ENAM Securities

EVENT UPDATE
India Research

Fertilizer Sector
Analyst: Jagdishwar Toppo
Email: jagdishwar@enam.com BONDAGE RISK RECEDES
Tel: 9122 6754 7605 The government has committed an immediate cash payment of Rs 220
bn for the fertilizer companies alleviating the risk of subsidy payment
Relative Performance in the form of illiquid and low yield bonds. This cash dole-out is
expected to substantially ease the working capital situation and
300 potentially catalyze a re-rating for the sector.
250
200
The highlights of Press release/ GOI (Fertilizer sector):
150
100
The government would give Rs 220 bn in cash to fertilizer
50 producers who have been demanding cash instead of bond.
Jul-07 Jan-08 Jul-08 This is over and above Rs 320 bn of cash payment committed in
Chambal Coromandel the budget. Total cash payment would stand at Rs 540 bn, out of
GNFC Sensex the total estimated fertilizer subsidy of Rs 1150 bn. (See Pg 2)
Source: Bloomberg, ENAM Research
Why cash & not bonds to the fertilizer sector? The acute
Relative Performance shortage of domestic supplies has led to farmer unrest (see pg 2) in
various parts of the country, jeopardizing the critical farmer vote bank
400 for political parties. Indian farm price for fertilizers (unchanged in the
300 last 15 years) is 1/5th of international price. Also, the low return cap for
200 the industry (See Pg 4), is now set to improve on the back of complete
100 de-regulation for phosphatic segment and part deregulation for the
urea sector. While farmers would keep paying at the same old
0
Jul-07 Jan-08 Jul-08 subsidized prices, the differential will be borne by the government as
Guj. State Nagarjuna
subsidy.
Zuari Indus Sensex
We believe this commitment towards cash payment by the
Source: Bloomberg, ENAM Research
govt is a major step towards the re-rating of the undervalued
fertilizer sector. We believe, the huge gas supply expected from RIL
(KG-basin) will also be a major catalyst for new investments in the
fertilizer space (See Pg 4). We recommend the entire space as an
investment opportunity. The stock specific upsides would depend on
the company’s plant location, balance sheet and management (for
upside, see sensitivity analysis on pg 3). Our forecasts do not factor in
the impact of changes in the new policy as we seek further clarity on
the business plans of these companies.

Sector summary
Company CMP Mkt cap EPS (Rs.) P/E (x) RoE (%) RoCE (%) Div Yield
(Rs.) (USD mn) FY08 FY09E FY08 FY09E FY08 FY09E FY08 FY09E FY09E (%)
Chambal 83 805 4.0 5.1 20.8 16.2 17 19 11 13 3.2
GNFC 124 406 24.0 28.9 5.2 4.3 22 22 27 27 4.8
GSFC 199 311 29.9 37.1 5.6 4.5 14 16 16 19 2.8
Nagarjuna 36 426 0.8 1.4 51.8 29.7 2 4 6 7 -
Zuari 273 222 38.8 46.9 8.3 6.9 15 15 16 16 1.1
Coromandel 173 566 16.1 35.2 10.7 4.9 33 51 29 41 6.1
Source: Company, ENAM estimates, FY09E EPS do not factor in the impact of the changes from the new fertilizer policy; Prices as on Aug 20, 2008

ENAM Research is available on Bloomberg (ENAM <Go>), Reuters.com and Firstcall.com 21 August 2008
 Fertilizer Sector

Fertilizer shortage: Farmer Fury!

Source: The Hindu, Press Trust of India

Wednesday, August 20, 2008

Ministry of Chemicals and Fertilizers. Source: Press Information Bureau
Rs. 22,000 crore Fertiliser Subsidy to be Released Soon: Shri Paswan
The government will soon release Rs. 22,000 crore to the fertilizer industry towards the subsidy bill.
Minister for Steel, Chemicals and Fertilisers Shri Ram Vilas Paswan today said that arrangement for the
same has been made and the payment will be made in cash. He said the decision to pay the second
tranche of Rs. 22,000 crore was made at a meeting taken by the Cabinet Secretary. Shri Paswan said the
government is aware of the problems of the fertilizer industry and thanked the Prime Minister for
intervening in the matter. The second tranche is in addition to the provision of about Rs. 32,000 crore
made in Union Budget for 2008-09. Shri Paswan said the fertilizer subsidy bill is expected to be Rs.
1,15,000 crore this year following hike in global price of fertilizers and addition of complex fertilizers to
the concession scheme.

AUGUST 2008 ENAM Securities 2

 Fertilizer Sector

International urea price

900
(USD/ MT)
800
700
600 Ceiling price of US $ 425
500
400
300
200
100 Floor price of US $ 250
0

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08
Jul-04

Jul-05

Jul-06

Jul-07

Jul-08
Source: Bloomberg

Potential profits for new investments in the sector @ USD 425 /tonne
Current De- Brownfield exp
(USD/tonne) Regulated bottleneck Case I Case II
Regime
Incremental volume - 20% 50% 50%
Capital cost 400 200 500 800
Realization 304 425 450* 450*
Cost - @ NG cost of USD6/mmbtu 240 240 240 240
EBITDA 64 185 210 210
Depreciation @5% 20 10 25 40
EBIT 44 175 185 170
RoCE (%) 11.0 88 37.0 21.3
Blended ROCE (%) 11.0 18 21.0 16.1
Blended EBITDA 64 84 113 113
Blended EBIT 44 79 136 129
Blended RoE (%) 12 26 32 21
Note: USD 400/ tonne cap employed for a typical old urea plant. Current greenfield capital cost for a new plant
would be around USD 1200 per ton, * Gas transportation charge up to USD 25 per ton will be reimbursed taking
the ceiling price to USD 450.

2x 3x

EPS Sensitivity
EPS (Rs) P/E (x)
On De-bottleneck On Brownfield On De-bottleneck On Brownfield
CMP Current Current
(20% add. Vol) (50% add. Vol) (20% add. Vol) (50% add. Vol)
Chambal Fert 83 4 8 17 21 10 5
GNFC 124 24 30 37 5 4 3
GSFC 166 30 38 47 6 4 4
Nagarjuna 42 1 4 10 53 12 4
Zuari 322 39 50 75 8 7 4
Source: Bloomberg, Company, ENAM Research

AUGUST 2008 ENAM Securities 3

 Fertilizer Sector

Existing urea policy: Implied EBITDA

(USD/tonne) Current

Capital Employed 400

Debt (70%) 280
Equity (30%) 120
PAT @ 12% RoE* 12
PBT 18
Interest @10% interest charge 28
Depreciation @5% of Capital Employed 18
EBITDA (a+b+c) 64
Source: ENAM Research, *Actual RoE is lower. USD 400 per ton cap employed for a typical old urea plant.
Current greenfield capital cost for a new plant would be around USD 1200 per ton

Existing urea policy: Realization and Cost Structure

(USD / Ton) Blended Naptha
(APM + LNG Spot Gas)
Domestic Price (Implied): a+b+c 379 729
Total Realization To Company (Implied):b+c 304 654
a. Freight + Dealer Margin 75 75
b. Farmer Pays To Company 120 120
c. Govt. subsidy To Co based on Cost of feed stocks and 12% assured
return (d+e-b) 184 534
d. Operating Cost 240 590
e. EBITDA 64 64
Operating cost (i + ii) 240 590
i. Gas/feed stocks + Conversion Cost 190 540
Gas cost ($/MMBTU):60% APM @USD3+ and 40% LNG @USD10+) 6 -
MMBTU Gas/Per ton 30 -
ii. Overheads 50 50
Source: Company, ENAM Research

AUGUST 2008 ENAM Securities 4

 Fertilizer Sector

Proposed gas pipeline network

Trans miss ion Pipe lines

Existing
Under Commissioning (RIL)
Planned Pipelines (RIL)
Planned Pipelines (GAIL)
Ready to Planned Pipelines (GSPC)
NFL
DAP/ MOP Mfg.facility
Pump in NFL
Nangal Urea Mfg. facility
NFL
CHAMBAL Delhi INDO GULF

Jagdishpur

Vijaypur
GSFC Kolkata

GNFC
Uran
RCF
Mumbai Krishnapatnam
RCF
Coromandel
Kakinada
Godavari
ZACL Hyderabad NFCL

Chennai

Coromandel

Kochi

Source: GAIL, ENAM Research

Gas requirement fertilizer Gas supply to double

100 250
(mmscmd) (mmscmd)

80 200

150
60

100
40
50
20
0
0 FY08 FY09E FY10E FY11E FY12E
FY08 FY09E FY10E FY11E FY12E Exisitng Field New dicovery

Source: Company, ENAM Research

AUGUST 2008 ENAM Securities 5

 Fertilizer Sector

This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document
should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the
securities of companies referred to in this document. The intent of this document is not in recommendary nature
Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of
companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an
investment. The investment discussed or views expressed may not be suitable for all investors
Enam Securities Private Limited has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied,
is made as to the accuracy, completeness or fairness of the information and opinions contained in this document
The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views
expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this
statement as may be required from time to time without any prior approval
Enam securities Private Limited, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as
principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment
banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient
should take this into account before interpreting the document
This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of ENAM Securities
Private Limited. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein
This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or
published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons),
Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of
this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any
such restrictions
Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential
including lost revenue or lost profits that may arise from or in connection with the use of the information.
Copyright in this document vests exclusively with ENAM Securities Private Limited.

AUGUST 2008 ENAM Securities 6