Enam Securities - Indian Fertilzer Sector

7/29/2019 Enam Securities - Indian Fertilzer Sector

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Sector summary

Source: Company,ENAM Research

Source: ENAM Research, Bloomberg

Relative Performance

Indian Fertilizer SectorIndia Research

July 3, 2007

Relative Performance

Source: ENAM Research, Bloomberg

Lead Analyst: Jagdishwar [email protected] (+91 22 6754 7605)

Associate: Ravindra [email protected] (+91 22 6754 7627)

Company Price Mkt cap(Rs.) (USD. bn) FY06 FY07 FY06 FY07 FY06 FY07 FY06 FY07 FY06 FY07

Chambal Fertilizers 36 337 5.4 2.8 6.8 12.5 26.9 13.0 20.3 16.0 2.0 2.1

Coromandel Fertilizers 82 232 6.9 7.9 11.9 9.1 21.3 21.3 18.9 20.7 1.9 2.3

Gujarat Narmada Valley Fertilizers 112 365 19.7 21.0 5.1 5.0 28.7 25.0 32.8 32.3 4.6 4.3

Godavari Fertilizers 105 75 8.2 15.4 11.0 6.7 28.6 41.8 13.8 19.0 2.3 4.6

Gujarat State Fertilizers 178 316 33.2 35.2 5.4 4.9 23.3 20.1 20.2 18.4 5.1 5.1

Nagarjuna Fertilizers 24 246 1.4 0.7 NA 19.9 3.5 1.7 5.5 5.6 - -

Zuari Industries 167 110 16.8 41.3 13.3 3.4 17.5 23.7 9.6 12.6 2.3 2.9

DPS (Rs)EPS (Rs.) P/E (x) RoE (%) RoCE (%)

406080

100120140160

Jun-06 Dec-06 Jun-07

Chambal Coromandel

GNFC Sensex

Bullish in the Long Term050

100

150

200

Jun-06 Dec-06 Jun-07Godavari Gujarat StateNagarjuna Zuari IndusSensex


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Table of contents

Slide No.

Investment Summary 3

Global Scenario 9

Indian Scenario 15

India Poised to change 20

Government Imperatives 25

Changing Landscape: Re-rating in the offering? 28

Annexures 32


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3

Investment Summary

Indian scenario: Situation set to improve Regulated industry with little incentives for efficiency or capacity additions

Growing fertilizer consumption leading to rising imports with almost no domestic capacity addition

Domestic prices not aligned with rising international prices

But rising promoter stakes, inspire confidence

Regulatory changes: Need of the hour Surmounting subsidies

Additional supply of natural gas, a key feedstock for Urea

Government imperatives: Decontrolling the sector in a phased manner

Incentivizing domestic capacity addition

Huge profit/ re-rating potential for urea companies in de-regulated scenario Rising fertilizer demand, driven by consumption in developing countries

Tight supply with new capacities added near the market place or sources of feedstock Global stock prices/ M&A activity at premium valuations

How to choose companies:` Cost competitive Companies located near gas pipelines

` Dynamic entrepreneurs and shareholder orientation

` High ROE companies utilizing cash efficiently either in expansion or diversification


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Urea: Profit Potential Scenario

Urea: Profit Potential in Regulated & Unregulated Scenario

Urea Profit Potential

Source: FAI, ENAM Research

17%

3,086

7,698*

4,612

2,510

2,102

$2.6

2,8205,5576,6708,228Profit (Rs/ Ton)

16%31%37%46%ROCE (%)

10,0207,2836,1704,612Cost of Production

3,9883,2402,9362,510Conversion Cost (Rs/Ton)

12,84012,84012,84012,840Selling Price (Rs/Ton) (International Prices)

4,043

$5.0

3,234

$4.0

2,102

$2.6

Cost of Feedstock (Rs/Ton)

Cost of Natural Gas assumed ($/mmbtu)

6,032

$7.5

0

3,000

6,000

9,000

12,000

15,000

$2.60 $2.60 $4.00 $5.00 $7.50

(Rs/ ton)

Cost of Feedstock Conversion Cost (NG) Conversion Cost (Electricity) Admin. Charges Profit

Huge profit potential but NG availability & industry deregulation hold the key!

International Urea selling price ~$305/ton

Source: FAI, ENAM Research, * Selling price inclusive of subsidy component

Pricepaid byfarmer

SubsidyComponent

Current Scenario


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Global fertilizer stock performance

Acquirer Yara Yara Coromandel

Target Kemira FERTIBRAS SA Godavari Fert

% Stake Acquired 30% 52% 5%

Mkt Cap (USD mn) 1,259 182 109

ROE (%) 10 13 29

P/E multiple (x) (12 months trailing) 15.7 10.8 18.6

Global M&A Activities

Source: Bloomberg,, ENAM Research

Source: Bloomberg,, ENAM Research

Company Country Mkt. Cap 1year 2year ROE P/E (x) EV/EBIDTA(x)

($ bn) Ret. (%) Ret. (%) (%) CY07E CY08E CY07E CY08E

Yara Norway 9.2 129 109 29.2 13.0 13.4 9.3 9.5

Mosaic US 17.6 162 169 (3.9) 54.2 19.7 22.0 11.4

Potash Corp Canada 24.6 177 195 25.7 27.0 23.4 15.8 14.1Agrium US 6.0 103 105 2.7 17.2 15.6 8.8 8.4

Terra US 2.2 285 327 (0.2) 19.0 19.8 7.5 9.0

CF Industries US 3.3 318 288 4.4 21.0 24.1 7.5 8.6

K+S AG Germany 6.1 102 158 26.2 22.5 19.3 10.3 9.2

Re-rating potential in the de-regulated scenario


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Industry Actions: Signaling confidence

Rising Promoter Stake : Signalling Confidence

(%)

40

42

44

46

48

50

2002 2003 2004 2005 2006 2007

Expanding Market Cap & Multiples(Rs mn)

0

40,000

80,000

120,000

160,000

2002 2003 2004 2005 2006 2007

(x)

0

4

8

12

16

Market Cap P/E (RHS)

Steady performance by industryplayers

Creeping promoter stakes inspire

confidence in the sector

(%)

0

20

40

60

80

100

120

FY00 FY01 FY02 FY03 FY04 FY05

(Rs bn)

0

3

6

9

12

RoCE (RHS) Subsidy Spending

Operating Profit

Urea Industry: Financial Snapshot

Source: Bloomberg, ENAM Research

Promoters increasing their stakes : A positive sign


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Local regulations: Poised to change

Rising demand: Rising at a CAGR of 14% and

no supply adds to meet the same. Rising demand

met by costly imports

Rising demand: Rising at a CAGR of 14% and

no supply adds to meet the same. Rising demand

met by costly imports

Deregulation of industry by offering incentives to

domestic capacity additions

Deregulation of industry by offering incentives to

domestic capacity additions

Surmounting subsidies:

Rapidly increasing (~20% CAGR) and have now

reached ~15% of fiscal deficit

Surmounting subsidies:

Rapidly increasing (~20% CAGR) and have now

reached ~15% of fiscal deficit

Decontrolled pricing

Dual subsidy regime Direct subsidies to poor

farmers

Incentives offered to export

Decontrolled pricing

Dual subsidy regime Direct subsidies to poor

farmers

Incentives offered to export

Huge natural gas availability in future: Huge

supply potential

Huge natural gas availability in future: Huge

supply potential Assuring undisrupted supply of natural gas for

fertilizer units

Assuring undisrupted supply of natural gas for

fertilizer units

Catalyst for ChangeCatalyst for Change ImperativesImperatives


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How to select companies?

3

3

3

2

3

GSFC

3

3

3

3

3

Godavari

2

2

3

3

3

GNFC

3

2

3

3

3

Coromandel

3

3

3

3

3

Chambal

Increasing stakes of promoters

Earnings Expansion

(Fertilizers volume growth orefficiencies)

Entrepreneurship(Proxy = Diversification into higher

RoE businesses)

Investor Friendliness

(Proxy = Dividend Payout > 25%)

Proximity to gas supply

(Units lying near the existing/

planned gas pipeline)

Criteria for Selection

32

23

32

22

33

ZuariNagarjuna

Buy a basket: High ROE companies utilizing cash efficiently either inexpansion or diversification


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Global Scenario


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(US$/ Bushel)

0

2

4

6

8

10

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Wheat Corn Soyabean

Rising global food grain demand

Global food grain demand expectedto outpace supply

Visible through consistently falling

inventories in the past decade

Prices of base crops are rising

Limited land along with increasing

population are conducive to fertilizer

demand growth

(mn tonnes)

1,700

1,800

1,900

2,000

2,100

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0

10

20

30

40

Grain Inventory (RHS)

Global grain balance

Source: Bloomberg, ENAM Research

Global Population & Fertile Land

(Acres/ Person)

0.0

0.3

0.6

0.9

1.2

1.5

1965 1980 1990 2000 2010E 2020E

0

2

4

6

8

10(bn)

Arable Land Population (RHS)

Source: Agrium,Yara, ENAM Research

115 days inventory

57 days inventory

Consumption

Production

Grain price

Source: Agrium,Yara, ENAM Research

Food grain demand rising on the back of population growth


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Fertilizers: Inevitable component for grains

Fruit&Vege

tables

6%

Rice

17%

Wheat

18%

Other

cereals

7%

Cotton

3%

Corn

17%

Other

32%

Fertilizer consumption: Across food products

Source : Yara, ENAM Research

Source: Farm Management Pocketbook John Nix 2004

Yield Improvement

Source: Winter wheat yield data; Long term trial, Broadbalk, Rothamsted (since 1856).

0

200400

600

800

1,000

1,200

0 50 100 150 200 250 300

Fertilizer application, Kg N/ha

(Euro/Hect)

Grains & fertilizer price movement($/ tonnes)

050

100

150200

250

300350

400

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

($/ bushel)

0.0

1.0

2.0

3.0

4.0

Urea Price Corn Price (RHS)

Breakup: Grain production costs

Cost Breakup Total Cost Variable Cost

Fertilizer 10% 12%

Labour 19% 23%

Sprays 13% 16%

Seed 5% 6%General overhead exp. 10% 12%

Power & Machinery 26% 31%

Rental Value 17% -

Total 100% 100%

Source : Yara, ENAM Research

Fertilizer: Integral component of grain production


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Fertilizers: Global Demand Scenario

Global consumption on the rise Growing at a CAGR of 3 5%

Developing countries, especially India &

China, are witnessing rapid growth

(mn tonnes)

0

40

80

120

160

200

1961 1971 1981 1991 2001 2006

N P K

CAGR: 3.7%

Global Fertilizer Consumption

Source: FAI, Capitaline, ENAM Research

(mn tonnes)

0

20

4060

80

100

120

1961 1971 1981 1991 2001 2006

N P K

Developing Countries

(mn tonnes)

0

20

40

60

80

100

120

1961 1971 1981 1991 2001 2006

N P K

Developed Countries

CAGR 7.7%

V/s

China and India

a/c for ~40% &20% of globalconsumption,respectively

Fertilizer Consumption:

India and China: The main demand drivers


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Global Fertilizers: Supply & Capacity Additions

Fertilizer Supply Trends Production is shifting towards regions with low cost

natural gas supply and/ or growing demand

Units in the North American and EU region have been

forced to shut down with increased cost of feedstock

Capacity addition Mainly in demand centersand natural gas hubs China (demand driver) and the Middle East (natural gas

reserves) are witnessing major capacity additions

Source :Fertecon, Agrium ENAM Research

Urea Capacity Addition Breakup

(mn tonnes)

0

2

4

6

8

10

2007 2008 2009

155

160

165

170

175

180

China NG Resources

Others Capacities (RHS)

Global Urea Capacity Utilization

70

75

80

85

90

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

(%)

India

China

Growing markets

Oman: $ 1Saudi Arabia: $0.75

Iran: $1.25

Russia: $1.45

USA: $6.75 China: $5.80

Trinidad: $1.65

Germany: $7.70

Brazil: $3.70

N. Gas Resources

(mn tonnes)

Market places and resource rich regions adding capacities


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India V/s China

India has one of the lowest levels offertilizer consumption

China enjoys better yield per hectare

with greater fertilizer consumption

Better yield per hectare leads to lower

dependence on fertilizer imports for

China

India: Low Consumption/ Hectare

(Kg/Hectare)

0

50100

150

200

250

300

China

France

Pakistan

Brazil

USA

World

India

India v/s China: Yield Comparison

(mn tonnes)

0

2

46

8

10

12

14

India China

20

22

24

26

28

30

Imports % of Total Consumption (RHS)

India v/s China: Fertilizer Imports

Source: CRIS Infac, ENAM Research

(Tons/Ha)

0

1

2

3

4

India China

India: Huge potential for fertilizer demand growth


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Indian Scenario


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Indian Fertilizer Industry: A Snapshot

SizeSize

Globally, the 3rd largest consumer

12% of global consumption

Size of ~20 mn tonnes, tilted in favor of Urea due to pricing advantage and raw

material availability

Globally, the 3rd largest consumer

12% of global consumption

Size of ~20 mn tonnes, tilted in favor of Urea due to pricing advantage and raw

material availability

StructureStructure Regulated industry with controls on input, output and pricing

Subsidized with capped returns

Regulated industry with controls on input, output and pricing

Subsidized with capped returns

ComparablesComparables Low consumption per hectare

One of the lowest food grain yield per hectare

Low consumption per hectare

One of the lowest food grain yield per hectare

SegmentsSegments N (Urea) Feedstock largely used is Natural Gas (66%) and Naphtha (29%) P (DAP) Largely produced with imported raw material Rock Phosphate

K (MOP) Largely imported

N (Urea) Feedstock largely used is Natural Gas (66%) and Naphtha (29%)

P (DAP) Largely produced with imported raw material Rock Phosphate

K (MOP) Largely imported


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Indian Fertilizer Industry: An Overview

Steady Demand Growth 3-5% in the past

20 years

Nearly self sufficient in Urea (N). A large

part of MOP (K) & P (DAP) demand is metthrough imports due to urea pricing

advantage and unavailability of inputs for

K&P production

Consumption tilted in favor of N against an

ideal ratio of 4:2:1 in turn leading to soil

deterioration

Fertilizer Consumption - India

(mn tonnes)

0

5

10

15

20

25

1950-51

1960-61

1970-71

1980-81

1990-91

2000-01

2006-07

N P K

Fertilizer Production and Imports

0%

20%

40%60%

80%

100%

1951-52

1960-61

1970-71

1980-81

1990-91

2000-01

2006-07

N P K

Consumption Ratio

CAGR13.6%

(mn tonnes)

0

5

10

15

20

25

1980-81

1990-91

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

N P Import

Note: Import largely K. Urea import on a rise recently

Price/tonRs 4,500

Price/ton>Rs7,000

Price/tonRs 4,830

Dependenceon importgrowing dueto domesticsupply

constraints


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Fertilizer Prices on an upswing

Indian companies are currently operating

almost at full capacity with no significant

greenfield urea capacity-adds since 99-00

Dependence on imports has been growing

in the recent past. Rising demand has not

been matched by capacity additions

Urea prices: Local v/s International

0

50

100

150

200

250

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

($/ ton)

Intl. Urea Price Regulated Urea Price

Source: FAI, Capitaline, ENAM Research

($/MMBTU)

0

2

4

6

8

10

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

Intl. Gas Price APM Gas Price (India)

Natural Gas Price : Controlled v/s International

Capacity Utilization: Indian Industry(mn tonnes)

10.0

10.5

11.0

11.5

12.0

12.5

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

(%)

80

85

90

95

100

105

110

Total capacity Utilisaion (RHS)

Regulated and international urea prices : The gap is widening


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Focus area should be players with expansion plans & smart cash utilization

Urea: Regulatory framework

Selling prices fixed at Rs 4,830/ ton

Assured post tax return of 12% on

capital employed compensated by way of

subsidies

Natural gas made available tomanufacturers at subsidized prices

Delay in subsidy payments leading to

working capital crunch

Urea Economics: Feedstock Natural Gas

Source: FAI, ENAM Research, Note: * Gas under APM of $2.6/MMBTU, ^ Including electricity input

0

2,000

4,000

6,000

8,000

10,000

Feedstock Cost Cost of

Conversion

RoCE 12%

(Rs/ ton)

MRP Rs 4,830/ton

Company Realization

Gas price of USD2.6 /mmbtu

Subsidycomponent

Urea Economics Feedstock ComparisonNaptha Based(~30%)($/ton)Energy Input(INR/ton)

70

188

75

11237

25

51*

733,0009^1,010Conversion Cost (b )

371,500-1,500Other Overheads ( c )

18,852

23,682

3,600

20,082

15,582

(INR/ton)

-

-

-

-

20

mmbtu

4904,612Total Op Cost (d = a+b+c)

883,086Assured return ( e)

460

578

380

($/ton)

2,868

7,698

2,102

Subsidy

Cost + Return (e - d)

Feedstock (a)


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India: Poised to change


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Fertilizer Demand: Expected to remain firm

Fertilizer demand likely to remain firm Rising food grain demand with an increasing

population and limited acreage to translate into

additional fertilizer needs

There is no perfect substitute for chemical

fertilizers due to limitations of organic fertilizers in

terms of quality as well as availability

Additional land for farming is unavailable

thus improving fertilizer consumption

Source: Broadbalk, Rothamsted , ENAM Research

India : Low Consumption/ Hectare

(Kg/Hectare)

0 50 100 150 200 250 300

China

France

Pakistan

Brazil

USA

World

India


Yield response (monetary value) to N fertilizer rate

Source: FAO/IBGE, MB Associates, EMBRAPA

India: Minimum potential farm land

0 50 100 150 200 250 300

India

CanadaChina

Argentina

EU

USA

Russia

Brazil (mn ha)

Used Potential

Potential toincrease

acreage: Zero

0

200

400

600

800

1,000

1,200

0 50 100 150 200 250 300

Fertilizer application, Kg N/ha

(Euro/Hect)

Rising population and limited acreage fuelling fertilizer demand growth


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Subsidy Burden: Mounting at a rapid pace

Fertilizer subsidy as a percentage of fiscaldeficit is ~15% and is mounting

Fertilizer subsidy burden on the rise Subsidies increasing at a rapid pace

Subsidy spending (including the concession on P &K)touched Rs 22.5 bn in FY07, growing at a CAGR of

20% in last 5 years

Share of fertilizer subsidies as a percentage of total

explicit subsidy spending has increased alarmingly

Rising fertilizer imports Currently, costly urea being imported instead of

incentivising cheaper domestic production

Subsidy spending on imported urea increasing at a

rapid pace

A large portion of P & K is being imported due to theunavailability of raw material

Urea Subsidy Spending

04080

120160200240280

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08E

(Rs bn)

Indigenous Urea Imported Urea P&K


(%)

01020

304050

6070

Food

Fertilizers

Petroleum

Export

Railways

Interest

Other

Explicit Subsidy Spending

CAGR 12%

Source: NIPFP, FAI, ENAM Research

Rising subsidy burden expected to force policy changes


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Relatively cheap pricing of gas is critical!

Natural gas availability? Increased availability of natural gas is likely

to ensure undisrupted supply of natural gas

for fertilizer units

Increased domestic supply likely to soften

natural gas prices

Government intervention and private

investments in the sector remain integral to

pricing decisions

($/mmbtu)

0

2

4

6

8

10

APM R-LNG Spot

Comparative gas prices


Natural gas

Air

DAP /MAP

Urea

Rock

Ammoniaplant

NH3

Phosphoricacid plant

H2PO4

CO2


Profit Potential: Urea & DAP

Urea DAP

Natural Gas Cost ($/mmbtu) 2.6 2.6

Natural Gas Requirement/ton 27.1 7.7Natural Gas Cost as a % of total Cost 62.7% 6.9%

Total Cost of Manufacturing (Rs/Ton) 4,612 13,000

International Selling Price (Rs/Ton) 12,840 17,742

Manufacturing Process : Urea & DAP

Source: YARA, ENAM Research


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Natural Gas: Huge supplies in the offing

Domestic supply expected to increasemanifold with natural gas discoveries in the

Krishna Godavari basin and the Mahanadi

delta

Cross border pipelines expected to furtherincrease natural gas availability in the

country

53 49 45 49 510

50

100

150

200

250

300

FY07 FY08E FY09E FY10E FY11E

(mmscmd)

ONGC OILJoint Venture Gas Reliance KG BasinONGC/GSPC KG Bas Qatar LNG

CBM

Domestic Suppliers

0%

10%

20%

30%

40%

50%

Power

Fertilizers

Petrochem

CityGas

LPGEtc

Sponge

Iron

Other

(mmscmd)Natural Gas: Current Demand Pattern



95

300

0

50

100

150

200

250

300

FY06 FY12

(mmscmd)

Gas Supply

Domestic Gas supplies

CAGR: 21%

Huge supply likely with new discoveries


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Government Imperatives


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Vicious cycle of subsidy

Deficit: Limitedlocal capacity

addition

Disaster :Mountingsubsidies

Surmountingsubsidy: Growing

import volumes & risingurea prices

ControlledROI

Incentivizinglocal supply :

Decontrol in a

phased manner

Breaking the vicious subsidy cycle

Government signalingpolicy changes

Incentives offered to industry

for operating above installed

capacity levels

Naphtha and LSHS unitsordered to convert to natural

gas within a period of two to

three years

Decontrol in a Phased

Manner? Direct subsidy to farmers

` Rural India benefiting from

government support (See

annexure 1 & 2)

` Market driven agro pricing

Dual subsidy regime

Market forces

Decontrol: Likely to break the vicious circle


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Government Actions?

Incentivising domestic production Steps conducive to increment in domestic production arelikely to be offered

Urea units operating above full capacity utilization

currently allowed to retain a portion of additional profits

Pricing Possibilities Dual subsidy regime

` Limiting subsidy only to small and medium farmers

` Providing cap of 120 kg of subsidized fertilizers for 2 acres or

lesser farmland, expected to benefit the industry

Deregulation of industry` Huge room for profits in deregulated scenario with prices

being determined by market forces

Exports - Is it possible??` Cheaper gas availability (compared to global spot prices) and

conversion cost advantage likely to enable export of fertilizers

(mainly N) to developed nations

0

3,000

6,000

9,000

12,000

15,000

$3.00 $4.00 $5.00

(Rs/ton)

Cost of Feedstock Conversion Cost (NG)Conversion Cost (Electricity) Admin. Charges

Profit

Urea Profit Potential


10,6439,5307,97211,48310,3708,812Selling Price (Rs/ Ton)

3,3603,3603,3604,2004,2004,200EBITDA

8008008001,0001,0001,000Depreciation @ 5%

7,2836,1704,6127,2836,1704,612Cost of Production

2,560

$2.6

3,200

$5.0

3,200

$4.020,000

3,200

$2.6

Greenfield 16% ROCE

EBIT

Cost of Natural Gas assumed ($/ mmbtu)Capital Cost (Rs/ ton)

2,5602,560

$5.0$4.016,000

Brownfield 16% ROCE


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28

How to choose companies?


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29

Cos near the proposed pipeline: Set to gain

Naphtha based producersordered to convert to gas

Existing urea producers likely

to get undisrupted gas supply

Units located near the

proposed gas pipeline set to

gain

Co. Name Near Existing Near Proposed

Pipeline Pipeline

Chambal Fert Partly YesCoromandel Fert No YesGujarat Narmada Valley Fert Yes YesGodavari Fert No YesGujarat State Fert Yes YesNagarjuna Fert No YesZuari Indust No Yes

Location of Mfg. Facility

Bhatinda

A1 BLOCK,

MYANMAR

NFL

NFL

CHAMBAL

GSFC

GNFC

RCF

RCF

ZACL NFCL

NFLINDO GULF

Urea Mfg. facility

Existing Lines

Proposed Pipelines

Turkmenisthan

Iran

Proposed Crossborder Pipelines

DAP/ MOP Mfg.facility

Godavari

Coromandel

Coromandel

Source: GAIL, ENAM Research

Source: GAIL, ENAM Research

Will reduction in gas cost be a pass through??

i i C i f S


30/35

30

Fertilizer Companies: Performance Snapshot

Period DPS(Rs) DividendPayout (%) DividendYield (%) RoE(%) Fert. Non-Fert. ExistingPipeline ProjectedPipeline

Chambal Fertilizers & Chemicals Ltd FY05 2 50 5.3 44 80 20

Main Product: Urea & Ammonia FY06 2 38 5.5 27 83 17

Diversification: Fibers, Shipping FY07E 2 74 5.9 13 75 25 Partly Yes

Coromandel Fertilisers FY05 2 30 2.4 37 100 -

Main Product: Ammonia Phosphate Fertilisers FY06 2 28 2.4 21 100 -Diversification: None FY07E 2 29 3.2 21 100 - No Yes

Gujarat Narmada Valley Fertilizers Co Ltd FY05 4 28 4.3 26 4 96

Main Product: Urea, Ammonium Nitro Phosphate FY06 5 23 4.6 29 12 88

Diversification: Chemical Business FY07E 4 20 4.1 25 16 84 Yes Yes

Godavari Fertilisers & Chemicals Ltd FY05 1 21 1.4 42 100 -

Main Product: DAP & Complex Fertilizers FY06 2 28 2.5 29 100 -Diversification: None FY07E 5 30 4.4 42 100 - No Yes

Gujarat State Fertilisers FY05 2 10 1.1 27 34 66

Main Product: Fertilizers - Urea, DAP, NPK FY06 5 15 2.8 23 43 57

Diversification: Chemical Business FY07E 5 15 3.0 20 38 62 Yes Yes

Nagarjuna Fertilizers & Chemicals FY05 - NA - 1 100 -

Main Product: Urea, Ammonia FY06 - NA - 4 100 -

Diversification: None FY07E - NA - 2 100 - No Yes

Zuari Industries Ltd FY05 2 NA 2.7 (2) 47 53

Main Product: Urea, Ammonia, Compund Fert.s FY06 2 14 1.0 17 54 46

Diversification: None FY07E 3 7 2.1 24 84 16 No Yes

Op. Profit Manufacturing Location

Source: Company, ENAM Research

Co.s with high RoEs and healthy payout are attractive opportunities

F ili C i F d l


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Fertilizer Companies: FundamentalsCompany Period Net Sales

(Rs mn)

EBITDA

(Rs mn)

Adj. PAT

(Rs mn)

FDEPS

(Rs)

ROCE

(%)

RoE

(%)

PE

(X)

EV/

EBITDA (X)

Chambal Fertilizers & Chemicals Ltd FY05 29,149 5,448 1,730 4 35 44 9.4 5.1

(CMP: 36) FY06 28,652 5,783 2,237 5 20 27 6.8 4.1

(MCap: USD337mn) FY07E 29,470 4,601 1,158 3 16 13 12.5 4.8

Coromandel Fertilisers FY05 15,251 1,491 716 6 35 37 12.6 7.6

(CMP: 82) FY06 18,469 1,807 878 7 19 21 11.9 8.0(MCap: USD232mn) FY07E 20,655 2,181 1,007 8 21 21 9.1 5.6

Gujarat Narmada Valley Fertilizers Co Ltd FY05 18,226 4,035 2,267 15 26 26 6.5 4.7

(CMP: 112) FY06 21,476 5,027 3,060 20 33 29 5.1 3.6

(MCap: USD365mn) FY07E 27,393 5,763 3,265 21 32 25 5.0 3.2

Godavari Fertilisers & Chemicals Ltd FY05 11,936 503 171 5 26 42 15.3 10.0

(CMP: 105) FY06 15,185 683 261 8 14 29 11.0 10.7

(MCap: USD75mn) FY07E 18,005 1,169 493 15 19 42 6.7 6.8

Gujarat State Fertilisers FY05 26,066 4,385 1,321 17 31 27 9.7 5.4

(CMP: 178) FY06 28,307 5,520 2,644 33 20 23 5.4 4.5

(MCap: USD316mn) FY07E 33,187 4,869 2,803 35 18 20 4.9 4.2

Nagarjuna Fertilizers & Chemicals FY05 12,664 3,027 128 0 11 1 - -(CMP: 24) FY06 14,529 3,042 654 1 5 4 - -

(MCap: USD246mn) FY07E 18,152 3,079 317 1 6 2 19.9 6.3

Zuari Industries Ltd FY05 28,816 1,027 (23) (1) 14 (2) NA 11.7

(CMP: 167) FY06 35,690 1,450 495 17 10 17 13.3 13.4

(MCap: USD110mn) FY07E 36,132 2,456 1,216 41 13 24 3.4 NA

Source: Company, ENAM Research


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Annexures

A 1 G t di l i iti ti


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Infrastructurespending:Bharat Nirman

ScientificKnow how

HigherIncome

HigherSpending

Higher RiskAppetite

Increasedinvestments

HigherProductivity

Virtuous Cycleof Prosperity

Ruralconnectivity

Regulatory

changes

CommodityExchanges

Access tocredit, microfinance,insurance

Private sectorparticipationon the rise

Annex.1: Govt. spending on rural initiatives Bharat Nirman: The most ambitious rural

plan in India (~USD40bn) Roads: ~USD11bn for rural road connectivity

Telephony: 67,000 villages to get phones by end-07

Irrigation & Water supply: Addl. Irrigation of 10mn

ha and clean water for 56,000 habitations (~USD21bn)

Rural Housing: >1.5mn houses to be constructed

every year for next 4 yrs (~USD3.2bn)

Electricity: For >125,000 villages (USD3.8bn)

Credit: Agri credit to double in next 3 yrs.

Bank lending was up 35% in the last 2 yrs ~2.2mn SHGs given credit link of ~USD2.5bn

Corporate participation: RIL, ITC, & Bharti

etc. giving a fillip to contract farming

Resurgence of rural India : Job growth in rural areas was higher at 3.3% v/s

1.7% for urban enterprises

Rural enterprises grew 5.5%, i.e double the growth

rate during last 2 decades

Rising rural incomes!

A 2 R l tilt i t li i


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Annex.2: Rural tilt in government policies

Amendments by the Government to give impetus to Agriculture & encouragetrade in perishable goods

Farmers will not need a license to hold commodities

A free market for Essential commodities

Pan India (To Be

Banned)

Essential Commodities Act

No need for farmers to sell to registered intermediaries

Farmers can sell to highest bidder

Move towards Information Driven markets

14 States

(Already Banned)

APMC Act

Allow warehouse receipts to become negotiable

instruments

Lead to greater banks lending due to mitigation of default

risk

Pan IndiaWarehouse Receipt Act

Integrate 16 laws governing food industry into one.

Remove conflicts between existing laws

Pan IndiaIntegrated Food Law

Reduce tax evasion

Increase tax/ GDP ratio

Pan IndiaVAT

Move from highly subsidised products to market demandTo be phased outMinimum Support Price (MSP)

BenefitsStatusAct


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