Fertilizers - Single Super Phosphate (SSP) Sector Note

HDFCSec Scrip ID RAMPHOEQNR LIBPHOEQNR Industry Fertilizer Fertilizer CMP Rs. 66.05 Rs. 77.95 Recommended Action Buy at CMP and add on dips Buy at CMP and add on dips Averaging Band Rs. 57 61 Rs. 68 74

April 16, 2012

Sequential Targets Rs. 77 and Rs. 88 Rs. 86 and Rs. 101 Time Horizon 1-2 quarters 1-2 quarters

Sector Background
Single super phosphate (SSP) is a high-in-demand fertilizer mostly used at the time of preparation of land for farming. It is a straight phosphatic multi-nutrient fertilizer which contains 16% water soluble P2O5, 12% sulphur, 21% calcium and some other essential micro nutrients in small proportions. The first SSP plant is said to have been established by EID Parry in the year 1906. Manufacturing of SSP is based on perhaps the simplest chemical reaction amongst chemical fertilizer industry. The main raw materials required are rock phosphate and sulphuric acid. SSP, a poor farmer's fertilizer (price-wise compared to DAP- Diammonium phosphate), is an option to optimise the use of phosphatic fertilizers and helps treat sulphur deficiency in soils (40% Indian soil is sulphur deficient). Several crops such as oilseeds, pulses, sugarcane, tea etc require more sulphur and phosphate, a phenomenon that is fulfilled with the use of SSP. SSP is classified into two categories, namely Single Super Phosphate (SSP) and Granulated Single Super Phosphate (GSSP). SSP accounts for ~5% of the total fertilizer consumption in the country. Production: Superphosphate is manufactured from the reaction between phosphate rock and sulphuric acid. Phosphate rock is rich in the mineral fluarapatite, which reacts with the sulphuric acid to give superphosphate. The chemical reaction is as follows: 2Ca5(PO4)3F + 7H2SO4 + 3H20 7CaSO4 + 3Ca(H2PO4)2H2O + 2HF

The production of single phosphate (SSP) is basically the conversion of insoluble P2O5 to soluble P2O5 by chemical reaction between phosphate ore and dilute sulphuric acid in definite proportion. Rock Phosphate contains Tri Calcium Phosphate, which is insoluble in water and hence cannot be taken by plants, however, the product of reaction is Mono Calcium Phosphate, which is soluble in water and can be taken by plants. The reactants, originally thin slurry, set to a solid mass during the reaction. The entire process could take up to 21 days. Granulated Single Super Phosphate (GSSP) is manufactured by feeding SSP powder to a rotating Granulator drum in which the powder SSP is mixed with water resulting in the formation of granules. The granules are then discharged to a rotary dryer drum and consequently cooled in a cooler drum. After cooling of the granules, granules are passed through vibrating screens of desired mesh and then packed in 50 kg HDPE bags for sale as GSSP. The use of granulated product is more beneficial than the use of powder. The powder dissolves immediately in irrigation water and becomes readily available. Plants use some part of it while the remaining goes to the sub soil with water and remains useless. The powder can be used only during sowing of seeds. It cannot be used on growing crops as it gets deposited on the leaves of the plants and being slightly acidic, burns them. The granulated product rolls down the plant and can be used harmlessly on standing crops. The biggest advantage in using the granulated product is that it is available to the crops for a longer time because it dissolves slowly. Advantages of SSP: Provides 15% of total phosphate requirement of the country Lowest price per kg (in non-urea space), preferred by small and marginal farmers Multi-nutrient fertilizer containing P2O5 as primary nutrient and Sulphur and Calcium as secondary nutrients It is the cheapest source of Sulphur for the soil. Only phosphatic fertilizer that can utilize Indian rock phosphate deposits Least foreign exchange per unit of P2O5 Utilizes acid effluent from other chemical industry and thus reduces nation's cost of effluent disposal. History of regulation: After decontrol of fertilizers in India in August 1992, the Government of India has been implementing a Concession Scheme for decontrolled phosphatic and potassic (P&K) fertilizers. SSP is one the decontrolled fertilizers covered under the Scheme. The Department of Fertilizers (DOF), after taking over the Concession Scheme from the Department of Agriculture and Cooperation in 2000, modified the guidelines for the Scheme so as to promote use of specified grades of rock phosphate purchased from notified sources for manufacture of SSP, with a view to ensure availability of quality SSP to farmers and to minimize possibility of sale of non-standard SSP to farmers. Till April 2010, the government, kept prices artificially low to maintain affordability and controlled retail prices of all fertilizers. As a result, Indian farmers were insulated from international price hikes. The Ministry of Chemicals and Fertilizers approved the Nutrient Based Subsidy (NBS) in March 2010 in an effort to decontrol prices. Since the announcement, fertilizer sales volumes have risen significantly. For example, in FY11, sales of complex fertilizers other than DAP rose by ~40% despite a significant increase in prices. Under the new regime, there is a fixed subsidy

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for nutrients and unlike in the past, when the government set the MRP, the current regime lets manufacturers determine their own selling prices. However, we cannot totally rule out the possibility of government intervention returning in the case of large fluctuations in price in future. On 5th May 2011, the Government announced the revised nutrient subsidy rates applicable for FY12. Nutrient subsidies increased substantially from the rates in FY11. On an annual basis, subsidy on Phosphorous has increased the most due to the rapid rise in DAP and Phosphoric Acid prices. This is because raw material prices have increased sharply in the international market, leading to high finished goods prices. However for FY13, the ministry reduced subsidy on all nutrients with the largest change in Phosphorous. While this move was to reduce subsidy outgo in line in a drop in global raw material prices, MRP could rise a little. At the same time, the government didnt announce any scheme in Urea. Urea remains the cheapest fertilizer and farmers could continue to overuse urea impacting soil quality. Nutrients Nitrogen Phosphorous Potassium Sulphur Subsidy/nutrient (Rs/kg) FY13 FY12 24.0 27.2 21.8 32.3 24.0 26.8 1.7 1.7 Percentage change FY13 over FY12 FY12 over FY11 -11.8% 17.2% -32.5% 22.8% -10.4% 9.4% -1.4% -5.6%

FY11 23.2 26.3 24.5 1.8

Subsides to DAP and MOP fertilisers were slashed by 27.4% and 10% respectively. But urea, the most used crop nutrient that accounts for the bulk of the government's spending (~Rs. 21,500 cr in FY11) on fertilisers, was left unchanged. The subsidy for DAP will stand at Rs. 14.4/kg in FY13 compared to Rs. 19.8 in FY12. For MoP, the same has been fixed at Rs. 14.4/kg against Rs. 16.1 in FY12. Indian fertilizer market: Fertilizer consumption increased from 20.3 mn tonnes in FY06 to ~29.2 mn tonnes in FY11 led by a rise in phosphorous consumption, which rose from ~5.2 mn tonnes in FY06 to ~9.4 mn tonnes in FY11. The consumption of fertilisers increased by 7% during FY2012 but the consumption growth was lower as compared with that in FY2011 (when consumption had grown by 14%). Fertilizer demand is expected to rise at a CAGR of ~8% to ~40-45 mn tonnes in FY16. Phosphorous is expected to account for a bulk of that increase at a CAGR of ~15% to ~16-18 mn tonnes in FY16 following increased availability of complex fertilizers after the Nutrient Based Scheme (NBS) came into effect. Producers are now given a subsidy on the volume of nutrient sold as opposed to that on the volume of product sold earlier. This gives the producers incentive to sell other fertilizers besides urea and DAP. Fertilizer consumption per tonne of grain production has increased over the years as shown in the table below but the increase is largely due to an increase in usage of urea. Soil fertility in India has deteriorated due to the excessive use of urea and hence, a greater usage of Phosphorous (P) and Potassium (K) fertilizers is required to balance fertilizations and optimise soil productivity. Year FY91 FY01 FY06 FY07 FY08 FY09 FY10 Fertilizer Consumption MMT 12.5 18.1 20.3 21.6 22.6 24.9 26.3 Growth Rate Food Grain Production MMT 176.4 209.8 208.6 217.3 230.7 234.5 218.2 Growth Rate Fertilizer/Food Grain 0.071 0.086 0.097 0.099 0.098 0.106 0.121

4% 2% 6% 5% 10% 6%

2% 0% 4% 6% 2% -7%

(Source: FAI Annual Seminar 2010)

India accounts for approximately 45% of the phosphoric acid global trade, ~16% of the global rock phosphate trade, ~9% of ammonia trade and ~11% of MOP (Muriate of Potash) trade. With such a strong global presence, we believe India can enjoy bargaining power with raw material suppliers; however, this would depend on input costs and global demand-supply. India is dependent on imported feedstock (rock phosphate, phosphoric acid), as domestic capacities have not matched the growth in demand. Any expansion/benefit can be contingent on the ability of the company to source raw material. SSP imports vary significantly as per the demand and supply in the country. For most of FY12, imports were far below their levels in 2009 however, imports increased significantly toward the end of 2011. Import prices are at all time highs because raw material prices are soaring. Import prices in December were ~Rs. 29,000/tonne. Domestic production has been stagnant for the past 4 years around 2.8 million MT/year. Growth in production has slowed down significantly but is expected to pick up going forward. Several leading fertilizer companies have indicated their interest in the SSP field and have already announced plans to set up plants. The total domestic capacity is expected to increase significantly

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over the next couple years, which could reduce the countrys dependence on imports. However, such an increase in capacity could also adversely affect raw material prices (which have been on the uptrend) as there are no significant phosphate rock capacities expected anytime soon across the globe. India imports majority of its raw material for SSP production and being a large player in the global market, could pressurize suppliers to maintain prices. SSP Import Trends and Prices
4000000 3000000 (Ton) 2000000 1000000 0 May-11 Nov-10 Aug-11 Nov-11 Feb-11 Jan-09 Jan-10 Apr-09 Apr-10 Jul-09 Oct-09 Jul-10 31000 27000 23000 19000 15000 (Rs.) 3500 3000 ('000 MTs) 2500 2000 1500 1000 5MFY11 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

SSP Domestic Production

Quantity - LHS

Unit Price - RHS

(Source: CSS, HDFC Sec Research)

Target

Actual

Triggers
Turnaround in the fortunes of fertilizer industry: The fertiliser industry was a laggard sector for years due to overhang of policy control, higher manufacturing costs (due to naphtha cost) and no capacity expansion. Since 2009, fertilizer policy has, however, shifted away from regulated returns in complex fertilizers to import parity realizations. NBS has sparked hopes of prosperity in the industry. NBS policy for decontrolled Phosphatic & Potassic (P&K) fertilizers has been implemented wef April 2010. Under NBS, the subsidy on decontrolled P&K fertilizers is determined for each nutrient on per kg basis and fixed by the Government on annual basis. NBS is fixed taking into consideration affordability of the farmer and prevalent price level of fertilizers and fertilizer inputs in the international market at that time. Since the subsidy for each grade of fertilizers is fixed for a year, the Maximum Retail Price (MRP) of fertilizers at farm gate level has been freed. Accordingly, the MRP of P&K fertilizers is decided and fixed by the fertilizer producing companies or the importers. However, they are required to print MRP along with applicable amount of subsidy on each fertilizer bag clearly. The international prices of fertilizers and its raw materials in the year 2011 increased substantially as compared to the prices in the year 2010. This increase in international prices of fertilizers and its raw materials were taken into account while fixing the subsidy rate under the NBS Scheme for the year 2011-12. However, any further increase or decrease in international prices of fertilizers and its raw material is expected to have some effect in the MRP of these fertilizers. The NBS was a life-changer for the industry and potential for profits of companies has increased. Benefits of Nutrient Based Subsidy (NBS): The NBS announced in March 2010 has had several positive implications for non-urea fertilizer manufacturers. Some benefits include: Companies can now compete on cost efficiency, brand equity, distribution network etc by charging competitive prices Companies can introduce various innovative products as opposed to the specific products as mentioned under the Product Based Subsidy Scheme earlier Companies with stronger bargaining power with raw material suppliers can broaden their margins Non-urea companies can compete as in a free market Companies can develop brands, an exercise that could benefit the company in the long-term The government can reduce its subsidy related administrative expense Large players entering the space could indicate good times ahead: Coromandel International, a part of the $3.8 billion-Murugappa Group, received approval to set up a green field 800 tonnes per day single super phosphate (SSP) plant including 400 tones per day granulator plant in the state of Punjab. The estimated cost of the project is Rs. 116 cr. Chambal Fertilisers & Chemicals received approval for setting up single super phosphate (SSP) plant at Dahej, Bharuch district in Gujarat, with an annual capacity of 5 lakh MT, at a project cost of approximately Rs 122 crore. Further, the company is also setting up a SSP Plant at its existing factory premises at Gadepan, Kota district in Rajasthan with an annual capacity of 2 lakh MT at a project cost of approximately Rs 32.50 crore. Rashtriya Chemicals and Fertilisers (RCF), one of the biggest public sector fertiliser companies in India, has also made a foray into the single super phosphate (SSP) fertiliser sector. In October 2011, RCFs CMD inaugurated a 60,000 MT SSP plant at

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Udaipur. As per reports, RCF plans to have a total cumulative capacity of one million tonnes of single super phosphate (SSP). RCF is also said to be looking for joint venture partners for the same. Besides just the fertilizer giants entering the space, Liberty Phosphate too is adding capacities. The companys total capacity is expected to increase from the present 5,62,000 MT to 9,24,000 MT per annum. The entry of leading fertilizer companies indicates good times for the industry. The plants of Coromandel and Chambal will still take a few quarters to be set up and the existing players could benefit significantly till then. SSP imports and import prices have increased significantly in FY12 and complex fertilizer output is expected to increase in FY13: SSP imports in 9MFY12 were ~32% higher than that in 9MFY11. SSP import prices in FY12 have been significantly higher as well. As seen in the chart above titled Import Trends and Prices, a spike in import prices is observed from May 2011 along with a rise in import quantity. This has resulted in ~80% rise in value of imports of SSP. It is evident that the demand for SSP remains robust despite higher prices however, domestic supply is unable to cater to the demand (as shown in the graph below, domestic production of SSP has remained in the 225,000 MT to 240,000 MT for almost 3 years). Domestic players are adding capacities but additional supplies could take over a year to reach the market. In the meanwhile, the present SSP manufacturers could experience good times in the form of higher demand and realizations in an era where NBS provides incentives listed above. Indias fertilizer production is pegged at 36.87 million tonnes in 2012-13, up over 8% from last fiscal. While urea production is estimated at previous year's level of 22.57 million tonnes, the output of complex fertilizers and DAP has been pegged higher at 9.98 million tonnes and 4.31 million tonnes, respectively, this year. Last fiscal, production of complex fertilizers and DAP was estimated at 7.82 million tonnes and 3.71 million tonnes each. As estimated by the government, complex fertilizer output is expected to increase by ~28% in FY13, indicating a possible good year for SSP. Domestic SSP Production
245 240 ('000 MT) 235 230 225 220 215 Feb-10 Dec-09 Dec-10 Feb-11 Jun-09 Jun-10 Aug-09 Aug-10 Jun-11 Apr-09 Apr-10 Apr-11 Aug-11 Oct-09 Oct-10

(Source: CSS, HDFC Sec Research)

Possible decontrol of urea prices: In an effort to decontrol prices, the Ministry of Chemicals and Fertilizers approved the NBS in March 2010. The introduction of this subsidy led to the freedom of pricing. However, due to its high demand and usage and low price, urea price was not decontrolled. The government has increased urea prices at times indicating an effort to decontrol them as well but the final plunge is yet to be taken. Indian farmers overuse urea, as it is cheap because of high government subsidy. This also results in the government spending close to Rs. 21,500 cr on Urea subsidy (FY11), which accounts for ~40% of the governments total fertilizer subsidy expense. An overdose of urea has led to degradation of land quality, a problem that could be solved by using phosphoric fertilizers to neutralize the land. A possible decontrol in urea pricing could lead to a significant jump in its price and hence, loss of attractiveness. Presently the price of Urea is ~Rs. 5.3/kg while that of SSP is ~Rs. 6.0/kg and DAP ~Rs.19.0/kg. While the difference between urea and SSP does not seem too large, that between SSP and DAP is wide enough. Hence to restore soil quality, the farmer will be willing to buy SSP (slightly expensive compared to urea but far cheaper than DAP). If Urea prices are decontrolled, they are likely to become higher than those of SSP and farmers would consider shifting to SSP even more to enhance the quality of their land. That being said, the timing and certainty of such decontrol (of urea) cannot be ascertained presently. As per reports, the fertilizer ministry is likely to send the new urea policy proposing a 10% hike in prices to the Cabinet for approval. In the past ten years, the government has raised urea prices only once by 10% to Rs. 5.3/kg. If the prices are revised, it will help the government to reduce its subsidy bill by ~ Rs. 2,000 crore. Positive outlook for the fertilizer industry in the Budget for 2012-2013: Finance Minister Pranab Mukherjee in his budget speech for FY13 made announcements that are likely to benefit fertilisers and agriculture related companies. The provision for fertiliser subsidy was reduced to Rs. 60,794 crore from Rs. 67,199 cr in FY12.

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The government announced that investment -linked deduction of capital expenditure incurred is proposed to be provided at the enhanced rate of 150% as against 100% at present for fertilizer. It exempted 5% customs duty on import of equipment for initial setting up or substantial expansion of fertilizer projects for a period of three years. The finance minister in his speech also said that the focus would now be to encourage the use of SSP more because for the government that subsidy is easy to control and good for the crops as well. Basic customs duty on a few soluble fertilizers and liquid fertilizers, other than urea, has been reduced from 7.5% to 5% and from 5% to 2.5% respectively. Also, complete exemption from basic customs duty will be provided to new fertilizer projects, a move that will encourage new entrants and push existing players to set up new plants. Fall in DAP imports and continued price differential denote shift in buying from DAP to SSP: Import of key fertiliser DAP has declined by 7% to 6.87 million tonnes in the April-February period of FY12. India had imported 7.41 million tonnes of the important crop nutrient in the year-ago period. The requirement of DAP in the rabi 2011-12 season (October-February) stood at 5.16 million tonnes, while the availability of the soil nutrient was 5.62 million tonnes during the period. Reduction in DAP usage could indicate an increase in SSP usage in the same period. DAP is significantly more expensive than SSP and Urea. DAP costs ~Rs. 19/kg while SSP costs only Rs. 6/kg and Urea costs ~Rs. 5.3/kg. The huge price differential discourages farmers from using DAP. Moreover, over the years, the price difference between DAP and Urea has widened from ~50% in FY11 to ~70% in FY12. However, The landed cost of imported DAP has fallen in the last six months, from $ 675-660 a tonne to around $ 540, with expectations of it easing further to $ 510-520 levels. As DAP consists of 46% phosphorous (compared to 16% in SSP), it is more impacted by phosphorous prices. A higher reduction in subsidy on phosphorous and in turn on DAP has helped SSP become more competitive vis--vis DAP. This situation could reverse only if there is a sharp reduction in prices of phosphorous. In such an event, reduction in DAP prices could cannibalise SSP consumption. Till then SSP consumption could keep rising steadily.

Concerns
Agricultural productivity and seasonality: The fertilizer industry is entirely dependant on the agriculture industry, which in turn is dependant on several factors such as quality of seeds and soil, irrigation and weather. Weather is a factor beyond the control of any individual and any extreme weather in a year (drought, flood, excess heat/cold etc) could negatively impact the sales of the industry. Moreover, the kharif and rabi seasons in the agriculture industry make demand for fertilizers seasonal. Q4 is traditionally a dull quarter across the SSP industry with low volumes followed by Q2, which means that the results of Q4FY12 might not be impressive across the board. Raw material prices: Major raw materials of the industry are Phosphate rock, Sulphuric Acid, Sulphur and Calcium. Sulphur prices have been rising and landed cost for the raw material in September 2011 was close to 40% higher than that in September 2010. While prices are still far below their 2007-2008 highs, the current uptrend could diminish margins. Phosphate rock prices have been rising steadily for a couple of years as well and are currently close to 70% higher than they were two years ago and close to 35% higher than they were a year ago. A steady increase in phosphate rock prices has led to an increase in SSP prices globally. However, urea prices have also increased significantly over the years as well and a possible liberalization/decontrol in urea prices by the government will increase the attractiveness of SSP. A further increase in phosphate rock, sulphur or sulphuric acid prices could put pressure on SSP manufacturers margins. While the NBS permits manufacturers to determine MRP, they do maintain the right to interfere in case of a high increase in farmgate prices. Hence the increase in raw material cost in such circumstances cannot be completely passed on to the farmers. The competitive advantage now lies in robust backward linkages and companies that are able to negotiate long-term contracts for raw materials at a relatively low rate win. Fertilizer Import Prices
210 190 170 150 130 110 90 Feb-10 Dec-09 Dec-10 Feb-11 Dec-11 Jun-10 Aug-10 Jun-11 Aug-11 Apr-10 Oct-09 Oct-10 Apr-11 Oct-11

Phosphate Rock
RM import prices in 2011 (Source: Coromandel International presentation Q2)

Urea

DAP

(Source: CSS, HDFC Sec Research)

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Government intervention on subsidies/prices: The Government of India is likely to make efforts to reduce its subsidy burden through partial decontrol of Urea prices. The governments effort to reduce subsidies is closely linked to international prices of the fertilizers as well as prices of raw materials. Phosphoric Acid (a significant raw material for the industry) prices have risen significantly. A future reduction in subsidy to bring down its burden or to stay in line with international finished goods prices cannot be ruled out. Such a reduction could pose a significant threat to the SSP companies topline and margins. Further any policy changes by the Government (on subsidy, imports, distribution etc) could also impact the fortunes of the fertiliser companies. Forex risk: Forex risk is a major concern for most players in the industry as most of the raw material used in the industry is imported. Rama Phosphate used Rs. 75.5 cr of forex in FY11. Khaitan Chemicals used ~Rs. 94.8 cr in FY11 and earned only Rs. 0.9 cr in the year. Liberty Phosphates used Rs. 74.6 cr of forex in FY11 and earned only Rs. 0.3 cr of forex in the year. As mentioned earlier, India is dependent on imported feedstock (rock phosphate, phosphoric acid), as domestic capacities have not matched the growth in demand. With the current depreciation in the value of the Rupee, companies could report forex losses in the coming quarters/year. Forex loss for 9MFY12 for Khaitan Chemicals and Liberty Phosphates was Rs. 13.8 cr and Rs. 5.5 cr respectively. Possibility of surplus capacity over the medium term: Taking advantage of the NBS, many existing players are expanding capacities while many new players are entering the industry. Of 82 units registered as manufacturers of SSP in the country, only 66 units were in operation during FY11. Moreover, out of the 66 operating plants, only about 25 units operated above 60% capacity utilization and the remaining 41 plants operated below 60%. The average capacity utilization of SSP industry for financial year ended March 2011 has remained at 49.50%. The shift from PBS to NBS has attracted significant attention and many units are starting operations again. Coromandel International and Chambal Fertilizers are setting up plants to manufacture SSP. All these factors could over the next few years lead to an oversupply in the industry leading to a drop in profitability over the medium term.

Company Overviews
Rama Phosphate Ltd (RPL) Rama Phosphate Ltd (RPL) is a leading SSP manufacturer in India with a presence in edible oil as well. The company is engaged in manufacturing phosphatic fertilizers viz. Single Super Phosphate (Powder as well as Granule), mixed fertilizers namely NPK and chemicals like Sulphuric Acid, Oleum etc. Total installed capacity of SSP is 4.78 lac MTs and that of Sulphuric Acid is 1.83 lac MT. RPLs products are marketed in various States in the country under brand names "Girnar" and "Suryaphool". Both brands are leaders in the states of Maharashtra, Madhya Pradesh (MP), Chhatisgarh, Rajasthan, Karnataka, Haryana, Gujarat, etc. The company has plants at Indore, Pune and Udaipur. The plants at Pune and Udaipur are fertilizer plants while that at Indore is a fertilizer and edible oils plant. The plant at Udaipur is situated in Jhamar Kothra, which is on the head of Rock Phosphate mines. The easy availability of raw material makes this plant very beneficial. The company's Pune plant is one of the oldest SSP plants in India with existence of over 40 years. The Pune plant has its own captive TG power generation system wherein electricity is generated exothermically in the process of production of Sulphuric Acid, which partly caters to the requirement of entire plant. The companys Indore plant too generates its own power through the exothermic reaction in the production of Sulphuric Acid. This facility also has an oil division that manufactured edible oils and de-oiled cakes. Indore is largest cultivator of soyabean in the country, making it an ideal location for an oilseed crushing plant. The company's edible oil brand "Sufla" is one of the most popular brands in MP and other Northern parts of India and has won several awards from SOPA. RPL is in the process of expanding its capacities at Udaipur (from 1.32 lac MT SSP to 1.81 lac MT SSP and from 0.66 lac MT GSSP to 1.66 lac MT GSSP), Pune (debottlenecking) and Indore (increase SSP capacity by ~1 lac MT). The company is also enquiring about Lecithin plants for its oil division. RPLs networth went negative in FY02 forcing the company into BIFR. The Hon'ble BIFR, vide its Order dated December 20, 2010, discharged RPL from the purview of SICA / BIFR. Promoters were issued 1.21 crore shares at a premium of Rs. 20 in accordance with the BIFRs clause for promoter equity infusion. This increased promoter holding to 81.5%, which could lead to a private placement or sale in open market in the near future as promoters will be required to reduce their holding to below 75% by June 2013. During the year, subsequent to negotiation with term lender and with thrust on debt reduction exercise, the term liability has been reduced by Rs. 11.6 cr, which will improve liquidity position in the long term. The debt equity ratio of the company as on H1FY12 is 0.5, which decreased after the promoters infused fresh equity. The companys low working capital can be attributable to the limited working capital loans the company might receive on account of having a negative networth. Key Facts for RPL RPL has significantly depreciated all its fixed assets resulting a low depreciation expense RPL has lower traded goods than competitors. Moreover, RPL has not traded any goods in 9MFY12 RPL has better working capital management than its peers perhaps due to low operations as it recently came out of the BIFR. The companys soya oil business is loss making and chances of recovery in the near future look bleak. However recently soybean and soymeal prices internationally have firmed up due to lower supplies form some other countries. The impact of

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this rise on profitability of RPL is uncertain at this point. Q3 and Q4 are the best seasons for soya. Revenue generated in the soya business in these quarters is good but profitability remains a concern. RPL has accumulated losses of Rs. 18.6 cr, and hence no dividend payments can be expected till the accumulated losses are wiped off. First dividend can be expected earliest in FY13. The company has low interest expense due to a small loan book (Rs. 46.0 cr at H1FY12) Khaitan Chemicals & Fertilizers Ltd (KCFL) KCFL began its operation in 1987 at Nimrani near Indore, West Madhya Pradesh and has earned cash profits each and every year, since its inception, even though SSP Industry has gone through tumultuous times. KCFL has earned the distinction of being the largest manufacturer of SSP in India. The company produces fertilizer, sold under the brand name of "Khaitan Khad", and is a brand leader in Western Madhya Pradesh. KCFLs unique 12% sulphur content in its SSP makes the companys products very popular among the farmers. It is extensively used in crops like oil seeds, groundnut, potato etc. The company manufactures powder and granular SSP. KCFL also manufactures Sulphuric Acid, Oleum, liquid SO3 and refined Soya Oil. The company has fertilizer manufacturing plants at Nimrani, Jhansi, Nimbahera and Fatehpur and a Soya division at Ratlam. The company already has two captive power generating units in its existing Fertilizer Division. These units of total capacity of 3325 KW generate power using the waste heat generated during the acid manufacturing process. The Company has now also put up a 1250 KW, WTG (Wind Turbine Generator) in Dhulia, Maharashtra for generation of power to be sold to the Maharashtra Government. Total SSP capacity is 911,500 MT (with additional 66,000 MT capacity via a long-term lease with Arihant Phosphate and Fertilizers Ltd) while total capacity for Sulphuric Acid is 267,300 MT. KCFL has received approval and environmental clearance a for 200,000 TPA SSP project at Dahej (Gujarat) and civil work has begun. This plant should be operational in FY13. KCFL has a debt/equity ratio of 1.2 as of H1FY12 and the company had paid Rs. 16.8 cr in interest expenses for 9MFY12. Key Facts for KCFL: KCFL has a very high gearing ratio with significant interest expense, which could make funding expansions a problem. Interest expense could increase. The companys soya oil business is loss making and chances of recovery in the near future look bleak. However recently soybean and soymeal prices internationally have firmed up due to lower supplies form some other countries. The impact of this rise on profitability of RPL is uncertain at this point. Q3 and Q4 are the best seasons for soya. Revenue generated in the soya business in these quarters is good but profitability remains a concern. Visibility of the companys future earnings is poor compared to its peers. . Liberty Phosphate Ltd (LPL) Liberty Phosphate Ltd (LPL) is one of the leading SSP (powder and granule) manufacturers in India with an installed capacity of 562,000 MT, which is in the process of being ramped up to 924,000 MT. The company also manufactures NPK and Magnesium Sulphate. LPL has 6 manufacturing units, one each at Udaipur, Kota, Baroda, Pali, Nimrani and Hospet. The group caters to ~18% of the SSP fertilizer demand of the country. The companys brand Double Horse is well known among farmers and has a strong market presence. LPL is also an importer and marketer of Di-Ammonium Phosphate (DAP), Mono Ammonium Phosphate (MAP), Triple Super Phosphate (TSP), Muriate of Potash and Sulphate of Potash (SOP). LPL does not manufacture Sulphuric Acid, a key raw material in the manufacturing process of SSP and hence does not captively manufacture power. The company presently buys Sulphuric Acid from Hindustan Zinc on a long-term agreement basis. LPLs gearing ratio is 0.4 as on H1FY12 and funding expansions could increase the debt a little. Key Facts for LPL: LPLs OPM expanded significantly in Q3FY12 and 9MFY12 and is higher than those of its competitors despite more trading activity and a high forex loss. LPL seems to benefit from cheap raw material expenses perhaps due to its long-term tie-ups with phosphate rock and sulphuric acid suppliers. LPL is increasing its capacity from 562,000 MT to 924,000 MT Promoters have been increasing their stake in the company through creeping acquisitions for the past 4 quarters. Promoter holding on 31st December 2011 was 55% as compared to that of 51.35% on 31st December 2010. LPL has already significantly depreciated all its fixed assets resulting a low depreciation expense as compared to its competitors LPL has low debt, which results in fairly low interest expense however, interest costs are rising as the company takes additional loans to add capacities

Comparative Production/Utilization/Sales
Rama FY10 MT 462000 FY11 MT 478000 Khaitan SSP FY10 MT 845500 FY11 MT 911500 Liberty FY10 MT 463000 FY11 MT 562000
7

Installed Capacity

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Opening Stock Production for sale Capacity Utilization Purchased Units Sold % of stock sold Closing Stock Net Value (Rs. Cr) Value per unit (Rs./MT)

17247 243334 52.7% 149019 57.19% 111562 87.67 5883.47

111562 367823 77.0% 379476 79.16% 99909 280.68 7396.39

34567 332543 39.3% 244520 66.61% 122585 140.10 5729.71

122585 398888 43.8% 34505 451067 81.13% 104887 326.04 7228.29

33323 340231 73.5% 336848 90.17% 132380 155.57 4618.36

132380 373454 66.5% 439102 86.81% 66707 240.94 5487.20

(Source: Company Reports, HDFC Sec Research)

Conclusion
SSP companies are currently on a good run. After the NBS was put into effect in 2010, non-urea fertilizers have seen good times. SSP is highly nutritious for the soil and the government is trying to promote its use to prevent soil from getting exhausted due to overuse of Urea. The India fertilizer market has been growing with the fertilizer quantity per kilo of food grain steadily rising. While the NBS goal is to decontrol the fertilizer industry, the government could still interfere when required. India is one of the largest fertilizer consumers in the world and with stagnant domestic supply, imports have been increasing. Several large players are in the process of adding SSP capacities as the current market structure makes it an extremely profitable venture. Finished goods prices have increased significantly due to decontrol and an increase in global raw material prices. Despite a fall in DAP prices, there is a large price difference between DAP and SSP and a relatively small price difference between SSP and Urea. In the possible scenario of decontrolled Urea prices, SSP companies will benefit significantly. SSP sales depend on agriculture, which makes it a seasonal industry. Q4 is usually the dullest quarter, especially for Rama Phospate. Raw material prices are a major concern but they are usually compensated by government subsidy. However, an unusually high raw material cost could have a negative effect. All SSP manufacturers import raw material, exposing them all to forex risk. Moreover, government regulation in a farmer-sensitive industry is always a major concern. Seeing the niche price-nutrient advantage, we believe the SSP space is expected to perform well in the near to medium term. Within SSP stocks, we like Rama Phosphate Ltd (RPL) and Liberty Phosphates Ltd (LPL). While RPL has the downside of a soya oil business, which is presently loss-making, its SSP business has shown consistent performance since the company exited the BIFR. Market cap of RPL and LPL is very low (~Rs. 120 cr for both) and debt is relatively low too resulting in a low EV. As seen in the Trailing P/E charts, RPL has historically traded at a slight premium to LPL and we expect this premium to continue. We think one can: Rama Phosphate Buy at CMP of Rs. 66.05 and add on dips to the band of Rs. 57 to Rs. 61 for sequential targets of Rs.77 and Rs. 88 (5x TTM EPS) Liberty Phosphate Buy at CMP of Rs. 77.95 and add on dips to the band of Rs. 68 to Rs. 74 for sequential targets of Rs.86 and Rs. 101 (3.5x TTM EPS) Rama Phos - Trailing P/E
500.00 400.00 300.00 200.00 100.00 0.00
7 8 9 0 -0 7 -0 8 -1 0 -0 9 -1 1 1 ct -0 ct -0 ct -0 ct -1 Ap r Ap r Ap r Ap r Ap r Ap r ct -1 -1 2

Liberty Phos - Trailing P/E

160.00 120.00 80.00 40.00 0.00 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Apr-12

Close -Unit Curr 2.5 X

0.5 X 3.5 X

1.5 X 4.5 X

Close -Unit Curr 3.0 X

1.0 X 4.0 X

2.0 X 5.0 X

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Financials
Quarterly Profit and Loss Account - Standalone
Rama Phosphate Particulars (Rs. Cr) Net Sales Other Operating Income Other Income Total Income Operating Expense Operating Profit OPM (%) Interest Depreciation PBT Exceptional Items Tax PAT NPM (%) Extraordinary Income PAT after extraordinary income EPS P/E (Annualised) 9MFY12 369.4 0.4 0.0 369.8 316.9 52.9 14.3% 5.7 3.2 44.0 0.0 13.6 30.4 8.2% 0.0 30.4 17.2 1.0 9MFY11 290.8 0.8 0.0 291.6 249.8 41.8 14.3% 4.3 3.7 33.8 0.2 0.0 33.7 11.6% -5.0 38.7 21.9 0.8 -100.0% -21.5% -21.5% 34.5% -13.9% 29.9% -104.5% #DIV/0! -9.9% %YoY 27.0% -50.8% #DIV/0! 26.8% 26.9% 26.5% 9MFY12 324.3 0.0 0.0 324.3 265.3 59.0 18.2% 7.9 2.0 49.1 0.0 15.9 33.1 10.2% 0.0 33.1 22.9 0.2 Liberty Phosphate 9MFY11 299.4 0.0 0.1 299.5 255.9 43.6 14.5% 5.8 2.3 35.5 0.0 11.8 23.7 7.9% 0.0 23.7 16.4 0.2 #DIV/0! 39.5% 39.5% 36.5% -12.5% 38.1% 990.3% 35.0% 39.5% % YoY 8.3% #DIV/0! -20.3% 8.3% 3.7% 35.3%

(Source: Company Reports, HDFC Sec)

Annual Profit & Loss Account

Rama Phosphate Particulars (Rs. Cr) Net Sales Other Operating Income Other Income Total Income Operating Expense % of sales Operating Profit OPM % Interest Depreciation PBT Exceptional Items Net Tax Effective Tax Rate % PAT NPM % Extraordinary Income PAT after extraordinary income EPS P/E
* Consolidated

Liberty Phosphate* %YoY 170.5% #DIV/0! -48.1% 165.4% 145.9% 494.8% 97.1% 20.0% FY10 203.7 0.0 8.0 211.7 194.4 95.4% 17.2 4.6% 4.8 2.3 10.1 0.0 #DIV/0! 3.7 36.1% 6.5 3.2% #DIV/0! 0.0 6.5 4.5 17.4 FY11 363.1 0.0 3.7 366.7 302.5 83.3% 64.2 16.7% 7.0 2.8 54.4 0.0 19.2 35.3% 35.2 9.7% 0.0 35.2 24.4 3.2 #DIV/0! 442.9% 442.9% 442.9% 425.4% 45.1% 23.2% 436.6% 272.6% %YoY 78.2% #DIV/0! -54.1% 73.3% 55.6%

FY10 130.9 0.0 3.1 134.1 126.6 96.6% 7.5 3.4% 3.0 3.7 0.8 0.0 0.0 0.0% 0.8 0.6% 0.0 0.8 1.5 44.8

FY11 354.3 0.0 1.6 355.9 311.2 87.8% 44.7 12.2% 5.9 4.4 34.3 0.0 4.9 14.3% 29.4 8.3% 0.0 29.4 16.7 4.0

4101.0%

3500.9%

3500.9% 1032.3%

(Source: Company Reports, HDFC Sec)

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Segmental
Rama Phosphate Fertilizers Particulars (Rs. Cr) Revenues PBIT PBIT % Segment Assets Segment Liabilities FY10 104.2 9.0 8.6% 129.7 66.5 FY11 307.8 49.5 16.1% 161.7 72.1 9MFY11 266.3 45.0 16.9% 87.1 9MFY12 331.5 55.0 16.6% 132.8 FY10 26.7 -2.1 -8.0% 9.3 12.6 FY11 46.4 -3.1 -6.7% 7.2 7.7 Soya/Oil 9MFY11 24.5 -2.3 -9.2% 11.3 9MFY12 37.9 -1.1 -3.0% 10.7 -

(Source: Company Reports, HDFC Sec)

Balance Sheet
Rama Phosphate Particulars (Rs. Cr) SOURCES OF FUNDS Shareholders' Funds: Capital Redeemable Preferance Shares Reserves & Surplus 5.5 0.0 45.8 51.3 Loan Funds: Secured Loans Unsecured Loans 54.8 7.8 62.6 Net Deferred Tax -4.0 40.0 9.7 49.7 0.9 46.0 0.9 38.5 0.2 38.7 0.8 59.4 1.7 61.2 0.7 43.1 3.3 46.4 1.1 17.6 0.0 73.6 91.2 17.6 0.0 75.8 93.5 14.4 5.0 42.1 61.5 14.4 5.0 73.4 92.8 14.4 5.0 92.9 112.3 FY10 FY11 H1FY12 FY10* Liberty Phosphate FY11* H1FY12

Total APPLICATION OF FUNDS Fixed Assets: Gross Block Depreciation Net Block Capital WIP

109.9

141.8

140.4

100.9

154.7

159.8

117.2 90.1 27.1 0.3 27.4

118.5 93.7 24.8 3.2 28.0 0.1

27.4 0.1

41.9 19.8 22.1 1.7 23.8 1.8

52.9 22.6 30.3 7.4 37.7 1.9

40.9 1.2

Investments Current Assets: Inventories Sundry Debtors Cash & Bank Balances Other Current Assets Loans & Advances

0.1

83.5 7.7 5.6 11.6 7.5 115.8

96.0 9.1 3.9 27.6 7.0 143.6 46.4 2.2

58.9 17.1 8.7 88.9 13.9 187.4 63.0 11.6

100.4 28.2 10.3 0.0 20.7 159.6 83.2 1.6

89.3 62.8 32.7 0.0 23.3 208.0 80.7 12.3

49.3 97.7 38.9 0.0 23.7 209.7 89.9 2.1

Current Liabilities Provisions

80.1 2.0

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82.1 Net Current Assets P&L Account/Miscellaneous 33.7 48.6

48.6 95.0 18.6

74.6 112.9 0.0

84.8 74.8 0.5

92.9 115.1 0.1

92.0 117.7 0.0

Total
* Consolidated

109.9

141.8

140.4

100.9

154.7

159.8

(Source: Company Reports, HDFC Sec)

Analyst: Kushal Sanghrajka (kushal.sanghrajka@hdfcsec.com) RETAIL RESEARCH Fax: (022) 30753435 Corporate Office: HDFC Securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station,
Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 30753435 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional Clients

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