Sector Update – Fertilizer Sector March 30, 2009

SECTOR
Fertilizer Sector Update
UPDATE

Analyst RIL’s KG basin gas sales agreement finally signed

Hetal Bachkaniwala Reliance Industries Ltd (RIL) on Friday, 27 March 30, 2009 formally signed gas sale and purchase
+91-22-6637 1232
agreements (GSPA) with 12 urea manufacturers in a move that may result in annual fertilizer subsidy
hetal.bachkaniwala@idbicapital.com
savings of more than Rs.30bn for the Government. The agreement was signed only with the existing 12
Nifty: 2978; Sensex: 9568 gas based urea players. The remaining urea units are running on alternate fuels such as Naphtha, Fuel Oil
and LSHS which are also expected to be converted to gas based units over the next 2 years.

The immediate beneficiary of the gas will be Tata Chemicals since it the only company ready with de-
bottlenecked capacity of about 0.2mn tons. Other companies such as Nagarjuna Fertilizers, Chambal
Fertilizers and RCF will be benefiting as and when their de-bottlenecking activity is completed. The financial
and other implications of KG Basin gas on Tata Chemicals, Nagarjuna Fertilizers and RCF has been
calculated in detail in our previous reports, Fertilizer Sector Report (dated 1 Dec 2008) and Rashtriya
Chemicals and Fertilizers Ltd. (dated 13 Jan 2009)

In order the see the impact of the gas supply on the fertilizer sector over the next few years, the total
demand-supply scenario for natural gas has to be understood first. The following table shows the projected
demand for gas in India according to the XIth 5 year plan.

Table 1: Gas Demand Projections during XIth Plan (MMSCMD)

Sectors 2007-08 2008-09 2009-10 2010-11 2011-12
Power 80 91 103 114 127
Fertilizer 41 43 56 79 79
City Gas 12 13 14 15 16
Industrial 15 16 17 18 20
Petrochem/Refinery/Internal 25 27 29 31 3
Sponge Iron/Steel 6 6 7 7 8
Total 179 197 226 264 282
Source: Natural Gas scenario, Government of India

Though the above projections were made with an expectation of 8% and more GDP growth, they are still a
fair indicator of the demand scenario through various sectors. Fertilizer sectors requirements is second
only to power sector, but has been awarded the first priority in allocation by the Government according to
the Gas Utilization Policy .

While the Gas Grid Pipeline infrastructure in India is ready for the supply of gas in the Western and Northern
parts, the pipeline is still under construction for the Southern and Eastern parts. These are expected to be
connected by FY12. Once this network is ready, the estimated gas supply for fertilizer sector will increase
to more than 50 mmscmd of which RIL's KG Basin will be supplying approx. 28 mmscmd.

Table 2: Financial snapshot

PE (x) EV/EBITDA (x) EPS (Rs.)
Company CMP (Rs.) Target FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E
Tata Chemicals 139 Hold (Rs.160) 7.1 5.7 6.9 8.7 4.1 5.4 19.59 24.44 20.10
RCF 38 Hold (Rs.32) 13.2 12.4 11.5 11.5 9.1 9.4 2.87 3.03 3.28
Nagarjuna Fertilizers 18 Hold (Rs.16) 34.1 31.5 21.8 7.3 6.7 6.4 0.53 0.57 0.82
Source: IDBI Capital Market Services

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 Sector Update – Fertilizer Sector

Diagram 1: Gas pipeline connectivity

Source: Reliance Industries

We have estimated the plant wise requirement for gas by the fertilizer sector in the coming years. All the companies which are
currently connected through the Gas Pipeline will be able to procure the gas in the first tranche, but companies such as Zuari
Industries, MCFL, SPIC, Madras Fertilizers and FACT which are yet to be connected to the pipeline will have to wait till FY12
when the GAIL pipeline is ready.
We have assumed that the existing Fuel Oil / LSHS based companies such as GNFC and certain units of National Fertilizers
will be converted into gas based unit by FY12. This will further increase the total requirement of gas by around 10 mmscmd for
the fertilizer sector.

Table 3: Projected gas requirement for fertilizer sector mmscmd

Name of Plants Capacity MMT FY10 FY11 FY12 FY13
KRIBHCO - Hazira 1.90 4.37 4.37 4.37 4.37
TCL - Babrala 1.13 2.60 2.60 2.60 2.60
KSFL - Shahjahanpur 0.96 2.20 2.20 2.20 2.20
IGL - Jagdishpur 1.00 2.31 2.31 2.31 2.31
NFL - Vijaipur I & II 1.90 4.37 4.37 4.37 4.37
IFFCO - Aonla I & II 1.93 4.43 4.43 4.43 4.43
IFFCO - Phulpur I & II 1.60 3.69 3.69 3.69 3.69
CFCL - Gadepan-I & II 1.94 4.47 4.47 4.47 4.47
SFC - Kota 0.42 0.96 0.96 0.96 0.96
On HVJ Pipeline 12.78 29.40 29.40 29.40 29.40
NFCL - Kakinada I &II 1.56 3.59 3.59 3.59 3.59
RCF, Thal 1.88 4.32 4.32 4.32 4.32
IFFCO- Kalol 0.60 1.38 1.38 1.38 1.38
GSFC- Badodra 0.41 0.94 0.94 0.94 0.94
GNVFC -Bharuch 0.71 1.63 1.63 1.63
RCF Trombay 0.33 0.76 0.76 0.76 0.76
On non-HVJ Pipeline 5.48 10.98 12.61 12.61 12.61
Other Naptha based plants 2.33 5.37 5.37
Fuel Oil / LSHS Based Plants 1.66 3.83 3.83
Total 22.27 40.38 42.02 51.21 51.21
Source: Fertilizer Statistics, FAI; IDBI Capital Market Services

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Sector Update – Fertilizer Sector

We have estimated that the total gas-based urea production will increase to 22.3 mtpa in FY12 from 17.6 mtpa in FY10 with the
FO/LSHS and other Naphtha based plants being converted to gas based plants. With this, KG Basin gas will be supplying more
than 50% of the fertilizer sectors gas requirement by FY12. The existing plants will continue using RLNG to a certain extent for
the coming years but their dependence on it will reduce. The major advantage of this to the companies will be that any
uncertainty regarding the prices of raw material will be removed resulting in better production and sales planning.

Table 4: Gas demand and supply scenario for fertilizer sector mmscmd
FY10E FY11E FY12E FY13E
Demand
Gas based urea production (MMT) 17.6 18.3 22.3 22.3
Gas required for urea 40.4 42.0 51.2 51.2
Total gas required 40.4 42.0 51.2 51.2
Supply
APM gas 14.0 14.0 14.0 14.0
JV gas 3.5 3.5 3.5 3.5
RLNG 7.9 4.5 5.7 5.7
Total existing supply 25.4 22.0 23.2 23.2
RIL KG Basin gas 15.0 20.0 28.0 28.0
Total gas supply 40.4 42.0 51.2 51.2
Source: IDBI Capital Market Services

With the GSPA in place for most of the fertilizer companies, we expect the first tranche of RIL gas to start flowing from next
month. Since the gas will be sufficient enough for fertilizer sector only for the first two months, other sectors like power and city
gas distribution will have to wait till the production is ramped up. Initial reports from RIL indicate that the production will be
ramped up by 10 mmscmd each month till it reaches 40 mmscmd by September'09. We have assumed that the ramping up
might get delayed to a certain extent and power sector may have to wait till June'09 for the first supply of gas.

Table 5: Estimated allocation of KG basin gas to various sectors till September 2009
Sector April May June July Aug. Sept.
Fertilizer 15.4 15.4 15.4 15.4 15.4 15.4
Ratnagiri Gas and Power 2.7 2.7 2.7 2.7
Power sector 1.9 6.9 16.9 18.0
City Gas Distrubution 3.9
Total supply 15.4 15.4 20.0 25.0 35.0 40.0
Source: IDBI Capital Market Services

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 Sector Update – Fertilizer Sector

While Nagarjuna fertilizer will be able to procure the gas at the cheapest rate due to the proximity of its plants to the source, Tata
Chemicals will be paying the highest rate among the sector.

Table 6: Gas supply & estimated cost - First tranche

Company mmscmd US$/mmbtu
Kribhco Hazira 1.37 5.87
GSFC 0.72 5.87
RCF Trombay 0.95 5.87
RCF Thal 2.10 5.87
Nagarjuna Fertilizers 1.55 5.34
GNFC 0.34 5.87
IFFCO Kalol 1.30 5.87
National Fertilizers 0.65 6.21
Chambal Fertilizers 1.15 6.21
IFFCO Aonla 1.75 6.21
IFFCO Phulpur 0.52 6.21
Kribhco Sahajahanpur 0.98 6.21
Tata Chemicals 0.88 6.21
Inco Gulf Jagdishpur 0.48 6.21
Shriram Fertilizers Kota 0.62 6.21
Total 15.36
Source: Economic Times; IDBI Capital Market Services

The immediate beneficiary of the gas will be Tata Chemicals since it is the only company ready with de-bottlenecked capacity.
The company will be able to receive IPP based price on approximately 0.2m tons in FY10 which will contribute around 2% and
5% of its estimated revenues and EBITDA respectively for FY10.

Other companies such as Nagarjuna Fertilizers, Chambal Fertilizers and RCF will be benefiting as and when their de-bottlenecking
activity is completed.

Table 7: Capacity expansion through de-bottlenecking activity MMT

Company Existing Post de-bottlenecking Additional Commissioning
Tata Chemicals 0.96 1.16 0.20 Ready
Chambal Fertilizers 1.73 1.87 0.14 FY10
Nagarjuna Fertilizers 1.20 1.41 0.21 Q3FY10
Rashtriya Chemicals & Fertilizers 1.71 1.96 0.25 FY11
Source: IDBI Capital Market Services

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Sector Update – Fertilizer Sector

Notes

Equity Sales/Dealing
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Manoj Shettigar (91-22) 66371157 manoj.shettigar@idbicapital.com
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Jignesh Vadoliya (91-22) 66371153 jignesh.vadoliya@idbicapital.com
Production & Database
S. Narasimhan Rao (91-22) 66371165 narasimhan.rao@idbicapital.com

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