hdfc sec inst research- indian fertilisers- a 'complex' mix

INSTITUTIONAL RESEARCH

Indian Fertilisers

A “Complex” mix

Satish Mishra

[email protected]

+91 22 6171 7334

Aishwarya Deepak

[email protected]

+91 22 6171 7322 9 July 2012

mailto : [email protected]


2

Executive summary

INDIAN FERTILISERS

Policy inaction, attempt to reduce subsidy, rising farmgate prices for complex fertilisers, weakening INR and politics around urea are some of the factors impacting profitability and investor sentiment. However, govt’s new found focus on tackling subsidies offers hope.

We have done a severity analysis on the excess channel inventory of complex fertilisers and the astronomical rise in farmgate prices. We expect ~25% degrowth in complex volumes in 1HFY13 with a major crack in 2QFY13. Our analysis suggests a decline in profitability for Indian complex players in FY13.

Since India is highly dependent on imports for ‘P’ and ‘K’ nutrients, we have analysed the country’s positioning in the world fertiliser map. Findings suggest low bargaining strength due to higher dependency, structural differences in usage pattern and strong international cartels.

Government’s recent moves suggest positive policy action for urea players. Though NBS for urea looks difficult, we expect a modified NPS-III to be announced shortly. This policy will positively impact the profitability of all urea players. Chambal Fertilisers, RCF and National Fertilisers should significantly benefit from this. A new investment policy for urea is also at an advanced stage of discussion.

We think complex players are at a near term disadvantage (Coromandel International) while urea players (Chambal Fertilisers and RCF) are looking at potentially better times.

(Rs mn) CMP

(Rs/sh) Target price

(Rs/sh) Recommondation Net Sales EBIDTA APAT

EPS (Rs/sh)

RoE (%)

P/E (x)

P/B (x)

Chambal Fertilisers 81 85 OUTPERFORM FY13E 72,296 7,836 3,531 8.5 20.2 9.5 1.9

FY14E 75,165 8,480 4,055 9.7 22.0 8.3 1.8

Coromandel International 274 241 UNDERPERFORM FY13E 95,063 9,357 5,673 20.1 22.4 13.7 2.9

FY14E 107,728 11,483 7,098 25.1 24.8 10.9 2.5

Deepak Fertilisers 141 150 OUTPERFORM FY13E 25,913 4,389 2,221 25.2 17.0 5.6 0.9

FY14E 29,343 5,234 2,790 31.6 18.6 4.4 0.8

Rashtriya Chemicals 62 63 OUTPERFORM FY13E 71,672 5,256 2,898 5.3 12.8 11.7 1.4

FY14E 76,111 5,373 3,112 5.6 12.6 10.9 1.3

Financials summary

Source : Company, HDFC Sec Inst Research

3

Outline

Complex fertilisers: industry update

Postmortem of Nutrient Based Subsidy (NBS)

India’s positioning in global fertiliser map

Policies in discussion

Companies

INDIAN FERTILISERS

4

Recent concerns

Govt.’s attempt to reduce subsidy

Channel inventory buildup

Higher global prices

Sharp rise in farmgate price

Depreciating Rupee

Lower fertiliser off take

Impact on complex players

De-growth in volumes Hit on margins Serious risk of profit crack

Severe pain ahead or concerns overblown?

CONCERN 1 CONCERN 2

COMPLEX FERTILISERS

5

CONCERN 1 : Channel inventory buildup

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1Q 2Q 3Q 4Q

FY08 FY09 FY10 FY11 FY12

Channel inventory buildup over 4QFY12

Likely trend (if no sales push in 4QFY12)

Reduction in FY13 subsidy for complex fertilisers (N: -12%, P: -33%, K: -10%) resulted in players

pushing volumes in 4QFY12 to distributors/ retailers

Figures are for DAP + other NPK (ex- MOP/ SSP)

DAP+NPK sales volume (mT)

COMPLEX FERTILISERS

Source : FAI, HDFC Sec Inst Research

6

Quarterly volume snapshot

1Q 2Q 3Q 4Q Year YoY Gr (%)

FY08 2.1 5.2 4.5 2.2 14.1 0.3

FY09 3.0 5.8 5.8 2.2 16.8 18.8

FY10 4.6 5.0 5.5 3.4 18.5 10.0

FY11 3.9 7.7 6.1 3.8 21.5 16.3

FY12 3.5 6.9 6.0 6.2 22.5 4.8

Sales volumes for DAP & NPK (mT)

1Q 2Q 3Q 4Q

FY08 15.1 37.0 31.9 15.9

FY09 17.8 34.5 34.8 12.9

FY10 24.7 26.9 30.0 18.4

FY11 18.0 35.7 28.6 17.8

FY12 15.3 30.5 26.7 27.5

Seasonality analysis for DAP & NPK (%)

Positive policy changes led to higher penetration and resulted in volume jump of 53% from FY08 to FY11

Higher prices & concern over raw material availability resulted in 8% YoY lower volumes in 9mFY12

4QFY12 : Announcement of lower FY13 subsidy, led to 62% YoY volume growth (sales push to grab higher FY12

subsidies)

Considering seasonality we believe channel inventory is 2.2-2.4mT (~55% of 1QFY13 & ~20% of 1HFY13 demand)

Hence, we expect that 1HFY13 volume may fall over 20% (considering no growth in final consumption given

recent price hike)

COMPLEX FERTILISERS

Source : FAI, HDFC Sec Inst Research Source : FAI, HDFC Sec Inst Research

7

CONCERN 2 : Sharp increase in farm gate price

-

5,000

10,000

15,000

20,000

25,000

30,000

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

DAP farm-gate price (Rs/T)

1QFY13 : Farmgate price (+)79.6% YoY & Subsidy (-)27.4% YoY = Realisation (+)12.8% YoY

1HFY13 : Farmgate price (+)65.6% YoY & Subsidy (-)27.4% YoY = Realisation (+)11.1% YoY

1Q 2Q

Farmgate price (F)

FY12 11,917 15,061

FY13 21,400 24,000*

Subsidy (S)

FY12 19,763 19,763

FY13 14,350 14,350

Realisation R = F + S

FY12 31,680 34,824

FY13 35,750 38,350

YoY Gr (%) +12.8 +10.1

Change in realisation (Rs/T)

Net revenues (-) 10%

Impact on topline in 1HFY13

Volumes (-) 20% YoY Realisation (+) 11% YoY

FY 12

FY 11

FY 10

FY 13

* Price hike announced on 15th june

COMPLEX FERTILISERS

Source : FAI, Industry reports, HDFC Sec Inst Research

8

EBIDTA impact

(A) Manufacturing Margin

1Q 2Q

Ammonia (US$/T)

FY12 530 550

FY13 545 560

Phosphoric Acid (US$/T)

FY12 1050 1080

FY13 980 950

INR-USD

FY12 44.6 45.7

FY13 53.8 55.0

1Q 2Q

RM cost for DAP * (Rs/T)

FY12 28,179 29,743

FY13 32,371 32,472

Realisation (Rs/T)

FY12 31,680 34,824

FY13 35,750 38,350

Gross profit (Rs/T)

FY12 3,501 5,082

FY13 3,379 5,878

*1 T of DAP requires 0.24T NH3 and 0.48T H3PO4

Weak rupee

High global prices

Lower subsidy

Increase in Farmgate price

FLAT to +VE margins

COMPLEX FERTILISERS



9

EBIDTA impact

(B) Trading margin

Complex fertilisers sales volume (mT)

1Q 2Q FY12

DAP imported 0.5 2.3 6.9

DAP manufactured 0.9 1.1 3.9

DAP-Total 1.4 3.4 10.8

Complex imported 0.1 1.2 3.4

Complex manufactured 1.8 2.0 7.5

Complex total 1.9 3.2 10.8

MAP 0.0 0.1 0.3

MOP 0.5 0.2 3.0

SSP 0.7 0.7 3.2

TSP 0.0 - 0.1

Ammonium Sulphate 0.1 0.2 0.5

Total complex fertilisers 4.7 7.6 28.7

1HFY12 (excl MOP and SSP) Manufactured : 59% Traded : 41%

After recent hike in farmgate prices, margins from trading business should also be flat to +ve YoY

Manufactured volumes have higher absolute margins (4-5x of traded fertilisers)

1Q 2Q DAP (US$/T) FY12 625 677 FY13 590 600 INR-USD FY12 44.6 45.7 FY13 53.8 55.0 Cost * FY12 31,339 34,554 FY13 35,404 36,700 Realisation (Rs/T) FY12 31,680 34,824 FY13 35,750 38,350 Operating profit (Rs/T) FY12 341 271 FY13 346 1,651

Margins in DAP trading

* Cost includes custom duty & other charges

COMPLEX FERTILISERS


Source : HDFC Sec Inst Research

10

Overall impact

Assuming that volumes de-growth to be highly skewed towards traded for companies having un-utilised manufacturing capacity

Net sales impact: -10%

EBIDTA impact: -10 to -15%

Upside risks

Opportunistic change in product mix (NPK ratio) by using cheaper nutrients in higher quantity

Better monsoon

Fertiliser volume growth despite price rise (MSP of crops increased by 15-50%)

Downside risks

Fertiliser contracts pending from previous year, may result in higher de-growth in manufacturing volume

Poor monsoon leading to less sowing of crops

Likely scenario in 1HFY13

COMPLEX FERTILISERS

11

In a complex mix

Govt./ Macro

Complex players

Global RM

suppliers

• Low subsidy • Weak rupee • Low subsidy • Flat rupee • Low subsidy • Strong rupee

Outcome

• Hike in farm gate price • No hit on margins • Sharp crack in vol. • Pressure to take hit in margins • Lowering farm gate price • Hit on profitability

• Small reduction in global prices • RM prices to remain stable • RM prices to correct

• Inventory buildup • Volumes down 15% • Inc. in farm gate price

• Inventory liquidation • Vols. down 20 -25% • Stable farm gate price • Redn. in farm price • Cons. of all excess inventory in channel • Situation likely to return to normal

1QFY13 (Lean season)

2QFY13 (Peak season)

Oct 12

( Peak season)

BLINKING TIME

12

1QFY13 : Reality check

Sales in Q1 is ~1/3rd of H1 volume

Anticipation of farm-gate price hike for Q2

resulted in further stocking by distributors

Major de-growth in manufacturing volumes

(trading volumes unavoidable due to contracts)

Volume crack still lower than expected, major

crack likely in 2QFY13

Hike in MSP of crops (15% to 50%) and better

monsoon can alleviate

Since margins are likely to remain flat, volumes

are key!

2mFY13 2mFY12 YoY Gr (%)

DAP Manufactured 0.40 0.55 (26.71)

DAP Imported 0.33 0.09 257.90

DAP total 0.73 0.64 14.04

NPK Manufactured 0.61 0.99 (38.23)

NPK Imported 0.20 0.01 1,373.38

NPK total 0.81 1.00 (18.93)

MOP 0.22 0.24 (7.33)

SSP 0.28 0.45 (38.32)

Total complex 2.04 2.33 (12.44)

Urea 3.36 3.40 (1.13)

2m data is for April & May

Sales volume (mT)

COMPLEX FERTILISERS


13

Volumes for major players (T)


DAP manf 42,821 54,230 26.6

DAP imp 52 1,771 3305.8

NPK manf 152,430 37,563 -75.4

NPK imp 66,901 66,323 -0.9

MoP 6,956 24,601 253.7

SSP 13,183 6,647 -49.6

Total 282,343 191,135 -32.3

Coromandel International


DAP manf 35,319 6 -100.0

DAP imp - 23,925 -

NPK manf 42,510 8 -100.0

MOP 12,599 237 -98.1

SSP 13,272 17,708 33.4

Total 103,700 41,884 -59.6

Urea 183,707 109,202 -40.6

Tata Chemicals


DAP manf 102,595 69,756 -32.0

DAP imp - 44,891 -

NPK manf 38,908 19,047 -51.0

NPK imp - - -

Amm Sulf 32,104 36,110 12.5

Total 173,607 169,804 -2.2

GSFC

Deepak Fertiliser


DAP manf

DAP imp

NPK manf 22,098 24,718 11.9

NPK imp

MOP

SSP

Total 22,098 24,718 11.9

Chambal Fertiliser


DAP manf

DAP imp 394 6,643 94.1

NPK manf

NPK imp

MOP 6,166 18 -99.7

Total 6,560 6,661 1.5

Urea 352,514 306,152 -13.2

RCF


DAP manf - - -

DAP imp 66 1,736 2530.3%

NPK manf 67,469 91,640 35.8%

NPK imp - 4,127 -

MoP - 15,841 -

Total Com 67,535 113,344 67.8%

Urea 312,247 315,655 1.1%

COMPLEX FERTILISERS

2m data is for April & May Source : FAI, HDFC Sec Inst Research


Postmortem - NBS

(Two years : too early to judge)

15

Analysing NBS impact

INTENTION OUTCOME so far

Better Fertilisers

Price-hike (if required)

Value added products

Balanced nutrient usage

Check on subsidy

Not affected by volatility in international price

No uncertainty over subsidy

No risk on returns

Better negotiation with RM suppliers

Promoting new investments

Doubling farmgate price

No new products

Skewed towards Nitrogen

No value added products

Increase in subsidy

Profitability least affected (as financials suggest)

Increasing capacity

-ve

-ve

+ve

COMPLEX FERTILISERS

Farmer

Industry

16

Farmgate price and subsidy post NBS

-

100

200

300

400

500

600

700

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

(Rsbn)

DAP

MOP

FP – Rs4,455/t FP – Rs17,000/t

FP – Rs9,350/t FP – Rs24,000/t

-

10,000

20,000

30,000

40,000

50,000

FY0

4

FY0

7

FY1

0

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Farmgate price (Rs/t) Import price (Rs/t)

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY0

4

FY0

7

FY1

0

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Farmgate price (Rs/t) Import price (Rs/t)

Nutrient proportion (target : NPK ratio of 4:2:1)

COMPLEX FERTILISERS

Complex subsidy

Source : FAI, Bloomberg, HDFC Sec Inst Research

-

25

50

75

100

FY07 FY08 FY09 FY10 Target FY11 FY12

N P K



India’s positioning in global fertiliser map

18

Global “N” dynamics

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Yara

CF

Ind

.

Po

tash

Co

rp

Togl

iatt

i

Agr

ium

Sin

op

ec

IFFC

O

Ko

ch

Euro

Ch

em

OC

I

(mT)

-

10

20

30

40

50

60

Ch

ina

Ru

ssia

Ind

ia

USA

Trin

idad

Ind

on

esia

Can

ada

Egyp

t

Ukr

ain

e

Pak

ista

n

(mT)

AMMONIA

12% of total Ammonia produced (CY10-157mT) was traded

China is the largest producer with 1/3rd share

Top-5 and Top-10 producers have 15% and 38% share (not concentrated market)

80-85% of ammonia is consumed for fertilisers

INDIAN FERTILISERS

Top 10 capacities Producers

Source : IFA, Industry reports, HDFC Sec Inst Research Source : IFA, Industry reports, HDFC Sec Inst Research

19

Global urea dynamics

~27% of urea produced globally is traded

Major export flows

Black Sea to Europe and Latin America

Arab Gulf to North America and Asia/Oceania

Chinese urea capacity is mainly coal based, hence exports from China have reduced sharply in CY11 to ~3mT (dual export tax imposed to discourage export of urea)

India, USA, Brazil and Thailand accounted for 45% of total urea imported globally in CY10

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Ch

ina

Ru

ssia

Om

an

Sau

di A

rab

ia

Eqyp

t

Qat

ar

Ukr

ain

e

Can

ada

Iran

Ven

enzu

ela

(mT)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Ind

ia

USA

Bra

zil

Thai

lan

d

Mex

ico

Turk

ey

Ban

glad

esh

Au

stra

lia

Fran

ce

Ph

ilpp

ins

(mT)

INDIAN FERTILISERS

Exporters CY10 Importers CY10


20

India : not a big ‘N’ players after all…

India consumption (mT) 26.7

World consumption (mT) 149.6

India cons/world cons. (%) 18.0

India import (mT) 5.2

World trade (mT) 40.0

India/total trade (%) 13.0

Import dependency (%) 19.3

• India’s share in global consn. and trade is 18% & 13% resp. • Import dependency is 19%

Comfortably positioned

Urea

Demand/ supply wise India is comfortably positioned

Gas being the raw material, prices of ammonia/ urea is driven by global energy cost

Despite usage being skewed towards N in India, our consumption is lower than high yield countries on a per hectare basis

In India urea is consumed mostly for wheat and rice crops, hence low pricing power

INDIAN FERTILISERS



India cons/world cons. (%) 9.6





Ammonia

• India’s share in global consn. and trade is 9.6% & 9.8% resp. • Price driven by energy prices

Comfortably positioned


21

Global “P” dynamics

Source: U.S. Geological Survey, IFA, HDFC Sec Inst Research

China is the largest producer of

rock phosphate

China, US and Morocco together

produce 65%

Reserves highly concentrated in

Morocco, China, Algeria, USA

CY11 (mT) Reserves (mT) Reserves (years)

China 72.0 3,700 51

United States 28.4 1,400 49

Morocco and Western Sahara

27.0 50,000 1,852

Russia 11.0 1,300 118

Other countries 7.4 500 68

Brazil 6.2 310 50

Jordan 6.2 1,500 242

Egypt 6.0 100 17

Tunisia 5.0 100 20

Israel 3.2 180 56

Syria 3.1 1,800 581

Australia 2.7 250 93

South Africa 2.5 1,500 600

Algeria 1.8 2,200 1,222

Canada 1.0 2 2

Senegal 0.9 180 189

Togo 0.8 60 75

Iraq - 580

World total 191.0 65,000 340

INDIAN FERTILISERS

Rock phosphate is the source mineral used for manufacturing phosphoric acid, the basic raw material for all phosphatic fertilisers like DAP, MAP, SSP and other grades of NPK

ROCK PHOSPHATE

22

Rock phosphate trade flow

(CY10 data) Prodn.

(mT) Consn.

(mT)

Surplus/ (deficit)

(mT)

West/ Central Europe

0.8 7.6 (6.8)

E. Europe & C. Asia

13.3 13.5 (0.2)

North America

26.2 29.0 (2.9)

Latin America

8.2 10.6 (2.4)

Africa

43.2 27.3 15.9

West Asia (M. East)

13.6 7.1 6.5

South Asia

2.1 8.9 (6.8)

East Asia

71.6 74.4 (2.9)

Oceania

3.1 3.4 (0.2)

Total 182.1 182.1

Major export is from Africa and Middle East to South Asia & Europe

Supply gap is maximum in West/Central Europe & South Asia

Rock consumed in Africa is upgraded into phosphoric acid /phosphatic fertilisers and further traded

INDIAN FERTILISERS

Source : IFA, Industry reports, HDFC Sec Inst Research

23

Phosphoric acid scenario

-

1.0

2.0

3.0

4.0

5.0

6.0

OC

P

Mo

saic

Po

tash

co

rp

YTH

IC

YTH

IV

Ph

osa

gro

Gu

izh

ou

GC

T

Val

e

Sin

och

em

(mT) Top-5 has market share of ~42%

Phos acid producers have strong financial muscles

12% of Phos acid is traded

Deficit is maximum in west/central Europe and South Asia

Phosphoric Acid CY10



India cons./world cons. (%) 9.8




India’s import dependency (%) 70.0

Despite ~58% proportion in global trade, high dependency on imports (70%) reduces bargaining strength

Ensuring availability before kharif / rabi season further reduces bargaining strength

INDIAN FERTILISERS

Global Producers

India’s positioning



24

Global “K” dynamics

Prod Cons Surplus/

(deficit)

Western Europe 7.1 5.9 1.2

Central Europe/FSU 19.7 4.3 15.4

Africa - 0.7 (0.7)

North America 20.3 10.2 10.1

Latin America 2.0 10.5 (8.5)

Asia 10.8 28.2 (17.4)

China 5.6 12.7 (7.1)

India - 4.2 (4.2)

Oceania - 0.5 (0.5)

World total 59.9 60.3

CY11 (%) CY11 (mT)

BPC 33.0 19.8

Uralkali (Russia) - 10.8

Belaruskali (Russia) - 9.0

Canpotex 30.8 18.4

Potash Corp (Canada) - 9.8

Mosaic (USA) - 7.2

Agrium (Canada) - 1.5

K+S (Germany) 9.5 5.7

ICL (Israel) 8.6 5.2

APC (Arab) 3.7 2.2

SQM (Chile, SA) 2.2 1.3

Chinese players 9.3 5.6

Others 2.9 1.7

100.0 59.9

Top-5 player has 64% market share Strong cartel - led by two groups

Demand rising at 3% CAGR over last 10 yrs

Europe/ FSU/ North America are exporters

Demand driven by Latin America and Asia

North/ Latin America & China consume 55%

INDIAN FERTILISERS

‘K’ potassium (Kalium in Latin) is mainly used in the form of muriate of potash (MOP). Other potassic fertilisers are sulfate of potash (SOP), potassium nitrate and potassium magnesium sulfate used in small proportions.

Production vs Consumption (mT) Player wise Production (mT)


25

India in the ‘K’ world...

India cons. (mT) 4.2

World cons. (mT) 59.9

India cons. (%) 7.0




India import/India cons (%) 100.0

India’s share in global consn. and trade is 7% & 16%

Import dependency is 100% Very strong cartels

Low negotiating power

India’s positioning

-

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

Consumption Production Import

Domestic consumption vs imports

India’s demand growing at ~5% CAGR Import dependency is 100% Drop in FY12 consumption was due to delay in shipment

in 1HFY12 due to delay in price negotiation

INDIAN FERTILISERS



26

Usage profile of major Potash users

Soybeans 35%

Sugar crops 21%

Corn 17%

Fruits & Vegetables

5%

Cotton 4%

Rice 4%

Other crops 14%

Corn 48%

Soybeans 11%

Fruits & Vegetabl

es 6%

Wheat 5%

Sugar crops

3%

Other crops 24%

Fruits & Vegetables

51%

Rice 28%

Sugar crops 5%

Wheat 4%

Corn 2%

Other crops 7% Fruits &

Vegetables 22%

Rice 35% Sugar crops 10%

Wheat 8%

Cotton 5%

Oil seeds 6%

Others 14%

Brazil

China

North America

India

High cash crops

HIGH pricing power

High cash crops

HIGH pricing power

High cash crops

HIGH pricing power

Low cash crops

LOW PRICING POWER

INDIAN FERTILISERS


27

India in global raw material map

Ammonia



India cons/world cons (%) 9.6



India/ total trade (%) 9.8


Phosphoric Acid








MOP








Comfortably positioned in terms of availability

Price driven by energy prices

Difficult, despite high share of global trade because of high dependence on imports

Negotiation power decreases to ensure timely availability

Very difficult, full dependence on imports

Negotiation power further decreases to ensure timely availability

INDIAN FERTILISERS


28

International Fertilizer Association (IFA) projections

Global fertiliser demand (mT, nutrients)

N P K Total

07-08 101 38 29 168

08-09 98 34 23 155

09-10 102 38 24 163

10-11 104 41 28 172

11/12 (e) 108 41 28 177

YoY Gr (%) 4.0 1.4 0.4 2.8

12/13 (f) 110 42 29 181

YoY Gr (%) 1.4 2.9 6.0 2.5

16/17 (f) 115 45 33 193

YoY CAGR (%) 1.5 2.3 3.7 2.1

2012 2013 2014 2015 2016

Supply

Capacity 169.0 174.3 176.5 189.2 189.4

Potential supply 140.8 146.4 149.7 158.4 162.2

Demand

Fertiliser 109.5 110.8 112.1 113.2 114.4

Non fertiliser 24.4 25.3 26.3 27.0 27.6

Losses 2.3 2.4 2.4 2.5 2.5

Unspecified demand 1.1 1.1 1.1 1.1 1.1

Total demand 137.3 139.6 141.9 143.8 145.6

Potential oversupply 3.5 6.8 7.8 14.6 16.6

% supply 2.5 4.6 5.2 9.2 10.2

Global N demand/supply (mT)

Global ‘P’ demand/supply (mn t) Global ‘K’ demand/supply (mT)

2012 2013 2014 2015 2016

Supply

Capacity 53.3 56.2 58.1 59.4 62.3


Demand

Fertiliser 36.7 37.6 38.3 39.0 39.7

Non fertiliser 5.0 5.3 5.5 5.6 5.6

Total demand 42.5 43.8 44.7 45.5 46.2

Potential balance 1.8 2.1 2.7 3.3 3.6

% supply 4.1 4.6 5.7 6.8 7.2

2012 2013 2014 2015 2016

Supply

Capacity 46.2 49.8 52.7 58.4 61.4


Demand

Fertiliser 28.4 30.0 31.0 31.7 32.6

Non-fertiliser 2.7 2.8 2.8 2.9 3.0

Total Demand 32.0 33.8 34.8 35.6 36.6

Potential oversupply 8.2 9.7 10.9 13.0 16.2

% supply 20.4 22.3 23.9 26.7 30.7

INDIAN FERTILISERS

FAI projects supply easing by CY14/15, however action by cartels remains the key

Source : IFA, Industry reports, HDFC Sec Inst Research Source : HDFC Sec Inst Research


Policies in discussion

30

Modified NPS-III (urea)

Fixed costs for urea manufacturers date back to 2002-03 and need revision.

The FAI has suggested an increase of Rs 350/T of fixed subsidy for all Urea units.

Minimum fixed cost subsidy of Rs2,300/T will apply (some manufacturers can

thus avail much more than Rs 350/T).

Additional fixed subsidy to be given as per the reassessed capacity.

Modified NPS-III will lead to additional subsidy burden of ~Rs9.5bn (total

expected subsidy for FY13 is ~Rs 700bn, Urea ~Rs 300bn).

NBS is unlikely to be implemented soon.

10% price-hike at farmer level, will result into subsidy reduction of ~Rs 15.4bn.

INDIAN FERTILISERS

31

Company wise impact of increase in fixed cost subsidy

Current fixed

subsidy (Rs/T)

New fixed

subsidy (Rs/T)

Reassessed capacity

(mT)

Cut-off capacity

(mT)

Addnl PBT

(Rs mn)

Addnl. PAT

(Rs mn)

FY12 PAT

(Rs mn)

FY12 EPS

(Rs/sh)

Upside due to addnl.

subsidy on FY12 EPS

Potential FY12 EPS

post addnl subsidy (Rs mn)

CMP (Rs/ sh)

P/E (actual

FY12 EPS)

P/E (potential

FY12 EPS)

Chambal Fertiliser 602 403 3,420 8.2 12% 9.2 81 9.9 8.8

CFCL-I 2,577 2,927 0.86 0.94 301

CFCL-I 3,305 3,655 0.86 0.90 301

RCF 1,095 734 2,500 4.5 29% 5.8 62 13.7 10.6

Thal 1,727 2,300 1.71 1.77 980

Trombay 2,330 2,680 0.33 0.33 116

NFL - 1,699 1,138 1,267 2.6 90% 4.9 86 33.3 17.6

Vijaipur-I 1,285 2,300 0.86 0.90 873

Vijaipur-II 2,403 2,753 0.86 0.90 301

Bhatinda-I x x+350 0.48 0.51 168

Bhatinda-II x x+350 0.51 0.52 179

Panipat x x+350 0.51 0.54 179

Tata Chemicals 3,100 3,450 0.86 0.96 301 202 5,866 23.0 3% 23.8 322 14.0 13.5

GSFC 3,187 3,537 0.37 0.38 130 87 7,575 95.1 1% 96.1 412 4.3 4.3

GNFC x x+350 0.64 0.68 224 150 2,838 18.3 5% 19.2 87 4.8 4.5

INDIAN FERTILISERS

Source : Industry reports, HDFC Sec Inst Research

32

New investment policy for urea

Urea realisation linked to gas price and international urea price.

Floating floor and cap for urea realisation depending on the prevailing gas price.

Within the range urea realisation is linked to International price of Urea.

Floor and cap to change by US$2/T for every change of US$0.1/mmbtu in gas

cost.

As per new draft player's ROE (post tax) should vary in the range of 12% to 20%

at given gas cost depending on International Urea price.

INDIAN FERTILISERS

33

Investment policy in discussion

Brownfield Greenfield

Capex (Rs bn) 4.2 4.7

Base Gas price (US$/mmbtu) 6.5 6.5

Floor/Ceiling realisation (US$/T) 285-315 305-335

Energy norms (Gcal/T) 5.0 5.0

IPP linkage % 90% 95%

Earlier proposed max. gas price (US$/mmbtu), linkage as discussed

14.0 14.0

New proposed max. gas price (US$/mmbtu)* 20.0 20.0

* Floor linked to gas price, however, cap is fixed corresponding to gas cost of US$14/mmbtu

INDIAN FERTILISERS

Source : Industry reports, HDFC Sec Inst Research


Companies

COMPANY UPDATE 9 JULY 2012

Chambal Fertilisers OUTPERFORM

HDFC Securities Institutional Research is also available on Bloomberg HSLB <GO>

INDUSTRY FERTILISER

CMP (as on 6 July 2012) Rs 81

Target Price Rs 85

Nifty 5,317

Sensex 17,521

KEY STOCK DATA

Bloomberg / Reuters CHMB IN / CHMB.BO

No. of Shares (mn) 416

Market Cap (Rs bn) / (US$ mn) 34 / 599

6 m avg traded val. (Rs. mn) 167

STOCK PERFORMANCE (%)

52 ‐ Week high / low Rs 119 / 66

3M 6M 12M

Absolute (%) (4.5) 0.1 (4.4)

Relative (%) (4.8) (10.5) 1.9

SHAREHOLDING PATTERN (%)

Promoters 55.10

FIs & Local MFs 10.86

FIIs 9.96

Public & Others 24.08

Source : BSE

Satish Mishra [email protected] +91‐22‐6171‐7334

Aishwarya Deepak [email protected] +91‐22‐6171‐7322

Fixed subsidy boost likely Positive policy outlook for urea and declining losses in software subsidiary drive our optimism.

We expect that NBS policy for urea will get deferred by 2‐3 years and modified NPS‐III policy may be announced shortly. Under the new policy additional fixed subsidy of Rs350/t will be given to all urea players. This can boost PAT by ~Rs 400mn (~12% upside to our FY13E PAT).

We remain cautious on profitability from complex fertilisers trading on the back of excess inventory into the system and higher farmgate prices. We have considered 17% and 34% YoY de‐growth in revenues and PBIT resp. for this segment in FY13. With urea capacity running at full throttle, we do not foresee any positive surprise on urea volumes in FY13 (est 2.13mTPA).

Decline in losses from software business and lower depreciation for urea facility to provide addnl. PBT of ~Rs 625mn in FY13.

Chambal Fertilisers is also a strong contender for building new brownfield urea capacity. Favourable new investment policy (ensuring returns at higher gas price) may result into additional 1.2mTPA urea capacity (capex Rs 42bn) by the company.

At Rs 81, Chambal trades at 9.5x FY13E EPS & 1.9x FY13E BV. Lower depreciation, improvement in software business and positive urea policy can drive sentiment. We recommend OUTPERFORM with a target price of Rs 85 (10x FY13E EPS)

Financial summary Rs mn FY10 FY11 FY12P FY13E FY14E Net Sales 41,519 56,857 75,382 72,296 75,165 EBIDTA 6,920 7,034 8,216 7,836 8,480 EBIDTA Margin (%) 16.7 12.4 10.9 10.8 11.3 APAT 2,154 2,388 3,425 3,531 4,055 EPS(Rs/sh) 5.2 5.7 8.2 8.5 9.7 RoE (%) 15.9 15.9 20.9 20.2 22.0 P/E (x) 15.6 14.1 9.8 9.5 8.3 P/B (x) 2.3 2.1 2.0 1.9 1.8 Source: Company, HDFC Sec Inst Research




Coromandel International UNDERPERFORM


INDUSTRY FERTILISER


Target Price Rs 241

Nifty 5,317

Sensex 17,521

KEY STOCK DATA

Bloomberg / Reuters CRIN IN / CORF.BO


Market Cap (Rs bn) / (US$ mn) 78 / 1,436



52 ‐ Week high / low Rs 358 / 245

3M 6M 12M

Absolute (%) (1.7) (1.0) (17.5)

Relative (%) (2.0) (11.5) (11.1)


Promoters 63.91


FIIs 7.73


Source : BSE



Near term hiccups Excess channel inventory of complex fertilisers and sharp increase in farmgate prices are likely to lead to ~25% crack in volumes for Coromandel and the rest of industry in 1HFY13. With complex fertilisers contributing ~85% and ~70% in revenues and EBIDTA respectively,

Coromandel is likely to be severely impacted with vol reduction in FY13. We expect manufacturing and trading volumes to decline by ~15% and ~20% respectively in FY13.

We expect pressure on working capital to continue on account of higher receivables. Phosphoric acid availability still remains an area of concern (captive production is ~20%).

Management’s focus on non‐subsidy business (Micronutrients, WSF, farm mechanisation, organic compost, plant protection) along with increasing retail centre augur for a robust contribution from this segment. Currently it contributes ~12% and ~30% at revenues and EBIDTA respectively.

Coromandel is increasing complex fertiliser capacity by ~25% to ~4.0mTPA (expected in 2HFY13). Agreement for phosphoric acid is in place through a JV (TIFERT) which will supply 0.18mTPA to Coromandel. Additional capacity will result into substitution of trading volumes with manufacturing volumes having 4‐5x higher margins.

At Rs 274, Coromandel trades at 13.7x P/E and 2.9x P/BV on FY13E basis. Due to near term volume concerns, we recommend UNDERPERFORM rating with a TP of Rs 241 (12x FY13E EPS). Coromandel has registered 42% CAGR in PAT in the last 5 yrs with an avg RoE of 36% and continues to be a high quality business. Any major correction in the stock is a buying opportunity.





Deepak Fertilisers OUTPERFORM


INDUSTRY CHEMICAL


Target Price Rs 150

Nifty 5,317

Sensex 17,521

KEY STOCK DATA

Bloomberg / Reuters DFPC IN / DPFE.BO





52 ‐ Week high / low Rs 176 / 118

3M 6M 12M

Absolute (%) (4.9) 11.4 (14.2)

Relative (%) (5.2) 0.8 (7.9)


Promoters 43.32


FIIs 13.58


Source : BSE



TAN volume is the key With expanded TAN capacity in place, rampup is crucial.

Fertilisers volumes should remain muted in 1HFY13 due to pipeline inventory, however, we expect improvement during the Rabi (2HFY13). We have factored lower fertiliser profits in FY13E.

New TAN facility had an exit capacity utilisation rate of ~62% in Mar’12. With improvement in mining and infrastructure activity post monsoons, utilisation should increase substantially in 2HFY13. We expect that even at ~18% margins (vs 24% using manufactured ammonia), ~Rs400mn additional EBIDTA is possible in FY13 (more than compensating the de‐growth in fertiliser business).

Management has guided for improved performance from Ishanya mall in FY13 as renovation activity completed in FY12.

Company has announced capex plans of Rs 3.6bn to increase its fertilisers capacity along with product enhancement and Rs0.6bn for Bentonite sulphur (specialty fertiliser). Post expansion capacities of NPK fertilisers and Bentonite sulphur will be 0.6mTPA and 62kTPA respectively. Expected commissioning by FY15.

At Rs 141, stock trades at 5.6x P/E & 0.9x P/BV on FY13E basis. Increasing utilisation and profitability of the new TAN facility improves earnings quality. Despite the uncertainty of domestic gas supply to NPK players, valuations and dividend yield of 4.2% translate to an OUTPERFORM rating. Our target price is Rs 150 (6.0x FY13E EPS).





Rashtriya Chemicals & Fertilisers OUTPERFORM


INDUSTRY FERTILISER


Target Price Rs 63

Nifty 5,317

Sensex 17,521

KEY STOCK DATA

Bloomberg / Reuters RCF IN / RSTC.BO





52 ‐ Week high / low Rs 91 / 42

3M 6M 12M

Absolute (%) 1.9 9.1 (22.3)

Relative (%) 1.6 (1.4) (16.0)


Promoters 92.5


FIIs 0.01

Public & Others 5.6

Source : BSE



De‐bottlenecking benefits to flow RCF has completed urea de‐bottlenecking that will add 0.2mTPA production linked to international price and retention of energy benefits.

Realisation for the additional capacity will be linked to IPP (expected to add ~Rs 700mn at EBIDTA). As per the current policy, benefits of energy reduction by ~0.35 Gcal/T (expected to add ~Rs 500mn at EBIDTA) will be retained for five years.

We expect that NBS for urea will be deferred by 2‐3 years and modified NPS‐III will be announced shortly. Under the new policy, additional fixed subsidy of Rs 350/T will be given to all players with a floor of Rs 2,300/T. This should add ~Rs 734mn to FY13 PAT (~25% upside to our estimates).

We remain cautious on profitability from complex fertiliser business on the back of excess inventory in the system and higher farmgate prices.

RCF is a front runner for adding new brownfield urea capacity and revival of sick units. Favourable new investment policy (ensuring returns at higher gas price) may result into additional 1.2mTPA urea capacity (capex Rs 42bn) by the company.

Any development regarding the commercial usage of large land bank in Mumbai (Chembur, 700 acres) and disinvestment will be positive triggers (not valued in our target price).

At Rs 62, stock trades at 11.7x FY13E EPS & 1.4x FY13E BV. Benefits from de‐bottlenecking and positive urea policy can drive sentiment. We recommend OUTPERFORM with a target price of Rs 63 (12x FY13E EPS)




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Rating Definitions

BUY : Where the stock is expected to deliver more than 15% returns over the next 12 months' period

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hdfc sec inst research- indian fertilisers- a 'complex' mix

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