4.6) in FY09 assuming phosphoric acid prices at
US$1800/tonne.
Addition in ship portfolio...contribution to the PAT: CFCL has got delivery
of three new ships in 1HFY09 and will get delivery of one ship in FY10 tha
will contribute the bottom-line, going forward.
Valuation: At the CMP of Rs47, CFCL is trading at 4.9x at its FY09E
consolidated EPS of Rs9.6 and 4.7x at its FY10E consolidated EPS of Rs10.0
We recommend BUY the stock with the price target of Rs70 (potential upside- 48.6%) based on 7x of FY10E earning.
Key Financials (Y/e March) FY07 FY08 FY09E FY10E
Revenue (Rs m) 29,806 32,850 45,118 46,262
Growth (%) 10.2 37.3 2.5
EBITDA (Rs m) 4,910 5,811 9,569 10,41
PAT (Rs m) 1,072 1,648 4,016 4,17
EPS (Rs) 2.6 4.0 9.6 10.0
Growth (%) 53.8 143.7 4.0
Net DPS (Rs) 1.8 1.8 1.8 1.
Profitability & Valuation FY07 FY08 FY09E FY10E
EBITDA margin (%) 16.5 17.7 21.2 22.5
RoE (%) 11.7 14.1 27.1 23.0
RoCE (%) 14.5 17.1 25.7 25.7
EV / sales (x) 1.3 1.1 0.8 0.8
EV / EBITDA (x) 7.8 6.3 3.7 3.
PE (x) 18.3 11.9 4.9 4.
P / BV (x) 2.1 1.7 1.3 1.
Net dividend yield (%) 3.8 3.8 3.8 3.
Source: Company Data; PL Research
Price Performance (RIC: CHMB.BO, BB: CHMB IN)
Source: Bloomberg, PL Research
Rating BUY
Price Rs47
Target Price Rs70
Implied Upside 48.6%
Sensex 10,581
(Prices as on October 16, 2008)
Trading Data
Market Cap. (Rs bn) 19.6
Shares o/s (m) 4,162.1
Free Float 50.0%
3M Avg. Daily Vol (000) 7,095.0
3M Avg. Daily Value (Rs m) 483.4
Major Shareholders
Promoters 50.0%
Foreign 9.8%
Domestic Inst. 10.0%
Public & Others 30.2%
Stock Performance
1M 6M 12M
Absolute (23.3) (17.2) (7.1)
Relative (1.6) 17.6 37.4
Source: Company Data; PL Research
Company ReportOctober 16, 2008
30
40
50
60
70
80
90
100
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
(Rs)
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28 October 16, 2008
Investment Rationale
Incentive to higher utilization in new policy...adds thebottom-line
We believe that CFCL's 7.7% of FY09 and FY10 production will be eligible for IPP
based on FY08 production level (116%) and subject to minimum production of
1.94m tonnes (target production specified by the government) of urea. We expect
that positive move in the policy will give incremental PAT of Rs507m (EPS -
Rs1.2) in FY09 and FY10, assuming the delivered cost of gas at US$7/mmbtu
CFCL will be eligible for 85% of IPP.
Policy benefit on existing production (Rs m
Remarks
EBIT based on IPP
Sales (In Tonnes) 154,348 Assuming company will maintainthe capacity utilization leve(119%) of FY08 and will achieve thetarget production of 1.94m tonneas per policy. Hence, 7.7% of totaproduction fall under IPP.
Sales Realization US$425 @ Rs42/US$ 17,850 Assuming import parity price ourea shouldn't fall below US$500/Tonne.
Sales 2,755
EBIT 36.0% Assuming delivered cost of gas atUS$7/mmbtu.
EBIT 993
EBIT based on Normal PricingSales (In Tonnes) 154,348
Sales Realization (Rs) 10,180
Sales 1,571
EBIT 15.0%
EBIT 236
Incremental EBIT 757
Interest - Chambal has 85% of total debts inshipping business. Hence, we havenot considered finance cost.
PBT 757
Tax (250)
PAT 507Equity 4,162
Incremental EPS 1.2
Source: PL Research
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Chambal Fertilisers and Chemicals
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CFCL can increase the capacity utilization further from FY08 level i.e. 116% and
add the bottom-line to that extent. We have made a sensitivity analysis at
different level of capacity utilization and delivered cost of gas (assuming IPP at
US$500/tonne).
Sensitivity analysis (Rs m
Higher Utilization at 116% 120% 125%
Gas@ US$8 US$7 US$8 US$7 US$8
Sales (In Tonnes) - Eligible for IPP 154,348 229,350 229,350 315,810 315,810
Sales Realization US$425 @ Rs42/US$ 17,850 17,850 17,850 17,850 17,850
Sales 2,755 4,094 4,094 5,637 5,637
EBIT % (In higher utilization) 30.9% 36.0% 30.9% 36.0% 30.9%
EBIT % at normal utilization 15.0% 15.0% 15.0% 15.0% 15.0%
Incremental EBIT due to higher utilization 438 861 651 1,186 896
Tax (145) (284) (215) (391) (296)
PAT 294 577 436 795 601
Equity 4,162 4,162 4,162 4,162 4,162Incremental EPS (Rs) 0.7 1.4 1.0 1.9 1.4
Source: PL Research
Further, our estimates are based on the assumption that IPP shouldn't fall below
US$500/tonne. We have made a sensitivity analysis at different levels of IPP
(assuming capacity at FY08 level of 119% and delivered cost of gas at
US$7/mmbtu):
Sensitivity analysis (Rs m
Higher Utilization at IPP at US$
450 400 350
Sales (In Tonnes) - Eligible for IPP 154,348 154,348 154,348
Sales Realization (85% of IPP @ Rs42/US$) 16,065 14,280 12,495
Sales Realization (In US$) 383 340 298
Sales 2,480 2,204 1,929
EBIT % (In higher utilization) 28.9% 20.1% 8.6%
EBIT % at normal utilization 15.0% 15.0% 15.0%
Incremental EBIT due to higher utilization 345 112 (123)
Tax (114) (37) 41
PAT 231 75 (83)
Equity 4,162 4,162 4,162
Incremental EPS (Rs) 0.6 0.2 (0.2)
Source: PL Research
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Chambal Fertilisers and Chemicals
30 October 16, 2008
Partial de-bottlenecking...eligible for IPP
CFCL is going for partial de-bottlenecking of its urea plant with a capex of
Rs4bn which will add 1.34lac tonnes (8% of current installed capacity) and wil
come on stream by April 2009. Funding of capex of Rs4bn will be done throughinternal accruals. De-bottlenecking of urea will be benefited by IPP-linked urea
policy. We believe that de-bottlenecking will boost the PAT by Rs270m (EPS -
Rs.0.6) in FY10 assuming the delivered cost of gas at US$7/mmbtu and capacity
utilization of 70%. De-bottlenecking will also result in energy saving but we
have not considered the same in our estimate.
Earning through de-bottlenecking (Rs m
Particulars 2009-2010E Remarks
Sales (In Tonnes) 93,800 Assuming company will achieve thetarget production of 1.94m tonneas per policy and 70% capacityutilization level in new capacity.
Sales Realization US$425 @ Rs42/US$ 17,850 Assuming import parity price ourea shouldn't fall below US$500/Tonne
Sales 1,674
EBIT% 36.0% Assuming delivered cost of gas atUS$7/mmbtu.
EBIT 603
Interest (200) Total Capex - Rs4bn.Funding othe capex is through internaaccrual but we are considering theopportunity cost.
PBT 403
Tax (133)
PAT 270
Equity 4,162
Incremental EPS (Rs) 0.6
Source: PL Research
Management will take a decision for further de-bottlenecking up to 25% increase
in the urea capacity only after successful implementation of 1.34lac tonnes.
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We have made a sensitivity analysis at delivered cost of gas at US$8/mmbtu and
further at different levels of IPP (assuming other factors remain constant)
Sensitivity analysis (Rs m
Particulars Gas @ US$8 IPP @US$450 400 350
Sales 1,674 1,507 1,339 1,172
EBIT 30.9% 28.9% 20.1% 8.6%
EBIT 517 435 269 101
Interest (200) (200) (200) (200)
PBT 317 235 69 (99)
Tax (105) (78) (23) 33
PAT 213 158 46 (66)
Equity 4,162 4,162 4,162 4,162
Incremental EPS (Rs) 0.5 0.4 0.1 (0.2)
Source: PL Research
IMACID JV ...commodity story
Spurting phosphoric acid prices will improve the profitability of IMACID
substantially. We expect that IMACID will add PAT of Rs1,935m (EPS - Rs4.6) in
FY09, assuming phosphoric acid prices at US$1800/tonne which is on a
conservative basis. This is because IMACID has contracted at US$2300/tonne in
Q2FY09 and average realization was US$1717/tonne in Q1FY09. IMACID posted
PAT of Rs830m (1.7x of FY08 PAT) in Q1FY09 itself. IMACID has repaid all the
debt in FY08, thus becoming a debt-free company.
Dimension of phosphoric acid
Source: Company Data, PL Research
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY06 FY07 FY08 FY09E FY10E
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Realization Per Tonne EBITDA Per Tonne PAT Per Tonne PAT (RHS)
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Chambal Fertilisers and Chemicals
32 October 16, 2008
We have made a sensitivity analysis of phosphoric acid prices for FY10 because
we are confident that in FY09, IMACID will achieve the EPS of Rs4.6. In FY10E,
our estimates are based on the phosphoric acid price at US$1500/tonne.
Sensitivity analysis (Rs mPhosphoric Acid Price US$ / Tonne 1,000 1,100 1,300 1,500 1,800
Sales 6,014 6,615 7,818 9,021 10,825
EBITDA 1,503 1,654 1,955 2,255 2,706
EBITDA Per Tonne (Rs) 10,500 11,550 13,650 15,750 18,900
Depreciation (287) (287) (287) (287) (287)
EBIT 1,216 1,367 1,667 1,968 2,419
Tax (243) (273) (333) (394) (484)
PAT 973 1,093 1,334 1,574 1,935
Equity 4,162 4,162 4,162 4,162 4,162
EPS (Rs) 2.3 2.6 3.2 3.8 4.6
Source: PL Research
Addition in ship portfolio...contribution to the PAT
CFCL has acquired delivery of three new ships in 1HFY09 and will get delivery of
one ship in FY10 that will contribute to the bottom-line, going forward. Shipping
business is an asset-based model and CFCL has five ships in their portfolio
currently (there will be six ships in FY10). CFCL has sold off a 1987 built single
hull aframex tanker in FY08 for a profit of Rs229.1m and we believe that the
company could fetch good value from the new ships in future. At present, CFCL
has four double hull vessels ships.
CFCL has bought the ships through debt which has been raised in FY07 at anattractive and competitive rate of LIBOR plus 90bps with the maturity of 12-13
years.
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Chambal Fertilisers and Chemicals
October 16, 2008 33
Worst and best case scenario
We are showing the worst and best case scenario of CFCL's FY09E and FY10E
EPS, considering the IPP price of urea at US$500/tonne.
Worst and best case
Worst Case Best Case
FY09E FY10E FY09E FY10E
Base Case 9.6 10.0 9.6 10.0
Less: EPS due to Higher Utilization 1.2 1.2 1.2 1.2
Less: EPS due to de-bottlenecking 0.0 0.6 0.0 0.6
Less: EPS contribution by IMACID 0.0 3.8 0.0 3.8
8.4 4.4 8.4 4.4
Add: EPS due to Higher UtilizationWorst Case - Gas price at US$8/mmbtuand utilization at FY08 level (116%).
Best Case - Gas price at US$7/mmbtuand utilization at 125% level. 0.7 0.7 1.9 1.9
Add: EPS due to de-bottleneckingWorst Case - Gas price at US$8/mmbtuBest Case - Our estimate is on best case. 0.0 0.5 0.0 0.5
Add: EPS contribution by IMACIDWorst Case- Phosphoric Acid at US$1000/ tonneBest Case - Phosphoric Acid at US$1800/tonne 0.0 2.3 0.0 4.6
9.1 7.9 10.3 11.5
FY09E Chng FY10E Chng
Worst Case 9.1 -5.3% 7.9 -20.9%
Base Case 9.6 0.0% 10.0 0.0%
Best Case 10.3 7.2% 11.5 14.1%
Source: PL Research
PE Band
Source: PL Research
0
10
20
3040
50
60
70
80
90
100
Apr-99
Oct-99
Apr-00
Oct-00
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
4 6 8 10 Price (Rs)
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Chambal Fertilisers and Chemicals
34 October 16, 2008
Company Background
CFCL, a company from the K K Birla group is one of the major players in the
fertilizer business and largest manufacturers of urea in the private sector. The
company also trades in DAP, complex fertilizers, pesticides and seeds. Thecompany has diversified into the other businesses like software, shipping and
textile.
Segmental breakup
Sales EBIT
Source: Company Data, PL Research
0
10,000
20,000
30,000
40,000
50,000
FY08 FY09E FY10E
(Rsm)
Urea Traded Goods Shipping
Textile & Others IMACID Software
-2,000
0
2,000
4,000
6,000
8,000
10,000
FY08 FY09E FY10E
(Rsm)
Urea Traded Goods Shipping
Textile IMACID Software
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Chambal Fertilisers and Chemicals
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Business Overview
Agri Inputs
CFCL's seed and pesticides trading business is growing faster and has enteredinto a new segment of commodity trading of mustard and cumin. Through CFCL's
relationship program "Uttam Bandhan", the company is in direct touch with
75,000 farmers. CFCL helps in building brand equity in the market, launching of
new products and educating the farmers to improve yields and productivity.
Textile
CFCL has spinning segment with the capacity of 80,208 spindles bearing the
name "Birla Textile Mills". In FY07, CFCL had commissioned 39,888 spindles to
seize the opportunities presented by the new economic environment in the
textile industry.
Software and business process
CFCL's subsidiary, ISG Novasoft, has embarked in the third-party India BPO sector
focusing on the broad area of asset-based lending services, with an initial thrust
in residential mortgages. ISG Novasoft is executing a unique and innovative
platform-based BPO strategy in scaling up transactional BPO services in India
to capture the compelling cost advantages that an India back-end offers
Chambal's software business is incurring losses due to amortization of software
development charges and will be a turnaround only when the company will get
substantial order in the future.
IMACID
IMACID is an equal JV between Office Cherifien de Phosphates (OCP) - the world's
largest producer of rock phosphate and phosphatic fertilizers, CFCL and TCL for
producing phosphoric acid with the annual capacity of 4.3m tonnes.
Foray into Infrastructure Sector
Chambal Infrastructure Ventures (CIVL) is a Special Purpose Vehicle (SPV) and awholly owned subsidiary of the CFCL. This subsidiary is engaged in the
development and setting up of power projects. It has, in turn, incorporated two
wholly-owned subsidiaries viz. Chambal Energy (Chhattisgarh) and Chamba
Energy (Orissa) for taking up power projects in the states of Chhattisgarh and
Orissa, respectively. CIVL has signed a MoU with the Government of Chhattisgarh
for setting up of 1100 MW thermal power plant. Application for setting up the
thermal power plant of 1200 MW in the state of Orissa is pending for approval
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Chambal Fertilisers and Chemicals
36 October 16, 2008
Key Risks and Concerns
Delay in the payment of subsidy
Delay in the payment of subsidy or issuance of subsidy bond of urea by theGovernment could cause serious financial burden to CFCL.
Delay in de-bottlenecking of urea plant
Any delay in the de-bottlenecking of the project could postpone the revenue
and profitability of the company.
Availability of natural gas
Natural gas is the cheapest feedstock for urea. However, due to the shortage of
this gas, CFCL is using naphtha to manufacture urea. Going ahead, usage of
naphtha instead of natural gas will adversely affect the profitability of company
Sharp fall in commodity prices
CFCL is in the commodity business and commodity prices are falling from the
peak. Hence, any sharp fall in the commodity prices could lead to an adverse
impact on the company.
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Chambal Fertilisers and Chemicals
October 16, 2008 37
Financials
Income Statement (Rs m
Y/e March FY07 FY08 FY09E FY10E
SalesFertilisers 20,000 19,023 21,544 23,218
Traded Goods 2,230 3,399 5,000 5,000
Shipping Business 1,766 3,282 4,006 5,203
IMACID - Phosphoric Acid 2,554 3,313 10,825 9,021
Others 3,257 3,833 3,743 3,820
Total 29,806 32,850 45,118 46,262
Growth (%) 10.2 37.3 2.5
EBIT
Fertilisers 2,699 2,711 3,811 4,415
As % of sales 13.5 14.3 17.7 19.0
Traded Goods 91 240 225 225
As % of sales 4.1 7.1 4.5 4.5
Shipping Business 394 789 796 1,059
As % of sales 22.3 24.0 19.9 20.4
IMACID - Phosphoric Acid 300 704 2,419 1,968
As % of sales 11.8 21.3 22.3 21.8
Others (453) (778) (330) (357)
As % of sales (13.9) (20.3) (8.8) (9.3)
Total 3,031 3,667 6,921 7,310
EBIT Margin (%) 10.2 11.2 15.3 15.8
Unallocated Income/(Expense) (240) (314) (224) (224)
Interest (1,052) (960) (918) (968)
PBT 1,739 2,393 5,779 6,117
PBT Margin (%) 5.8 7.3 12.8 13.2
Tax (688) (756) (1,763) (1,942)
Tax Rate (%) 39.6 31.6 30.5 31.8
PAT before exceptional Items 1,050 1,637 4,016 4,175
PAT Margin (%) 3.5 5.0 8.9 9.0
Exceptional Items 108 738 - -
PAT 1,158 2,374 4,016 4,175
Source: Company Data, PL Research
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Chambal Fertilisers and Chemicals
38 October 16, 2008
Balance Sheet (Rs m
Y/e March FY07 FY08 FY09E FY10E
Source of Funds
Equity Capital 4,162 4,162 4,162 4,162
Share Application - 30 30 30Share Premium 64 1,127 1,127 1,127
Profit & Loss/ General Reserve 4,902 6,371 9,511 12,809
Networth 9,129 11,690 14,829 18,128
Total Debt 20,124 18,545 18,545 18,545
Deferred Tax Liability 3,163 2,844 2,844 2,844
Other Liabilities 1,409 978 978 978
Total 33,825 34,058 37,197 40,495
Application of Funds
Net Fixed Assets 23,361 24,439 22,921 26,593
Intangible Assets 981 1,605 1,605 1,605
Goodwill on Consolidation 736 470 470 470Investments 218 223 223 223
Inventories 3,864 3,177 4,272 5,007
Sundry Debtors 6,026 2,213 5,340 6,259
Cash & Bank 1,393 1,449 2,868 1,591
Loans & Advances 1,082 861 861 861
Other Current Assets 66 3,849 3,849 3,849
Sundry Creditors (1,777) (1,880) (2,670) (3,129)
Acceptances/ Other Liabilities (743) (970) (1,164) (1,455)
Provisions (1,405) (1,392) (1,392) (1,392)
Working Capital 8,505 7,307 11,964 11,591
Miscellaneous Expenses 25 14 14 14
Total 33,825 34,058 37,197 40,495
Source: Company Data, PL Research
Cash Flow (Rs m
Y/e March FY07 FY08 FY09E FY10E
Cash from operating activities (1,091) 6,086 3,651 6,600
Cash from investing activities (7,911) (3,899) (1,355) (7,000)
Cash from financing activities 9,433 (2,131) (876) (876)
(Dec)/Inc in cash 431 56 1,419 (1,277)
Opening Cash 962 1,393 1,449 2,868
Closing Cash 1,393 1,449 2,868 1,591
Source: Company Data, PL Research
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Key ratios
Y/e March FY07 FY08 FY09E FY10E
Growth Ratio (%)
Sales (4.2) 10.2 37.3 2.5
EBITDA (0.2) 18.3 64.7 8.8PAT (28.8) 53.8 143.7 4.0
EPS (28.8) 53.8 143.7 4.0
Asset Based Ratio (%)
RoCE/RoI 14.5 17.1 25.7 25.7
RoE/RoNW 11.7 14.1 27.1 23.0
Gearing
Debt/Equity 2.2 1.6 1.3 1.0
Per Share (Rs)
EPS 2.6 4.0 9.6 10.0BV 21.9 28.1 35.6 43.6
DPS 1.8 1.8 1.8 1.8
CEPS 7.7 9.9 16.6 18.0
Margins (%)
EBIT 10.2 11.2 15.3 15.8
PAT 3.5 5.0 8.9 9.0
Tax Rate 39.6 31.6 30.5 31.8
Dividend Payout 64.7 31.6 18.7 17.9
Velocity (Days)
Debtors 59.8 45.8 50.0 50.0Inventories 40.9 39.1 40.0 40.0
Valuations (x)
P/E 18.3 11.9 4.9 4.7
P/CEPS 6.1 4.8 2.8 2.6
P/BV 2.1 1.7 1.3 1.1
M.Cap/Sales 0.7 0.6 0.4 0.4
EV/EBITDA 7.8 6.3 3.7 3.5
EV/Sales 1.3 1.1 0.8 0.8
Source: Company Data, PL Research
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This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as
information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not beconsidered or taken as an offer to sell or a solicitation to buy or sell any security.
The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the
accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the
information, statements and opinion given, made available or expressed herein or for any omission therein.
Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well
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1.6%
0%
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ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF.