HDFC Sec Inst Research - Indian Fertilisers - A 'Complex' Mix

INSTITUTIONAL RESEARCH
Indian Fertilisers
A Complex mix
Satish Mishra satish.mishra@hdfcsec.com
Aishwarya Deepak aishwarya.deepak@hdfcsec.com +91 22 6171 7322
9 July 2012
+91 22 6171 7334
INDIAN FERTILISERS
Executive summary
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, govts 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 countrys positioning in the world fertiliser map. Findings suggest low bargaining strength due to higher dependency, structural differences in usage pattern and strong international cartels. Governments 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.
Financials summary
(Rs mn) Chambal Fertilisers CMP (Rs/sh) 81 Target price (Rs/sh) 85 Recommondation OUTPERFORM FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Net Sales 72,296 75,165 95,063 107,728 25,913 29,343 71,672 76,111 EBIDTA 7,836 8,480 9,357 11,483 4,389 5,234 5,256 5,373 APAT 3,531 4,055 5,673 7,098 2,221 2,790 2,898 3,112 EPS (Rs/sh) 8.5 9.7 20.1 25.1 25.2 31.6 5.3 5.6 RoE (%) 20.2 22.0 22.4 24.8 17.0 18.6 12.8 12.6 P/E (x) 9.5 8.3 13.7 10.9 5.6 4.4 11.7 10.9 P/B (x) 1.9 1.8 2.9 2.5 0.9 0.8 1.4 1.3
Coromandel International
Deepak Fertilisers Rashtriya Chemicals
274
141 62
241
150 63
UNDERPERFORM
OUTPERFORM OUTPERFORM
Source : Company, HDFC Sec Inst Research
INDIAN FERTILISERS
Outline
Complex fertilisers: industry update

Postmortem of Nutrient Based Subsidy (NBS)
Indias positioning in global fertiliser map

Policies in discussion Companies
COMPLEX FERTILISERS
Recent concerns
Govt.s attempt to reduce subsidy Higher global prices Depreciating Rupee
CONCERN 1
Channel inventory buildup
CONCERN 2
Sharp rise in farmgate price
Impact on complex players Lower fertiliser off take
De-growth in volumes
Hit on margins Serious risk of profit crack
Severe pain ahead or concerns overblown?

4
COMPLEX FERTILISERS
CONCERN 1 : Channel inventory buildup

DAP+NPK sales volume (mT)
FY08 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 1Q
Source : FAI, HDFC Sec Inst Research
FY09
FY10
FY11
FY12
Likely trend (if no sales push in 4QFY12)
Channel inventory buildup over 4QFY12
2Q
3Q
4Q
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)
COMPLEX FERTILISERS
Quarterly volume snapshot

Sales volumes for DAP & NPK (mT)
1Q FY08 FY09 FY10 FY11 FY12 2.1 3.0 4.6 3.9 3.5 2Q 5.2 5.8 5.0 7.7 6.9 3Q 4.5 5.8 5.5 6.1 6.0 4Q 2.2 2.2 3.4 3.8 6.2 Year YoY Gr (%) 14.1 16.8 18.5 21.5 22.5 0.3 18.8 10.0 16.3 4.8 FY08 FY09 FY10 FY11 FY12
Seasonality analysis for DAP & NPK (%)

1Q 15.1 17.8 24.7 18.0 15.3 2Q 37.0 34.5 26.9 35.7 30.5 3Q 31.9 34.8 30.0 28.6 26.7 4Q 15.9 12.9 18.4 17.8 27.5
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)
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COMPLEX FERTILISERS
CONCERN 2 : Sharp increase in farm gate price

DAP farm-gate price (Rs/T)
30,000
Change in realisation (Rs/T)

1Q Farmgate price (F) 2Q 15,061 24,000* 19,763 14,350 34,824 38,350 +10.1
25,000 20,000 15,000
FY 13 FY 12
FY12 FY13 Subsidy (S) FY12 FY13 Realisation R = F + S FY12
11,917 21,400 19,763 14,350 31,680 35,750 +12.8
10,000
5,000 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
FY 11 FY 10
Mar
FY13 YoY Gr (%)
Source : FAI, Industry reports, HDFC Sec Inst Research
* Price hike announced on 15th june
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
Impact on topline in 1HFY13

Volumes (-) 20% YoY Realisation (+) 11% YoY
Net revenues (-) 10%
COMPLEX FERTILISERS
EBIDTA impact
(A) Manufacturing Margin
1Q Ammonia (US$/T) FY12 FY13 Phosphoric Acid (US$/T) FY12 FY13 INR-USD FY12 FY13 44.6 53.8 45.7 55.0 1050 980 1080 950 530 545 550 560 2Q RM cost for DAP * (Rs/T) FY12 FY13 Realisation (Rs/T) FY12 FY13 31,680 35,750 3,501 3,379 34,824 38,350 5,082 5,878 28,179 32,371 29,743 32,472 1Q 2Q
Gross profit (Rs/T)

FY12 FY13
*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
EBIDTA impact
(B) Trading margin
Complex fertilisers sales volume (mT)
DAP imported DAP manufactured DAP-Total Complex imported Complex manufactured Complex total MAP MOP SSP TSP Ammonium Sulphate Total complex fertilisers
Margins in DAP trading

FY12 6.9 3.9 10.8 3.4 7.5 10.8 0.3 3.0 3.2 0.1 0.5 28.7
1Q DAP (US$/T) FY12 FY13 INR-USD FY12 FY13 Cost * FY12 FY13 Realisation (Rs/T) FY12 FY13 Operating profit (Rs/T) FY12 FY13 625 590 44.6 53.8 31,339 35,404 31,680 35,750 341 346 2Q 677 600 45.7 55.0 34,554 36,700 34,824 38,350 271 1,651
1Q 0.5 0.9 1.4 0.1 1.8 1.9 0.0 0.5 0.7 0.0 0.1 4.7
2Q 2.3 1.1 3.4 1.2 2.0 3.2 0.1 0.2 0.7 0.2 7.6
1HFY12 (excl MOP and SSP)

Manufactured : 59% Traded : 41%
* Cost includes custom duty & other charges Source : HDFC Sec Inst Research
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)
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COMPLEX FERTILISERS
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%
Likely scenario in 1HFY13
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
10
In a complex mix
Govt./ Macro Global RM suppliers Complex players
Outcome
1QFY13 (Lean season)
Low subsidy Weak rupee
Small reduction in global prices
Hike in farm gate price No hit on margins Sharp crack in vol. Pressure to take hit in margins
Inventory buildup Volumes down 15% Inc. in farm gate price Inventory liquidation Vols. down 20 -25% Stable farm gate price
2QFY13 (Peak season)
Low subsidy Flat rupee
RM prices to remain stable
BLINKING TIME
Oct 12 ( Peak season) Low subsidy Strong rupee RM prices to correct Lowering farm gate price Hit on profitability Redn. in farm price Cons. of all excess inventory in channel Situation likely to return to normal
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COMPLEX FERTILISERS
1QFY13 : Reality check

Sales in Q1 is ~1/3rd of H1 volume Sales volume (mT)
2mFY13 DAP Manufactured DAP Imported DAP total NPK Manufactured NPK Imported NPK total 0.40 0.33 0.73 0.61 0.20 0.81 0.22 0.28 2.04 2mFY12 0.55 0.09 0.64 0.99 0.01 1.00 0.24 0.45 2.33 YoY Gr (%) (26.71) 257.90 14.04 (38.23) 1,373.38 (18.93) (7.33) (38.32) (12.44)
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
MOP SSP Total complex
Since margins are likely to remain flat, volumes are key!
Urea
2m data is for April & May
3.36
3.40
(1.13)
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COMPLEX FERTILISERS
Volumes for major players (T)

Coromandel International
2mFY11 DAP manf DAP imp NPK manf NPK imp MoP SSP Total 42,821 52 152,430 66,901 6,956 13,183 282,343 2mFY12 54,230 1,771 37,563 66,323 24,601 6,647 191,135 YoY Gr (%) 26.6 3305.8 -75.4 -0.9 253.7 -49.6 -32.3 DAP manf DAP imp NPK manf
GSFC
2mFY11 102,595 38,908 2mFY12 YoY Gr (%) 69,756 44,891 19,047 -32.0 -51.0
RCF
2mFY11 2mFY12 YoY Gr (%) DAP manf DAP imp NPK manf NPK imp 66 67,469 1,736 91,640 4,127 15,841 2530.3% 35.8% 67.8% 1.1%
NPK imp
Amm Sulf Total
32,104 173,607
36,110 169,804
12.5 -2.2
MoP Total Com Urea
67,535 113,344 312,247 315,655
Tata Chemicals
2mFY11 DAP manf DAP imp NPK manf MOP SSP Total Urea 35,319 42,510 12,599 13,272 103,700 183,707 2mFY12 YoY Gr (%) 6 23,925 8 237 17,708 41,884 109,202 -100.0 -100.0 -98.1 33.4 -59.6 -40.6
Deepak Fertiliser
2mFY11 2mFY12 YoY Gr (%) DAP manf DAP imp NPK manf NPK imp MOP SSP Total 22,098 24,718 11.9 22,098 24,718 11.9
Chambal Fertiliser
2mFY11 2mFY12 YoY Gr (%) DAP manf DAP imp NPK manf NPK imp MOP Total Urea 6,166 6,560 18 6,661 -99.7 1.5 -13.2 394 6,643 94.1
352,514 306,152
2m data is for April & May Source : FAI, HDFC Sec Inst Research
13
Postmortem - NBS
(Two years : too early to judge)
COMPLEX FERTILISERS
Analysing NBS impact

INTENTION
Better Fertilisers Price-hike (if required) Value added products Farmer Balanced nutrient usage Check on subsidy Not affected by volatility in international price Skewed towards Nitrogen No value added products Increase in subsidy
OUTCOME so far
Doubling farmgate price
-ve
No new products
-ve
No uncertainty over subsidy No risk on returns
Better negotiation with RM suppliers

Promoting new investments Industry
Profitability least affected (as financials suggest) Increasing capacity
+ve
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COMPLEX FERTILISERS
Farmgate price and subsidy post NBS

DAP
Farmgate price (Rs/t) 50,000 40,000 Import price (Rs/t)
Complex subsidy
700 600 (Rsbn)
500
400 300 FP Rs9,350/t FP Rs24,000/t 200 100
30,000
20,000 10,000 Jun-10 Mar-11 Jun-11 Mar-12 Sep-10 Dec-10 Sep-11 Dec-11 Jun-12 FY04 FY07 FY10
FY06
FY07
FY08
FY03
FY04
FY05
FY09
FY10
FY11 FY11
MOP
Farmgate price (Rs/t) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 FY04 FY07 Import price (Rs/t)
Nutrient proportion (target : NPK ratio of 4:2:1)

N 100 75 50 FP Rs4,455/t FP Rs17,000/t Jun-10 Mar-11 Jun-11 Mar-12 Sep-10 Dec-10 Sep-11 Dec-11 Jun-12 FY10 25 P K
FY07 FY08 FY09 FY10 Target FY12
Source : FAI, Bloomberg, HDFC Sec Inst Research
FY12
16
Indias positioning in global fertiliser map
INDIAN FERTILISERS
Global N dynamics
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 Producers
60 50 40 30 20 (mT)
Top 10 capacities
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0
Agrium PotashCorp Sinopec IFFCO Yara EuroChem Togliatti CF Ind. Koch OCI
(mT)
10
Canada China Russia Egypt India USA Ukraine Indonesia Pakistan Trinidad
Source : IFA, Industry reports, HDFC Sec Inst Research
18
INDIAN FERTILISERS
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
Importers CY10
7.0 6.0 5.0 4.0 3.0 2.0 1.0
Thailand Turkey France India Bangladesh Saudi Arabia Venenzuela Philppins USA Mexico Oman Eqypt Iran China Brazil Australia Ukraine Qatar Canada Russia
Exporters CY10
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 (mT)
(mT)
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INDIAN FERTILISERS
India : not a big N players after all

Ammonia
India consumption (mT) 15.2
Urea
India consumption (mT) World consumption (mT) India cons/world cons. (%) 26.7 149.6 18.0 5.2 40.0 13.0 19.3
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
World consumption (mT)

India cons/world cons. (%) India import (mT) World trade (mT) India/total trade (%) Import dependency (%)
157.3
9.6 1.9 19.5 9.8 12.6
India import (mT)

World trade (mT) India/total trade (%) Import dependency (%)
Indias share in global consn. and trade is 9.6% & 9.8% resp. Price driven by energy prices
Indias share in global consn. and trade is 18% & 13% resp. Import dependency is 19%
Comfortably positioned
Comfortably positioned
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INDIAN FERTILISERS
Global P dynamics
ROCK PHOSPHATE
China United States Morocco and Western Sahara Russia Other countries Brazil Jordan Egypt Tunisia Israel Syria Australia South Africa Algeria Canada Senegal Togo Iraq World total CY11 (mT) 72.0 28.4 Reserves (mT) Reserves (years) 3,700 51 1,400 49
27.0
11.0 7.4 6.2 6.2 6.0 5.0 3.2 3.1 2.7 2.5 1.8 1.0 0.9 0.8 191.0
50,000
1,300 500 310 1,500 100 100 180 1,800 250 1,500 2,200 2 180 60 580 65,000
1,852
118 68 50 242 17 20 56 581 93 600 1,222 2 189 75 340
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
China is the largest producer of
rock phosphate
China, US and Morocco together produce 65% Reserves highly concentrated in
Morocco, China, Algeria, USA
Source: U.S. Geological Survey, IFA, HDFC Sec Inst Research
21
INDIAN FERTILISERS
Rock phosphate trade flow

(CY10 data) West/ Central Europe E. Europe & C. Asia North America Latin America Africa West Asia (M. East) South Asia East Asia Oceania Total
Prodn. (mT)
0.8 13.3 26.2 8.2 43.2 13.6 2.1 71.6 3.1 182.1
Consn. (mT)
7.6 13.5 29.0 10.6 27.3 7.1 8.9 74.4 3.4 182.1
Surplus/ (deficit) (mT) (6.8) (0.2) (2.9) (2.4) 15.9 6.5 (6.8) (2.9) (0.2)
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
22
INDIAN FERTILISERS
Phosphoric acid scenario

Global Producers
6.0 5.0 4.0 3.0 2.0 1.0
Phosagro Guizhou Mosaic YTHIV YTHIC OCP GCT Vale Potash corp Sinochem
(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
Indias positioning
Phosphoric Acid India consumption (mT) World consumption (mT) India cons./world cons. (%) India import (mT) World trade (mT) India/total trade (%) Indias import dependency (%)
CY10 3.9 39.9 9.8 2.7 4.7 57.5 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
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INDIAN FERTILISERS
Global K dynamics
Production vs Consumption (mT)
Prod Western Europe Central Europe/FSU Africa North America Latin America Asia China India Oceania World total 7.1 19.7 20.3 2.0 10.8 5.6 59.9 Cons 5.9 4.3 0.7 10.2 10.5 28.2 12.7 4.2 0.5 60.3 Surplus/ (deficit) 1.2 15.4 (0.7) 10.1 (8.5) (17.4) (7.1) (4.2) (0.5) BPC Uralkali (Russia)
Player wise Production (mT)

CY11 (%) 33.0 CY11 (mT) 19.8 10.8
Belaruskali (Russia)
Canpotex Potash Corp (Canada) Mosaic (USA) Agrium (Canada) K+S (Germany) ICL (Israel) APC (Arab) SQM (Chile, SA) Chinese players Others
30.8 9.5 8.6 3.7 2.2 9.3 2.9 100.0
9.0
18.4 9.8 7.2 1.5 5.7 5.2 2.2 1.3 5.6 1.7 59.9
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.
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%
Top-5 player has 64% market share Strong cartel - led by two groups
24
INDIAN FERTILISERS
India in the K world...

Indias positioning
India cons. (mT) 4.2
4.0
Domestic consumption vs imports

Consumption Production Import
World cons. (mT)

India cons. (%) India import (mT) World trade (mT) India/total trade (%) India import/India cons (%)
59.9
7.0 4.2 26.4 15.9 100.0
3.0 2.0 1.0 -
FY 94
FY 82
FY 84
FY 86
FY 88
FY 90
FY 92
FY 96
FY 98
FY 00
FY 02
FY 04
FY 06
Indias share in global consn. and trade is 7% & 16% Import dependency is 100% Very strong cartels
Indias 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
Low negotiating power

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FY 08
INDIAN FERTILISERS
Usage profile of major Potash users

Rice 4% Cotton 4%
Fruits & Vegetables 5%
Other crops 14%
Brazil
Soybeans 35%
North America
High cash crops
Other crops 24% Sugar crops 3% Corn 48%
High cash crops
HIGH pricing power

Wheat 5%
Fruits & Vegetabl es 6%
HIGH pricing power
Corn 17%
Sugar crops 21%
Soybeans 11%
China
Corn 2%
Wheat 4% Sugar crops 5% Other crops 7%
India
Others 14% Oil seeds 6% Cotton 5%
High cash crops
Low cash crops
Rice 28%
HIGH pricing power
Wheat 8% Sugar crops 10%
LOW PRICING POWER

Rice 35%
26
INDIAN FERTILISERS
India in global raw material map

Ammonia India consumption (mT) World consumption (mT) India cons/world cons (%) India import (mT) World trade (mT) India/ total trade (%) Import dependency (%) 15.2 157.3 9.6 1.9 19.5 9.8 12.6 Phosphoric Acid India consumption (mT) World consumption (mT) India cons/world cons (%) India import (mT) World trade (mT) India/ total trade (%) Import dependency (%) 3.9 39.9 9.8 2.7 4.7 57.5 70.0
MOP India consumption (mT) 5.0
World consumption (mT)

India cons/world cons (%) India import (mT) World trade (mT) India/ total trade (%) Import dependency (%)
59.9
8.3 5.0 26.4 18.9 100.0
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
27
INDIAN FERTILISERS
International Fertilizer Association (IFA) projections

Global fertiliser demand (mT, nutrients)
07-08 08-09 09-10 10-11 11/12 (e) YoY Gr (%) 12/13 (f) YoY Gr (%) 16/17 (f) YoY CAGR (%) N 101 98 102 104 108 4.0 110 1.4 115 1.5 P 38 34 38 41 41 1.4 42 2.9 45 2.3 K 29 23 24 28 28 0.4 29 6.0 33 3.7 Total 168 155 163 172 177 2.8 181 2.5 193 2.1
Global N demand/supply (mT)

2012 Supply Capacity Potential supply Demand Fertiliser Non fertiliser Losses Unspecified demand Total demand Potential oversupply % supply 169.0 140.8 109.5 24.4 2.3 1.1 137.3 3.5 2.5 2013 174.3 146.4 110.8 25.3 2.4 1.1 139.6 6.8 4.6 2014 176.5 149.7 112.1 26.3 2.4 1.1 141.9 7.8 5.2 2015 189.2 158.4 113.2 27.0 2.5 1.1 143.8 14.6 9.2 2016 189.4 162.2 114.4 27.6 2.5 1.1 145.6 16.6 10.2
Global P demand/supply (mn t)

2012 Supply Capacity Potential supply Demand Fertiliser Non fertiliser Total demand Potential balance % supply 53.3 44.3 36.7 5.0 42.5 1.8 4.1 2013 56.2 45.9 37.6 5.3 43.8 2.1 4.6 2014 58.1 47.4 38.3 5.5 44.7 2.7 5.7 2015 59.4 48.8 39.0 5.6 45.5 3.3 6.8 2016 62.3 49.8 39.7 5.6 46.2 3.6 7.2
Global K demand/supply (mT)

2012 Supply Capacity Potential supply Demand Fertiliser Non-fertiliser Total Demand Potential oversupply % supply
Source : HDFC Sec Inst Research
2013 49.8 43.5 30.0 2.8 33.8 9.7 22.3
2014 52.7 45.7 31.0 2.8 34.8 10.9 23.9
2015 58.4 48.6 31.7 2.9 35.6 13.0 26.7
2016 61.4 52.8 32.6 3.0 36.6 16.2 30.7
46.2 40.2 28.4 2.7 32.0 8.2 20.4
FAI projects supply easing by CY14/15, however action by cartels remains the key
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Policies in discussion
INDIAN FERTILISERS
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.
30
INDIAN FERTILISERS
Company wise impact of increase in fixed cost subsidy

Current fixed subsidy (Rs/T) Chambal Fertiliser CFCL-I CFCL-I RCF Thal Trombay NFL Vijaipur-I Vijaipur-II Bhatinda-I Bhatinda-II Panipat Tata Chemicals 1,285 2,403 x x x 3,100 2,300 2,753 x+350 x+350 x+350 3,450 0.86 0.86 0.48 0.51 0.51 0.86 1,727 2,330 2,300 2,680 1.71 0.33 1.77 0.33 0.90 0.90 0.51 0.52 0.54 0.96 2,577 3,305 2,927 3,655 0.86 0.86 0.94 0.90 New Reassessed Cut-off fixed capacity capacity subsidy (mT) (mT) (Rs/T) Addnl Addnl. FY12 PBT PAT PAT (Rs mn) (Rs mn) (Rs mn) 602 301 301 1,095 980 116 1,699 873 301 168 179 179 301 202 5,866 23.0 3% 23.8 96.1 19.2 322 412 87 14.0 4.3 4.8 13.5 4.3 4.5 1,138 1,267 2.6 90% 4.9 86 33.3 17.6 734 2,500 4.5 29% 5.8 62 13.7 10.6 403 3,420 Upside Potential P/E P/E FY12 due to FY12 EPS CMP (actual (potential EPS addnl. post addnl (Rs/ sh) FY12 FY12 (Rs/sh) subsidy on subsidy EPS) EPS) FY12 EPS (Rs mn) 8.2 12% 9.2 81 9.9 8.8
GSFC
GNFC
3,187
x
3,537
x+350
0.37
0.64
0.38
0.68
130
224
87
150
7,575
2,838
95.1
18.3
1%
5%
Source : Industry reports, HDFC Sec Inst Research
31
INDIAN FERTILISERS
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.
32
INDIAN FERTILISERS
Investment policy in discussion

Brownfield Capex (Rs bn) Base Gas price (US$/mmbtu) Floor/Ceiling realisation (US$/T) Energy norms (Gcal/T) IPP linkage % Earlier proposed max. gas price (US$/mmbtu), linkage as discussed New proposed max. gas price (US$/mmbtu)*
* Floor linked to gas price, however, cap is fixed corresponding to gas cost of US$14/mmbtu
Source : Industry reports, HDFC Sec Inst Research
Greenfield 4.7 6.5 305-335 5.0 95% 14.0 20.0
4.2 6.5 285-315 5.0 90% 14.0 20.0
33
Companies
COMPANYUPDATE
9JULY 2012
ChambalFertilisers
OUTPERFORM
FERTILISER Rs81 Rs85
5,317 17,521 CHMBIN/CHMB.BO 416 34/599 167
INDUSTRY CMP(ason6July2012) TargetPrice

Nifty Sensex KEYSTOCKDATA Bloomberg/Reuters No.ofShares(mn) MarketCap(Rsbn)/(US$mn) 6mavgtradedval.(Rs.mn) STOCKPERFORMANCE(%) 52Weekhigh/low Absolute(%) Relative(%) Promoters FIs&LocalMFs FIIs Public&Others
Source:BSE
Fixedsubsidyboostlikely
Positive policy outlook for urea and declining losses in software subsidiary driveouroptimism.
WeexpectthatNBSpolicyforureawillgetdeferredby23yearsandmodifiedNPSIIIpolicymay beannouncedshortly.UnderthenewpolicyadditionalfixedsubsidyofRs350/twillbegivento allureaplayers.ThiscanboostPATby~Rs400mn(~12%upsidetoourFY13EPAT). We remain cautious on profitability from complex fertilisers trading on the back of excess inventoryintothesystemandhigherfarmgateprices.Wehaveconsidered17%and34%YoYde growth in revenues and PBIT resp. for this segment in FY13. With urea capacity running at full throttle,wedonotforeseeanypositivesurpriseonureavolumesinFY13(est2.13mTPA). Declineinlossesfromsoftwarebusinessandlowerdepreciationforureafacilitytoprovideaddnl. PBTof~Rs625mninFY13. 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 additional1.2mTPAureacapacity(capexRs42bn)bythecompany. AtRs81,Chambaltradesat9.5xFY13EEPS&1.9xFY13EBV.Lowerdepreciation,improvement insoftwarebusinessandpositiveureapolicycandrivesentiment.WerecommendOUTPERFORM withatargetpriceofRs85(10xFY13EEPS) Financialsummary
Rsmn NetSales EBIDTA EBIDTAMargin(%) APAT EPS(Rs/sh) RoE(%) P/E(x) P/B(x) FY10 41,519 6,920 16.7 2,154 5.2 15.9 15.6 2.3 FY11 56,857 7,034 12.4 2,388 5.7 15.9 14.1 2.1 FY12P 75,382 8,216 10.9 3,425 8.2 20.9 9.8 2.0 FY13E 72,296 7,836 10.8 3,531 8.5 20.2 9.5 1.9 FY14E 75,165 8,480 11.3 4,055 9.7 22.0 8.3 1.8
Rs119/66 3M (4.5) (4.8) 6M 0.1 (10.5) 12M (4.4) 1.9 55.10 10.86 9.96 24.08
SHAREHOLDINGPATTERN(%)
SatishMishra satish.mishra@hdfcsec.com +912261717334 AishwaryaDeepak aishwarya.deepak@hdfcsec.com +912261717322

Source:Company,HDFCSecInstResearch
HDFCSecuritiesInstitutionalResearchisalsoavailableonBloombergHSLB<GO>
COMPANYUPDATE
9 JULY2012
CoromandelInternational
UNDERPERFORM
5,317 17,521 CRININ/CORF.BO 282 78/1,436 44

Source:BSE
Neartermhiccups
Excesschannelinventoryofcomplexfertilisersandsharpincreaseinfarmgate pricesarelikelytoleadto~25%crackinvolumesforCoromandelandtherest ofindustryin1HFY13.
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 manufacturingandtradingvolumestodeclineby~15%and~20%respectivelyinFY13. Weexpectpressureonworkingcapitaltocontinueonaccountofhigherreceivables.Phosphoric acidavailabilitystillremainsanareaofconcern(captiveproductionis~20%). Managementsfocusonnonsubsidybusiness(Micronutrients,WSF,farmmechanisation,organic compost, plant protection) along with increasing retail centre augur for a robust contribution fromthissegment.Currentlyitcontributes~12%and~30%atrevenuesandEBIDTArespectively. Coromandelisincreasingcomplexfertilisercapacityby~25%to~4.0mTPA(expectedin2HFY13). AgreementforphosphoricacidisinplacethroughaJV(TIFERT)whichwillsupply0.18mTPAto Coromandel. Additional capacity will result into substitution of trading volumes with manufacturingvolumeshaving45xhighermargins. At Rs 274, Coromandel trades at 13.7x P/E and 2.9x P/BV on FY13E basis. Due to near term volumeconcerns,werecommendUNDERPERFORMratingwithaTPofRs241(12xFY13EEPS). 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. Financialsummary
Rs358/245 3M (1.7) (2.0) 6M (1.0) (11.5) 12M (17.5) (11.1) 63.91 7.25 7.73 21.11

COMPANYUPDATE
9 JULY2012
DeepakFertilisers
OUTPERFORM
CHEMICAL Rs141 Rs150
5,317 17,521 DFPCIN/DPFE.BO 88 12/226 12

Nifty Sensex KEYSTOCKDATA Bloomberg/Reuters No.ofShares(mn) MarketCap(Rsbn)/(US$mn) 6mavgtradedval.(Rs.mn) STOCKPERFORMANCE(%)
TANvolumeisthekey
WithexpandedTANcapacityinplace,rampupiscrucial.
Fertilisers volumes should remain muted in 1HFY13 due to pipeline inventory, however, we expectimprovementduringtheRabi(2HFY13).WehavefactoredlowerfertiliserprofitsinFY13E. New TAN facility had an exit capacity utilisation rate of ~62% in Mar12. 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 degrowth in fertiliserbusiness). Management has guided for improved performance from Ishanya mall in FY13 as renovation activitycompletedinFY12. 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. ExpectedcommissioningbyFY15. 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 OUTPERFORMrating.OurtargetpriceisRs150(6.0xFY13EEPS). Financialsummary
52Weekhigh/lowRs176/118 Absolute(%) Relative(%) Promoters FIs&LocalMFs FIIs Public&Others

Source:BSE
3M (4.9) (5.2)
6M 11.4 0.8
12M (14.2) (7.9) 43.32 9.64 13.58 33.46

COMPANYUPDATE
9 JULY2012
RashtriyaChemicals&Fertilisers
OUTPERFORM
5,317 17,521 RCFIN/RSTC.BO 552 34/618 81

Source:BSE
Debottleneckingbenefitstoflow
RCF has completed urea debottlenecking that will add 0.2mTPA production linkedtointernationalpriceandretentionofenergybenefits.
Realisation for the additional capacity will be linked to IPP (expected to add ~Rs 700mn at EBIDTA).Asperthecurrentpolicy,benefitsofenergyreductionby~0.35Gcal/T(expectedtoadd ~Rs500mnatEBIDTA)willberetainedforfiveyears. WeexpectthatNBSforureawillbedeferredby23yearsandmodifiedNPSIIIwillbeannounced shortly.Underthenewpolicy,additionalfixedsubsidyofRs350/Twillbegiventoallplayerswith afloorofRs2,300/T.Thisshouldadd~Rs734mntoFY13PAT(~25%upsidetoourestimates). We remain cautious on profitability from complex fertiliser business on the back of excess inventoryinthesystemandhigherfarmgateprices. 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 additional1.2mTPAureacapacity(capexRs42bn)bythecompany. AnydevelopmentregardingthecommercialusageoflargelandbankinMumbai(Chembur,700 acres)anddisinvestmentwillbepositivetriggers(notvaluedinourtargetprice). AtRs62,stocktradesat11.7xFY13EEPS&1.4xFY13EBV.Benefitsfromdebottleneckingand positiveureapolicycandrivesentiment.WerecommendOUTPERFORMwithatargetpriceofRs 63(12xFY13EEPS) Financialsummary
Rs91/42 3M 1.9 1.6 6M 9.1 (1.4) 12M (22.3) (16.0) 92.5 1.89 0.01 5.6

Rating Definitions BUY OUTPERFORM UNDERPERFORM SELL
: : : :
Where the stock is expected to deliver more than 15% returns over the next 12 months' period Where the stock is expected to deliver 0 to 15% returns over the next 12 months' period Where the stock is expected to deliver (-) 10% to 0% returns over the next 12 months' period Where the stock is expected to deliver less than (-)10% returns over the next 12 months' period
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HDFC Sec Inst Research - Indian Fertilisers - A 'Complex' Mix

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HDFC Sec Inst Research - Indian Fertilisers - A 'Complex' Mix

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INSTITUTIONAL RESEARCH

Satish Mishra satish.mishra@hdfcsec.com

Aishwarya Deepak aishwarya.deepak@hdfcsec.com +91 22 6171 7322

+91 22 6171 7334

Source : Company, HDFC Sec Inst Research

Complex fertilisers: industry update

Indias positioning in global fertiliser map

Impact on complex players Lower fertiliser off take

Severe pain ahead or concerns overblown?

CONCERN 1 : Channel inventory buildup

Likely trend (if no sales push in 4QFY12)

Channel inventory buildup over 4QFY12

Quarterly volume snapshot

Seasonality analysis for DAP & NPK (%)

Source : FAI, HDFC Sec Inst Research

Source : FAI, HDFC Sec Inst Research

CONCERN 2 : Sharp increase in farm gate price

Change in realisation (Rs/T)

25,000 20,000 15,000

FY12 FY13 Subsidy (S) FY12 FY13 Realisation R = F + S FY12

11,917 21,400 19,763 14,350 31,680 35,750 +12.8

FY13 YoY Gr (%)

Source : FAI, Industry reports, HDFC Sec Inst Research

* Price hike announced on 15th june

Impact on topline in 1HFY13

Net revenues (-) 10%

Gross profit (Rs/T)

Source : FAI, Industry reports, HDFC Sec Inst Research

*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

Margins in DAP trading

Source : FAI, Industry reports, HDFC Sec Inst Research

1HFY12 (excl MOP and SSP)

Likely scenario in 1HFY13

Poor monsoon leading to less sowing of crops

1QFY13 (Lean season)

Low subsidy Weak rupee

Small reduction in global prices

2QFY13 (Peak season)

Low subsidy Flat rupee

RM prices to remain stable

1QFY13 : Reality check

Anticipation of farm-gate price hike for Q2 resulted in further stocking by distributors

MOP SSP Total complex

Since margins are likely to remain flat, volumes are key!

Volumes for major players (T)

MoP Total Com Urea

67,535 113,344 312,247 315,655

Analysing NBS impact

Doubling farmgate price

No uncertainty over subsidy No risk on returns

Better negotiation with RM suppliers

Profitability least affected (as financials suggest) Increasing capacity

Farmgate price and subsidy post NBS

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

FY07 FY08 FY09 FY10 Target FY12

Source : FAI, Bloomberg, HDFC Sec Inst Research

Source : FAI, HDFC Sec Inst Research

Indias positioning in global fertiliser map

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