Fertiliser Sector Report - PINC Research

RESEARCH
FERTILISER SECTOR
SECTOR REPORT
Dawn of a new era...

Contents
Investment Summary .............................................................................. 1
Investment Rationale ............................................................................... 2
Sector Background .................................................................................. 10
Companies
Chambal Fertilisers and Chemicals Ltd. ................................................. 27
Coromandel International Ltd. .................................................................. 34
Deepak Fertilisers and Petrochemicals Corporation Ltd. ........................ 40
Nagarjuna Fertilisers and Chemicals Ltd ................................................ 47
Rashtriya Chemicals and Fertilisers Ltd ................................................. 55
Annexures .................................................................................................. 63
RESEARCH
FERTILISERS Sector View - Attractive
Investment Summary 12 October 2009
Beginning of a new Era

The share of agriculture to India’s GDP has declined over time
and currently stands at ~17%. However, it still plays a vital role
as it employs ~60% of the population and provides a crucial Nutrients consumption trend (mn MT)
backward and forward linkage to the rest of the economy. The
government is targeting 8-9% GDP growth and self-reliance in Consumption Import
24
food production. Fertilisers, being directly associated with
agriculture should significantly benefit from such an upturn.
18
Favourable policy changes
Rising subsidy bills and dependency on imports has resulted 12
in several positive policy changes like realisation linked with
international prices parity (IPP), decrease in MRP of complex 6
fertilisers, energy reduction benefits to be retained with players.
These changes would act as incentives to hike capacity as -
well as improve the profitability and returns on the business. FY 82 FY 91 FY 00 FY 09
Demand remains robust; Supply yet to catch up
SECTOR OVERVIEW
Over the last 5 years fertilisers’ consumption has grown at a

Fert Index BSE Rebased
CAGR of 6.7%. With no significant capacity addition in the 200
last 10 years, this demand has been met through imports
increasing the proportion of imports from 15% to 45%. 150
RIL gas – A natural support
Natural gas from RIL’s KG basin provides a big support to the 100
industry in achieving self-sufficiency in Urea production. With
first priority, fertiliser sector has received ~15mmscmd of natural 50
gas out of ~40mmscmd in first allocation from RIL KG D6.
-
Expansion and efficiency improvement Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
Changing favourable scenario has led fertiliser manufacturers
to implement energy reduction measures and capacity
additions. Consequently there will be considerable accretion
(15-40%) to earnings from FY11 onwards.
Chirag Dagli
ATTRACTIVE VALUATIONS chirag.dagli@pinc.co.in
We believe that fertiliser sector with rising demand and Tel: +91-22-6618 6462
favourable policy changes offer a great investment opportunity.
Companies with strong positioning and ongoing projects should Satish Mishra
make significant improvement in profitability in the coming satish.mishra@pinc.co.in
years. We initiate coverage on the sector with a positive outlook Tel: +91-22-6618 6488
and our top picks are Coromandel and Chambal Fertilisers.
Sector Summary
KEY FINANCIALS
CMP Mkt Cap Net sales (Rs mn) EPS (Rs) P/E (x) TP
Company Rating
(Rs) (Rs bn) FY10E FY11E FY10E FY11E FY10E FY11E (Rs)
Chambal Fert. 52 22 45,270 47,645 5.9 7.3 8.8 7.2 73 BUY
Coromandel Int. 213 30 59,022 70,118 25.4 31.7 8.4 6.7 285 BUY
Deepak Fert. 89 8 13,398 15,519 13.9 15.1 6.4 5.9 114 BUY
Nagarjuna Fert. 34 15 18,742 21,205 1.7 3.3 19.8 10.4 47 BUY
RCF 65 36 59,655 64,260 3.8 4.8 17.0 13.6 73 HOLD
PINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO> 1
RESEARCH
INVESTMENT RATIONALE
Despite the emphasis laid by the government to increase agricultural productivity by using
more fertilisers and other inputs, domestic capacity has not increased due to lack of
availability of raw materials and restrictive policies.
Why to look at fertiliser sector => dark nights are over, be an early bird & enjoy the
dawn
The Past…
No capacity addition in the last decade
Government’s target of achieving self sufficiency in food grains production is resulting in
higher usage of fertilisers to increase productivity. Despite this there has been no significant
capacity addition in last decade and all current capacities are not operating at 100%
utilisation level.
Capacity and Production of Fertilisers (mn MT)

Capacity N Production N Capacity P Production P
16.0
Stagnant production 12.0

capacity since last
decade...
8.0
4.0
-
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: Fertiliser Association of India (FAI)
Increasing dependency on imports

Lack of significant indigenous capacity additions and higher usage of fertilisers resulted in
higher dependency on imports to meet the growing demands. Consequently, proportion of
imports increased significantly against the govt’s target of self-reliance
Share of imports in fertiliser consumption (mn MT)

Production Imports
28.0
21.0
Increasing share of 14.0

imports to meet the
demand...
7.0
-
FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09
Source: FAI
satish.mishra@pinc.co.in 2
RESEARCH
Mounting subsidy burden

Fertiliser sector being highly regulated and controlled, any negatives for the sector has
impacted both the government and the manufacturers. Increasing dependency on imports
and MRPs fixed at customer’s end despite of rising input costs, has resulted in mounting
subsidy load for the government with subsidy at ~Rs1tn in FY09.
Subsidy granted to fertiliser sector (Rs bn)

Urea P & K Fertilisers
1,000
Ballooning subsidy bill... 750
500
250
0
FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: FAI
The Present…
There has been several positive developments for the fertiliser sector in the last one year,
which augur well for the future. Key ones are discussed below,
Natural Gas (NG) availability in India
Gas finding at RIL KG D6 basin is going to be a big booster for India in terms of meeting
energy requirements. As per Crisil research, NG availability is expected to grow at a
CAGR of ~17% for the next three years. RIL has already started production of 40mmscmd
from its KG basin, which is likely to double by year-end.
NG Availability (mmscmd)
Ex isting fields New discov eries LNG supplies Coal bed methane Pipeline imports
240
180
Increasing availability of
natural gas...
120
60
-
FY 07E FY 08 P FY 09 P FY 10 P FY 11 P FY 12 P
Source: Crisil Research

Natural gas is a key raw material for Ammonia that is used in production of Urea and
complex fertilisers. Indigenous availability promises higher natural gas allocation to fertiliser
sector, which is a major positive. In the first allocation from RILKG basin, fertiliser sector
had top priority and received allocation of ~15mmscmd of NG.
RESEARCH
Positive policy changes

Increasing subsidy burden and higher dependence on imports has led fertiliser ministry to
make several positive changes in the fertiliser policy in the last one year. These are aiming
towards more transparency, competitiveness and growth in the sector.
Key changes in Urea Policy
z Guidelines to switch from liquid fuels (Naphtha & LSHS) to natural gas
Realisation of expanded z Capital subsidy for players switching from LSHS to natural gas
capacity for Urea to link z No permission is required from government for de-bottlenecking or expansion
with IPP...
z Benefits of energy saving to be retained with manufacturers for five years
z Revived capacity’s realisation (for subsidy calculation) to be linked with IPP.
Key changes in Complex Fertiliser Policy
z Nutrient based pricing of complex fertilisers (resulted in reduction of prices by 15-25%
for farmers that should increase usage of complex fertilisers)
z Manufacturer can sell their product anywhere in India, actual freight cost to be returned
z· Fertilisers subsidy to manufacturers are linked with international prices of raw materials
Nutrient based pricing for
complex fertilisers... and fertilisers
z No permission is required from government for de-bottlenecking or expansion
z Profits to be shared between producers and government if they contract raw material
at lower prices than prevailing market rates
Govt is also planning to provide nutrient based subsidy that should bring competition in the
sector.
Sharp correction in raw materials and fertiliser prices
A sharp correction in the international prices of raw materials and fertilisers in CY10 from
their peaks of CY09, has provided further boost to the fertiliser sector. This will help
government with reduced subsidy outflow and players with higher capacity utilisation.
Price movement of raw materials and fertiliser
Ammonia (USD/MT) Phosphoric Acid (USD/MT)

1200 2,400
900 1,800
600 1,200
300 600
0 0
Oct-96
Oct-01
Oct-06
Apr-94
Jul-95
Jan-98
Apr-99
Jul-00
Jan-03
Apr-04
Jul-05
Jan-08
Apr-09
Oct-98
Dec-99
Oct-05
Dec-06
Apr-95
Jun-96
Aug-97
Feb-01
Apr-02
Jun-03
Aug-04
Feb-08
Apr-09
Source: Crisil Research Source: Crisil Research
RESEARCH
Urea (USD/MT) DAP (USD/MT)

1000 1400
750 1050
500 700
250 350
0 0
Oct-02
Oct-96
Oct-01
Oct-06
Dec-
Sep-
Feb-
Mar-
Aug-
Apr-94
Jul-98
Jan-07
Jun-08
Apr-94
Jul-95
Jan-98
Apr-99
Jul-00
Jan-03
Apr-04
Jul-05
Jan-08
Apr-09
May-
The future…
Many of the fertiliser companies have taken proactive measures to reap the benefits of
revised policy. These changes are likely to have partial impact on earnings in FY10 and full
blown impact from FY11 onwards.
Benefits to the Government
Decline in international prices of fertilisers entail lesser fertiliser subsidy bill in FY10 and
FY11. With pressure easing, the government should be in a position to provide further
assistance and timely disbursement of subsidy to the manufacturers.
Fertiliser subsidy to decline (Rs bn)

1,200
900
Correction in raw material
prices to lessen govt.’s
subsidy burden... 600
300
0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E
Benefits to Urea Manufacturers

Urea players are likely to have considerable benefit from the changed scenario of fertiliser
sector. We have discussed below the benefits accruing to the players under our coverage.
Capacity addition
Production above cutoff will be linked to 85% of international price of Urea with a floor and
ceiling of USD250 and USD425 respectively. This should add significantly to the earnings
of the companies. Even at realisation of USD250, operating margins will be ~30% and with
increasing international prices, companies will have significant growth in profitability.
RESEARCH
Reduced Energy Consumption

Energy reduction benefits to
be retained with Urea De-bottlenecking and upgradation of technology will lead to savings in energy costs and
players... the complete benefits will be retained with manufacturers for the first five years.
Benefits from Capacity addition and energy reduction

Manufacturers Reassessed Cut-off IPP linked RIL gasallocation Expected Energy Reduction
Capacity(mn MT) Capacity(mn MT) production(mn MT) (mmscmd) (Gcal/MT of Urea)
Chambal 1.72 1.84 0.20 1.15 0.20
Nagarjuna 1.17 1.41 0.18 1.55 0.45
RCF Thal 1.71 1.77 0.27 3.05 0.40
Coromandel NA NA NA NA NA
Deepak NA NA NA NA NA
Source: FAI, Company, PINC Research
Ease in Working Capital management

Availability of more natural gas will decrease the proportion of usage of liquid fuels like
Naphtha and LSHS, this inturn should reduce working capital requirement and ease the
short-term loan requirement. There are chances that with reduced subsidy, the companies
should not be allocated any fertiliser bonds as subsidy.
Benefits to Complex and Phosphatic Manufacturers
There has been more usage of Urea as compared to other fertilisers in the past mainly due
to their lower market price. This led to an imbalance in the nutrient content of soils.
Government took the corrective action in FY08 by reducing the MRP of different complex
fertilisers based on nutrient content.
Higher utilisation
Post reduction of MRP of complex fertilisers by 20-25%, farmers are likely to increase the
usage of complex fertilisers that should result in better yield. With higher usage, there
should be more demand for complex fertilisers. Higher demand and realisation linked with
Reduction in MRP of
complex fertiliser to increase international price should motivate in higher production. The players with more capacity
usage... should benefit most in these situations. Coromandel is the largest complex fertiliser
manufacturer among the listed companies.
Capacity addition
Changes in fertiliser’s policy and increasing demand scenario should result in capacity
addition with tie-ups for raw materials. Coromandel International (among in our coverage)
is forming a JV (along with GSFC and GCT) for setting up a 380k MT p.a. Phosphoric acid
plant. The same will cater to a planned capacity addition of ~450k MT p.a. of complex
fertilisers at Kakinada commencing production from end of FY11. This should contribute
partially to earnings in FY11 and full impact from FY12 onwards.
Working Capital management
There are chances that with reduced subsidy, there will be no further fertiliser bonds
allocation to companies, which inturn should reduce short-term loan requirement for
managing working capital.
RESEARCH
Are the valuations justified => we think yes, best is yet to come
Share prices of fertiliser companies have shown significant rise from their lows in Mar’09.
However, we believe there is still a significant upside remaining for these companies.
Fertiliser business – A cash cow
Fertiliser business with government assured return of 12% post tax has worked as a cash
cow for fertiliser companies. With demand greater than supplies, the only problem that
fertiliser companies have faced in past was managing their working capital. Untimely
disbursement of subsidy, bonds against cash subsidy and usage of liquid fuels in absence
of natural gas remain the reasons for volatility in working capital management.
Cash flow from operations (Rs bn)

FY05 FY06 FY07 FY08 FY09 FY10E FY11E Market Cap Mar Cap/ FY11E
cash after WC
Chambal Fert Before w. c. 4.4 4.0 4.0 4.4 7.1 6.2 6.6 22.9 2.9
After w. c. 3.3 5.6 (0.5) 5.5 12.2 2.2 7.8
Coromandel Int Before w. c. 1.1 1.3 1.5 3.5 7.6 2.9 3.7 28.0 12.4
After w. c. 1.1 (0.5) 1.2 3.3 0.2 4.7 2.3
Nagarjuna Fert Before w. c. 3.2 2.7 2.6 2.8 3.0 3.3 4.0 15.0 3.1
After w. c. 4.0 3.4 4.7 3.4 4.0 3.0 4.8
RCF Before w. c. 3.3 2.2 3.1 3.1 2.9 3.2 3.5 36.4 14.0
After w. c. 1.3 1.7 (0.7) 1.4 (3.1) 11.2 2.6
Deepak Fert Before w. c. 0.9 0.7 1.4 1.6 2.5 2.1 2.4 7.9 3.9
After w. c. 1.1 0.4 0.7 1.6 1.7 2.1 2.0
Source: Company, PINC Research
Correction in raw material prices, higher availability of natural gas, lower subsidy burden
for government and favourable changes in policy should result in higher cash generation for
these companies. Analysis of Nagarjuna Fertiliser’s cash flow numbers provide sense of
pure Urea business (other companies have mix of business and issues). Current market
capital of Nagarjuna Fertilisers i.e. Rs15bn is recoverable in four years from the cash
generation from operations.
Higher Returns
Most of these companies had higher returns in the past and with the situation improving
we believe that they should yield higher returns in the future.
ROCE (%) ROE (%)

Chambal Fert Coromandel Fert Chambal Fert Coromandel Fert
Nagarjuna Fert RCF Nagarjuna Fert RCF
Deepak Fert Deepak Fert
36.0 48.0
27.0 36.0
18.0 24.0
9.0 12.0
- -
FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY05 FY06 FY07 FY08 FY09 FY10E FY11E

RESEARCH
BSE Vs Fertiliser sector

As discussed earlier, fertiliser sector lost its flavour in the market due to its inherent
problems. By comparing movement of fertiliser index (made with all major fertiliser
companies based on their market cap) vis-à-vis BSE Sensex, it can be observed that
fertiliser sector has underperformed Sensex in recent past. Even after recovery from their
bottom in Mar’09, the fertiliser index is still behind the market.
Fertiliser Index Vs BSE

Fert Index BSE Rebased
360
270
Fertiliser index under-

180
performing the market...
90
-
Jan-04 Feb-05 Mar-06 Apr-07 May -08 Jun-09
Source: Capitaline Plus, PINC Research
Positive intrinsic and extrinsic factors augur well for the fertiliser sector in future. We feel
that there will be a complete rerating of fertiliser sector with visibility of their future profitability.
Higher Dividend – A support
Few of the fertiliser companies provide good dividend yield, which further provide support to
the share price of the stock.
Dividend Yield (%)

Chambal Fert Coromandel Fert Nagarjuna Fert RCF Deepak Fert
6.0
4.5
Higher dividend yield-

a support to share price... 3.0
1.5
-
FY07 FY08 FY09 FY10E FY11E
RESEARCH
What are the top picks => here is the answer

The five companies under our coverage should reap the benefit of uptrend in fertiliser
sector based on their positioning. We have tried to choose our best pick based on following
criteria.
Way to look at the sector
We feel that there are few key parameters to analyse the strength and earning potential for
Urea and complex fertiliser manufacturers.
Urea players
z Availability of natural gas
Availability of natural gas is z Expansion and energy reduction plans
the key for Urea players... z Production with IPP linkages
z Larger the player, more the benefits
Complex Manufacturers
z Tie-ups for sourcing raw materials
Tie-ups for raw materials
vital link for complex z Expansion plans
manufacturers... z Larger the player, more the benefits
Higher Returns
Fertiliser stocks have robust returns, higher cash generation from operations and higher
dividend yield as discussed earlier. Few of the companies should also witness significant
improvement in their earnings in next two years.
Best Picks
Based on all the factors mentioned above, we have done the relative grading of all the
stocks under our coverage.
Relative Grading
Positioning Future triggers Financial Prudence Returns to shareholders
Total
Companies Business Capacity/ Product Exposure Ongoing Working Debt/ Profit Gr in Dividend Score
concentration Market Portfolio to Policy Projects Capital Equity next 2 years Returns Yield
Chambal 3 4 3 4 5 5 2 4 3 4 37
Coromandel 5 5 5 4 4 3 5 1 5 2 39
Nagarjuna 2 3 4 4 4 5 1 5 1 1 30
RCF 3 3 3 4 2 2 5 3 2 2 29
Deepak 4 4 4 2 4 2 3 1 4 5 33
Source: PINC Research Note: Rating on a scale of 1 to 5 (5 being the best)
Based on all the factors, our best picks for the fertiliser sector are Chambal Fertilisers
and Coromandel International Ltd.
Our best picks: Chambal We subscribe ‘BUY’ recommendation for Nagarjuna fertiliser and Deepak fertiliser;
Fert. & Coromandel Int... however, they have other businesses like Refinery and Chemicals respectively contributing
significantly to their earnings. We initiate RCF with ‘HOLD’ recommendation, despite it
being one of the largest fertiliser manufacturing PSUs due to lack of clarity of any expansion
plan, government’s stake in future expansions and costlier valuations at the current level.
However, any positive changes in the policy regarding revival of sick units will benefit RCF
the most.
RESEARCH
SECTOR BACKGROUND
Fertiliser sector plays a significant role in a country like India, where agriculture sector still
commands a dominant presence. Due to its specific importance, Government of India has
always been directly associated with this sector in all its decision making process. During
the green revolution, this sector saw major capacity addition but since last decade there
has been no considerable addition and this has increased our dependency on imports to
meet our fertiliser requirements. For understanding the dynamics of this sector, it is important
to recognise the role of all associated variables, their limitations and expectations from
this sector.
Factors impacting Fertiliser sector
Raw
Material
Production International
Capacity Market
Fertiliser
Sector
Agriculture Government
Sector Policies
Source: PINC Research
Existing production capacity, availability of raw materials, government policies, international

demand-supply scenario for fertilisers are some of the major factors influencing the fertiliser
sector. We will try to understand the equation of fertiliser sector with each of these
stakeholders to analyse the likely future of this sector.
AGRICULTURE SECTOR
Though the share of agriculture sector to the Indian GDP has declined over the period of
Agriculture sector employs time and currently stands at ~17% of the GDP, it still plays a vital role as it employs ~ 60%
~60% of population and of the Indian population. Along with that, it provides crucial backward and forward linkages
contributes ~17% to Indian
to the rest of the economy. Government from the time of green revolution movement is
GDP...
trying to achieve self-reliance in food grains production, and concerted efforts in this direction
have resulted in substantial increase in agriculture production.
RESEARCH
Production and Yield of food grains
Total food grain production has increased at a CAGR of 2.6% from ~60 mn MT in 1950-51
to ~230 mn MT in 2007-08. This is associated with an increase in yield from 522 kg/
hectare to 1854 kg/ hectare in 2008.
Food grain production

Production (mn MT) Yield (Kg/ Hectare)
300 2000
225 1500
Grain production increased

with CAGR of ~2.6% in last 150 1000
60 years...
75 500
0 0
FY 51
FY 59
FY 67
FY 75
FY 83
FY 91
FY 99
FY 07
Source: Indiastat, DoF (Dept of Fertilisers, Ministry of Fertilisers and Chemicals)
Even with ~4x growth in food grain production in last 60 years, situation is still not rosy.
With population expected to grow at ~1.2% CAGR in next decade and 300 mn people
below poverty line posses a big challenge in future to achieve the target of self-sufficiency
in food grain production for India.
Growth in Indian population Agricultural land& irrigation coverage
Indian Population (Bn) Area (mn Hectare) Irrigation Cov erage

160 160 60
120 120 45
Current irrigation penetration

80 80 30
is ~46%...
40 40 15
- 0 0
FY 51
FY 65
FY 79
FY 93
FY 07
1900
1925
1950
1975
2000
2025
Source: Populstat Source: Indiastat, DoF
RESEARCH
With agricultural land stagnant at around 125 mn hectare from last four decade, the increase
in production is a result of better irrigation facilities (coverage increased from ~20% to
~45%), advanced farming techniques, high productive seeds and lastly, higher usage of
fertilisers.
Proportion of Urea in total fertiliser (‘000 MT)

Total Fertiliser Consumption Urea consumption
60,000
45,000
Urea being cheaper was 30,000

widely used as compared
to P and K nutrients... 15,000
-
FY 91
FY 93
FY 95
FY 97
FY 99
FY 01
FY 03
FY 05
FY 07
Indiastat, DoF
There has been an increase of 1.7x in usage of fertilisers in the last two decade. Annual
consumption of fertilizers in nutrient terms (N, P & K ), has increased from 0.7 lacs MT in
1951-52 to 225.70 lacs MT 2007-08, while per hectare consumption of fertilisers, which
was less than 1 Kg in 1951-52 has risen to the level of ~117 Kg in 2007-08. However, a
factor most noticeable is that Urea comprise ~55% of total usage in all these years.
Plants require balanced nutrition for their growth. Nitrogen (N), Phosphorous (P) and
Potassium (K) are the primary nutrients, where as sulphur (S), Calcium (Ca) and Magnesium
(Mg) are secondary nutrients (these are used in lower amount as compared to primary
nutrient but are important for growth of plants). Apart from these six nutrients, there are
around ten other micronutrients required for different kind of crops.
Fertiliser consumption in India (’000 MT)
Higher usage of Urea (~46% N), a fertiliser used for meeting the Nitrogen requirement,
over the years, created an imbalance in the nutrition content of the soil. The reasons for
disproportionate usage of fertilisers and reverse action taken by government are discussed
under the relationship between fertiliser sector and government.
RESEARCH
Fertiliser consumption in India ('000 MT)

Year Urea Complex DAP SSP MOP Misc Total
FY 91 14,077 3,113 4,248 3,558 1,631 1,180 27,807
FY 92 14,003 3,276 4,518 3,165 1,701 1,115 27,777
FY 93 14,905 3,043 4,052 2,008 974 1,364 26,347
FY 94 15,810 3,159 3,480 2,353 1,053 1,490 27,345
FY 95 17,112 3,974 3,586 2,626 1,270 1,308 29,876
FY 96 17,909 3,851 3,451 2,983 1,392 1,301 30,888
FY 97 19,024 3,588 3,624 3,018 1,198 1,326 31,779
Fertiliser consumption has
increased by ~6.7% in last FY 98 19,619 3,785 5,372 3,660 1,729 1,287 35,451
five years... FY 99 20,396 3,821 5,828 3,693 1,621 1,254 36,613
FY 00 20,278 4,523 6,937 3,601 2,049 1,181 38,568
FY 01 19,186 4,780 5,885 2,860 1,829 1,016 35,557
FY 02 19,917 4,963 6,181 2,605 1,992 894 36,552
FY 03 18,493 4,810 5,473 2,499 1,912 786 33,973
FY 04 19,767 4,757 5,625 2,544 1,841 853 35,388
FY 05 20,665 5,508 6,256 2,549 2,406 883 38,268
FY 06 22,298 6,694 6,764 2,756 2,731 890 42,133
FY 07 24,338 6,799 7,381 2,910 2,586 829 44,844
FY 08 25,963 6,571 7,497 2,288 2,881 606 45,805
Source: Indiastat, DoF
With limitation of agricultural land and lower irrigation penetration, higher and balanced
usage of fertilisers is the key to strengthen the agriculture sector. Government’s emphasis
on eradicating poverty, self-reliance on food and check on sky rocketing food-inflation
augurs well for the fertiliser sector.
FERTILISER PRODUCTION CAPACITY
India is the third largest fertiliser manufacturer in the world with an installed capacity of
~12 mn MT of nitrogen and 5.7 mn MT of phosphatic nutrients. However, with increasing
demand for fertilisers, around ~25% N, ~50% P and ~100% K nutrients requirements are
met through imports.
As discussed earlier, plants require all nutrients in balanced proportion for their proper
growth. Complex fertilisers contain N: P: K: S in different proportions. The following charts
provide clarity on the demand-supply scenario of different primary nutrients.
RESEARCH
Nutrient wise production and consumption of nutrients in India
Demand-Supply for Nitrogen (mn MT)

Consumption Production Import
16.0
12.0
Nitrogen imports stands 8.0

at ~25%...
4.0
-
FY 82
FY 84
FY 86
FY 88
FY 90
FY 92
FY 94
FY 96
FY 98
FY 00
FY 02
FY 04
FY 06
FY 08
Source: DoF
Demand-Supply for Phosphorous (mn MT)

6.0
4.5
Phosphorous imports stands

3.0
at ~50%...
1.5
-
FY 82
FY 84
FY 86
FY 88
FY 90
FY 92
FY 94
FY 96
FY 98
FY 00
FY 02
FY 04
FY 06
FY 08
Source: DoF
Demand-Supply for Potassium (mn MT)

4.0
3.0
2.0
Potassium imports stands

1.0
at ~100%...
-
FY 82
FY 84
FY 86
FY 88
FY 90
FY 92
FY 94
FY 96
FY 98
FY 00
FY 02
FY 04
FY 06
FY 08
Source: DoF
RESEARCH
India is highly dependent on imports for their fertiliser requirements. Except nitrogen, we
are highly exposed to international prices of phosphatic and potassic fertilisers due to
higher component of imports.
It is clearly apparent from the above graphs that there has been no significant capacity
addition for any kind of fertilisers in the last decade. The current situation is that out of total
capacity of ~23 mn MT for Urea, ~2.8 mn MT is closed. This resulted in ~90% capacity
utilization for available production capacity for Urea. Situation is even worse in Phosphatic
and complex fertilisers as capacity utilisation is only ~65%. Major reason for lower capacity
utilisations is the insufficiency of indigenous raw materials.
RAW MATERIAL AVAILABILITY
As discussed above, capacity utilisation for existing facilities are ~65% and ~90%
respectively for complex fertilisers and Urea. Reasons for low capacity utilisations are
z Unavailability of sufficient raw materials in India
z Inadequate long-term tie-ups for supply of raw materials with international players
z Loopholes in government policies
Raw Materials for Urea
Urea Manufacturing Process
Urea Manufacturing Process
Ammonia + Carbon Dioxide => Urea
Hydrocarbon is the only

requirement for production
of Urea... Hydrogen + Nitrogen Air Oxygen + Carbon
Hydrocarbon (NG, Naphtha, FO)

(Main Raw Material)
Urea is manufactured with chemical reaction of Ammonia and Carbon dioxide at high-
temperature and high-pressure conditions. It can be seen clearly in the manufacturing flow
sheet that the raw materials required for production of intermediates (Ammonia and Carbon
dioxide) of Urea are Air and Hydrocarbon. Air, which takes care of Nitrogen and Oxygen
requirement, is freely available in the atmosphere. Hydrocarbon is required for meeting the
requirement of Hydrogen and Carbon. Apart from usage for feed, hydrocarbons are also
RESEARCH
needed to meet fuel requirements. Different hydrocarbons used for feed/ fuel in Urea
manufacturing are Natural gas, Naphtha and Fuel oil.
Segmentation based on different hydrocarbons used for feed and fuel in FY08 is given
below,
Feed-wise segmentation Fuel-wise segmentation
Mixed feed
16 Others
19
~80% of capacity is running Fuel Oil

on Natural gas and mixed 11 Fuel Oil
12
feed...
Nephtha
7
Nephtha
14
Netural Gas Netural Gas
66 55
Usage of Natural gas has following advantages over other feed/ fuel options:
z Higher operating efficiency
z Lower energy consumption
z Lower cost of production
In FY08, ~66% of feed and ~55% of fuel requirements were met through Natural gas.
Government is continuously trying to increase the consumption of natural gas for Urea
manufacture. Usage of Naphtha for fertilisers is showing a decline since the last few years.
Naphtha usage for fertilisers

Total Consumption ('000 MT) Consumption (Fertiliser)
20000
15000
Naphtha consumption
decreasing for fertilisers... 10000
5000
0
FY86
FY88
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
Source: Indiastat
RESEARCH
As per the current fertiliser policy, all Urea plants operating with Naphtha and Fuel oil as
feed, has to switch completely to natural gas by 2010. Availability of natural gas from RIL
KG basin and higher imports of LNG augur well for the increased usage of natural gas.
With signs of adequate availability of natural gas and favorable policy environment by
government, many of the fertiliser companies are going for debottlenecking of their existing
capacities.
Around 26mmscmd of natural gas were available to fertiliser plants in FY08, which shows
a shortfall of ~15mmscmd. With all debottlenecking under progress, switch from other
feed to natural gas and resumption of closed plants will further increase the requirements
of natural gas to ~54mmscmd by FY12.
Demand scenario of natural gas for Urea plants

Av ailable Deficit Rev amp requiremnet Sw itch requirement
60
9.3
45 3.5
Further requirement of NG 15.2

at ~13mmscmd for switching 30
and revamping... 41.4 41.4
15
26.2
0
FY08 FY10 FY12E
Source: Crisil Research, PINC Research
In the first allotment of gas from RIL KG basin, fertiliser industry was given the first priority
and received the allocation of ~15mmscmd of natural gas out of ~40mmsmd production.
With production of gas doubling from RIL KG basin by FY10 and increased availability of
imported LNG, it is unlikely that existing plants will face any constraints regarding availability
of raw material for the existing plants and planned de-bottlenecking.
RESEARCH
Raw Materials for Complex Fertilisers

Complex fertilisers contain two or more than two nutrients out of Nitrogen, Phosphorous
and Potassium. They are represented as N: P: K, where N, P and K represents the
percentages of NH3, P2O5 and K2O. With importance on balanced nutrient content, now
Sulphur is also considered as an important nutrient and so fertilisers are represented as
N: P: K: S.
Complex Fertiliser Manufacturing Process
Complex Fertilisers
Nitrogen Sulphur
(N: P: K: S)
Ammonia Sulphuric Acid
Ammonia, Phosphoric acid, Phosphorous Potassium

Potash and Sulphuric acid
are raw materials for complex
fertilisers...
Phosphoric Acid Muriate of Potash
Rock Phosphate Sulphuric Acid

Complex Fertiliser Manufacturing Process

As per the nutrient content of complex fertilisers, different raw materials are used. As
discussed earlier, India is heavily dependent on imports for P and K nutrients to the tune
of 50% and 100% respectively. Around 45% of Sulphur requirements are also met through
imports. Such a high dependency on imports for raw material is the reason for lower
capacity utilisation of complex fertilisers.
Over the years, import trends for Ammonia and phosphoric acid are given below:
Ammonia Import Phosphoric Acid Import

Ammonia Imported ('000 MT) P2O5 Import ( ' 000 MT)
2,000 3,200
Increasing dependency on 1,500 2,400

imports to meet raw
materials requirement...
1,000 1,600
500 800
- -
FY 82
FY 84
FY 86
FY 88
FY 90
FY 92
FY 94
FY 96
FY 98
FY 00
FY 02
FY 04
FY 06
FY 08
FY 82
FY 84
FY 86
FY 88
FY 90
FY 92
FY 94
FY 96
FY 98
FY 00
FY 02
FY 04
FY 06
FY 08

RESEARCH
Apart from lower capacity utilisation, higher dependency on imports has exposed fertiliser
industry to international price fluctuations. Immense rise in raw material and fertiliser
prices in 2007-08 led to a significant impact on the government’s kitty in FY09 as subsidy
outflow. High volatility in prices and gaps in current subsidy policy for complex fertiliser
forced many of the established players to shutdown their production in Q4FY09.
INTERNATIONAL MARKET
As discussed earlier, Indian fertiliser sector is highly dependent on imports to meet domestic
fertiliser demand. India consumes ~14% of total fertiliser production in the world. In terms
of consumption, India is among the top three countries and is in top four nations in terms
Higher imports has exposed
of fertiliser’s production.
India to international
market... Fertiliser industry went through a highly volatile price regime in the last 1.5 years. Nature
of price volatility, which made all fertiliser companies to earn highest ever profit in FY09
and YoY de-growth in Q1FY10 can be seen in the price movement graphs of fertilisers and
raw materials prices given below.
Prices of fertilisers
Urea (USD/ MT) DAP (USD/ MT)

1000 1400
750 1050
500 700
250 350
0 0
Dec-95
Dec-00
Dec-05
Oct-96
Oct-01
Oct-06
Apr-94
Aug-97
Apr-99
Aug-02
Apr-04
Aug-07
Apr-09
Apr-94
Jul-95
Jan-98
Apr-99
Jul-00
Jan-03
Apr-04
Jul-05
Jan-08
Apr-09
International Urea price which were in the range of USD300/ MT in Jan’07, reached to USD
Sharp correction in fertiliser 835 in Sep’08 and is currently trading at USD280. Similarly, Di-Ammonium phosphate
prices... (DAP) price rose from USD320/MT to USD1330/MT in May’08 and is currently trading at
USD 340/ MT.
RESEARCH
Raw Material Prices
Rise in fertiliser prices were due to extraordinary surge in raw material and intermediate
product prices. Price movement for major raw materials is given below
Ammonia (USD/ MT) Phosphoric Acid (USD/ MT)

1200 2,400
900 1,800
600 1,200
300 600
0 0
Oct-96
Oct-01
Oct-06
Apr-94
Jul-95
Jan-98
Apr-99
Jul-00
Jan-03
Apr-04
Jul-05
Jan-08
Apr-09
Oct-98
Dec-99
Oct-05
Dec-06
Apr-95
Jun-96
Aug-97
Feb-01
Apr-02
Jun-03
Aug-04
Feb-08
Apr-09
Phosphate Rock (USD/ MT) Sulphur (USD/ MT)

600 1000
450 750
300 500
150 250
0 0
Oct-97
Dec-98
Oct-04
Dec-05
Dec-99
Oct-02
Apr-94
Jun-95
Aug-96
Feb-00
Apr-01
Jun-02
Aug-03
Feb-07
Apr-08
Apr-94
Sep-95
Feb-97
Jul-98
Mar-04
Aug-05
Jan-07
Jun-08
May-
Fertiliser companies and government get impacted differently from price movement of raw
materials and finished goods. In the current fertiliser policy, exposure of fertiliser players is
limited to short-term price movement. Actual brunt of soaring prices was borne by the
government of India. We will discuss this in later part of this report, after talking about
fertiliser policy.
RESEARCH
GOVERNMENT’S INVOLVEMENT
Due to the direct association between fertiliser sector and agriculture sector, government
of India (GOI) has always been the decision maker for fertiliser sector. Department of
fertilisers, under the Ministry of Chemicals and Fertilisers performs following role,
z Planning for fertilizer production including import of fertiliser

Government - A decision
maker in fertiliser sector... z Allocation and supply linkages for movement and distribution of urea
z Administration of concession schemes and management of subsidy for controlled as

well as decontrolled fertilisers
z Determination of retention price for urea, quantum of concession of decontrolled

fertilisers costing of such fertilizers and pricing of Phosphatic and Potassic fertilisers.
In simple terms, GOI is responsible for timely supply of fertilisers at subsidised prices to
farmers across the country.
FERTILISER POLICY
Fertiliser policy has been made with an aim of achieving the maximum degree of self-
sufficiency in the production of fertilisers based on utilisation of indigenous feedstock and
to ensure availability of fertilisers to the farmers.
With growing population and limited agricultural land, it is essential to raise the grain
productivity to meet the food demand of the country. Things become further significant for
GOI, as ~300mn population is still below the poverty line.
Fertiliser – A highly subsidised Industry
To support the higher usage of fertilisers, GOI provides significant subsidy assistance to
fertiliser industry. The subsidy on fertilizers is passed on to the farmers in the form of
subsidised MRPs. The selling prices (farm gate prices) are much lower than the actual
Fertiliser sector a highly
subsidised industry... cost of these fertilisers and this difference is borne by GOI as subsidy.
Contrary to other industry, where selling prices are linked with inflation, there has been no
increase in farm gate price of Urea from the last seven years and price of complex fertilisers
have declined by 20-25% across different mix in 2008.
There are multiple reasons for the unusual pricing behaviour in the fertiliser industry
z GOI wants more usage of fertilisers to increase productivity
z Fertilisers being associated with agricultural sector is a political issue
z Reduction in complex fertiliser prices to increase usage of balanced nutrients
RESEARCH
Complex fertilisers (Rs / MT)

Product Mar’03 – Jun’08 Jun’08 onwards
DAP 9,350 9,350
Muriate of Potash, MOP 4,455 4,455
MAP 9,350 9,350
Triple Super Phosphate 7,460 7,460
Single Super Phosphate 3,400 3,400
Ammonium Sulphate 10,350
Reduction in MRP to 16:20:00:13 7,100 5,875
increase usage of P and K
20:20:00:00 7,280 5,343
nutrients...
20:20:00:13 7,280 6,295
23:23:00:00 8,000 6,145
28:28:00:00 9,080 7,481
10:26:26:00 8,360 7,197
12:32:16:00 8,480 7,637
14:28:14:00 8,300 7,050
14:35:14:00 8,660 8,185
15:15:15:00 6,980 5,121
17:17:17:00 8,100 5,804
19:19:19:00 8,300 6,487
Source: DoF
Urea (Rs / MT)

Period Farm gate price (Rs / MT)
Pre-August 1992 3,060
Aug'92 - Jun'94 2,760
Jun'94 - Jun'97 3,320
No increase in MRP of Urea Jun'97 - Jan'99 3,660
despite increasing MSP for Jan'99 - Feb'00 4,000
grains... Mar'00 - Feb'02 4,600
Mar'02 - Jan'03 4,830
Feb'03 5,070
Mar'03 till date 4,830
Source: DoF
Increase in raw materials and fertiliser prices in international market has influenced Indian
fertiliser industry as well. Due to no corresponding rise in farm gate prices, it has led to
increase in subsidy burden for the Indian government over the years.
RESEARCH
Subsidy given to Fertiliser Sector (Rs Crore)

Subsidy Released Total Liabilities Net incidence
Year carryover to of subsidy for
P&K Subsidy
Urea next year the year
Fertilisers
FY03 7,788 3,225 11,013
FY04 8,509 3,326 11,835 2,002
Subsidy bill to reduce by FY05 10,637 5,142 15,779 3,372 17,149

~50% in FY10... FY06 11,749 6,550 18,299 5,914 20,841
FY07 15,354 10,598 25,952 8,788 28,826
FY08 23,204 17,134 40,338 5,000 36,550
FY09 33,901 65,555 99,456 17,158 116,614
FY10E 21,000 24,000 45,000
Source: DoF, Crisil Research, PINC Research
Proportion of subsidy to complex fertilisers increased to 66% in FY09 against sub 50%
level in the previous years. Primary reasons for change in proportion are
z Decrease in complex fertiliser prices in Jun’08
z Higher dependency for P & K nutrients on international market
z Unprecedented rise in fertilisers and raw materials price in H1FY09
Fertilisers – A highly regulated Industry

Increasing subsidy burden year on year has become a bone in government’s neck. Fertiliser
industry is one of the highly regulated industries and probably that has been the reason for
almost no growth in this sector in 21st century. However, seeing the deteriorating situation,
GOI has done several policy changes in the recent pass aiming
z Facilitating Urea capacity addition
z Increasing the capacity utilisation of complex fertilisers
z Corrective actions in policy which resulted in limitations for fertiliser manufactures
z Check on rising subsidy bills

We will discuss the highlights of current fertiliser policy and will try to analyse how it is
influencing fertiliser’s manufacturers and government of India.
Current Policy for Urea
z MRPs are fixed for end customers
z Shift from cost plus system to new pricing scheme
z Benefits to energy efficient players
z Mandate guidelines for shifting to natural gas from other higher cost fuels by 2010
RESEARCH
z Capacity expansion above cut-off limit is linked to international prices – no requirement

of government approval
Revamping – Investment of ~Rs10bn – Realisation linked to 85% of IPP*
Expansion – Investment of ~30bn – Realisation linked to 90% of IPP*

Expanded production in Urea
to link with IPP realisation... Revival of sick plants – Realisation linked to 95% of IPP*
Greenfield projects – Prices decided through bidding route
* IPP linkages are to the extent of floor and ceiling of USD250 and USD425 respectively
z Incentive for energy reduction program, as benefits will be completely retained by the
company for 5 years
z 50% of sales is controlled by government and rest 50% can be sold by companies
anywhere, with reimbursement of actual freight
Current Policy for Complex Fertilisers
z Pricing based on nutrient content of the fertilisers
z Significant reduction in MRPs of complex fertilisers to support higher usage

Subsidy linked with z Sulphur will get similar treatment as Nitrogen, Phosphorous and Potassium for subsidy
international prices for
calculation
complex manufacturer...
z Subsidy linked to international prices of raw materials and fertilisers
z No permission is required for expansion from government
z· Additional benefits to company for sourcing raw material cheaper than existing prices
in the market
z No restriction on location to sell the fertilisers, actual freight cost to be reimbursed
Current concerns for fertiliser manufacturers

Urea
z Current policy for Urea capacity expansion with floor at USD250 / MT makes investment
less attractive for expansions other than de-bottlenecking
z No firm allocation of natural gas is creating problems in financial closure of expansion

projects
z No capital subsidy to units switching from Naphtha to natural gas
Complex Fertilisers
z In current policy, the manufacturers get subsidy based on lower of current month’s
price and previous month prices, this can have significant impact on margins in declining
raw material price scenario, however, in long term it get balanced when situations are
other way around
RESEARCH
Expectations from the forthcoming policy changes

Urea
z Higher revision of floor prices of expanded Urea produce from USD250 / MT to attract
Urea players in brown-field expansion or revival of sick plants
Floor rate of USD250/MT is
making brownfield expansion z Firm allocation of natural gas for future expansion to bring more clarity in expansion
or revival less attractive... and will speed up the financial closure of projects
z No future subsidy as fertiliser bonds
Complex Fertilisers
z Manufacturers can have significant hit in margins in declining raw material price scenario
z Continuation of subsidy on sulphur used in specialty fertilisers
z No future subsidy as fertiliser bonds
Sector structure
Ownership structure of fertiliser manufacturers
Fertiliser sector is divided into two categories based on the nutrients and in three categories
based on ownership.
Urea Manufacturer (%) Phosphatic Manufacturer (%)

Public Sector
Co-operative Sector Public Sector Co-operative Sector 7
26 29 30
Private Sector Private Sector

45 63
Future growth
There has been a CAGR of ~6.7% in fertiliser consumption in the last five years with
~8.5% for complex fertilisers and ~5.5% for Urea. We believe that reduced prices of complex
There has been a CAGR
fertilisers and higher knowledge among farmers should witness a continuation of the robust
of ~6.7% of fertiliser
consumption in the last five growth of consumption of complex fertilisers over Urea. We do not believe subdued monsoon
years... in 2009 is going to influence this sector severely, as still imports contribute a significant
portion and sector is likely to grow at more than 5% in near future.
C O M PA N I E S
26
RESEARCH
Initiating Coverage
CHAMBAL FERTILISERS AND CHEMICALS LTD. BUY
CMP : Rs52 TP : Rs73 BSE Sensex : 16,643

Chambal Fertilisers and Chemicals Ltd (CFCL) is one of the largest 12 October 2009
Urea manufacturers contributing ~10% of total Urea production in India.
Chirag Dagli +91-22-6618 6462
Located near HBJ pipeline strengthens company's candidature in any chirag.dagli@pinc.co.in
allocation of natural gas. Energy reduction initiatives are likely to
further boost profitability. CFCL has a 33% stake in IMACID, a JV formed Satish Mishra +91-22-6618 6488
to produce Phosphoric acid. It has further diversified into shipping, satish.mishra@pinc.co.in
textile, IT/ITES and plans to foray into power generation.
RIL KG basin to improve profitability
CFCL has received ~1.15mmscmd of natural gas at the cost of USD6.21/
mmbtu (including transportation). Availability of more gas should reduce
production cost and improve operating margins. Non-usage of liquid fuels
(Naphtha and LSHS) should further result in lower working capital requirements
and higher profitability.
STOCK DATA
Energy reduction to boost earnings
Market Cap Rs21.6bn
CFCL’s initiative for reduction in energy consumption should result in decrease Book Value per share Rs30.8
of 0.2Gcal of energy per MT of Urea. This benefit (~470mn) will be completely Eq Shares O/S (FV Rs10) 416.2mn
retained with the company. Along with energy reduction, CFCL will get benefit Free Float 50.4%
Avg Traded Value (6 mnths) Rs246mn
of IPP linked pricing on ~0.2mn MT of Urea, which should provide an EPS
52 week High/Low Rs75/29
Rs0.8 to Rs3.5, depending on the prevailing international Urea prices. Any Bloomberg Code CHMB IN
further plans of de-bottlenecking will add significantly to earnings due to IPP Reuters Code CHMB.BO
linked realisations.
IMACID - A rewarding JV
Despite production facility only for Urea, CFCL with its JV in Morocco is well TOP SHAREHOLDERS
positioned to take benefit of spike in phosphoric acid prices. It has production Name % holding
capacity of ~0.4mn MT p.a. of Phosphoric acid.
LIC of India 4.01
VALUATIONS AND RECOMMENDATION Manbhawani Investments Ltd 1.26
Availability of natural gas and energy reduction programme should increase Sundaram Bnp Paribas Mutual Fund 1.03
profitability by CAGR of 18% in the next two years, considering conservative
international Urea prices. At CMP of Rs52, CFCL is trading at 7.2x and 4.8x
of P/E and EV/EBITDA respectively for FY11 estimates of Rs7.3. With PERFORMANCE (%)
expected favourable development in Urea business, we initiate coverage
1M 3M 12M
with a 'BUY' recommendation and a target price of Rs73 with a time horizon Absolute 8.1 (15.6) 1.1
of 18 months. Relative (1.9) (27.9) (23.0)
KEY FINANCIALS Rs mn
FY07 FY08 FY09 FY10E FY11E RELATIVE PERFORMANCE
Net Sales 29,470 32,056 55,974 45,270 47,645
YoY Gr. (%) (4.4) 8.8 74.6 (19.1) 5.2 Chambal Fert BSE (Rebased)
Op. Profits 4,514 5,016 6,530 7,334 8,004 100
OPM (%) 15.3 15.6 11.7 16.2 16.8
75
Adjusted Net Profits 1,315 1,165 2,175 2,458 3,022
YoY Gr. (%) (10.9) (11.4) 86.7 13.0 22.9 50
KEY RATIOS
Adj. Dil. EPS (Rs) 3.2 2.8 5.2 5.9 7.3 25
ROCE (%) 10.4 8.5 11.8 11.2 12.6
0
ROE (%) 14.7 11.2 17.7 18.1 19.5
Oct-08 Jan-09 Apr-09 Jul-09 Sep-09
PER (x) 16.5 18.6 10.0 8.8 7.2
EV/ Net Sales (x) 1.4 1.2 0.8 1.0 0.9
EV/ EBDITA (x) 7.9 7.3 6.0 6.0 4.8
27
RESEARCH
Chambal Fertilisers and Chemicals Ltd.
BACKGROUND
Chambal Fertilisers and Chemicals Ltd (CFCL) was promoted in 1985 by Zuari Agro
Chemicals Ltd (A Birla Group Company). CFCL’s Urea production facilities are situated
near HBJ pipeline at Gadepan (Rajasthan). With production capacity of 2mn MT p.a.,
Largest private manufacturer CFCL is the largest private manufacturer of Urea contributing ~10% to the total Urea
of Urea... production in the country. To provide one-stop solution, CFCL sources other agri-inputs
like DAP, MOP, SSP, pesticides & seeds and sells along with its manufactured Urea
under the ‘Uttam’ brand.
The company, in 1997 formed a JV, Indo Maroc Phosphore SA (IMACID), at Morocco, with
Tata Chemicals and Office Cherifien Des Phosphates as equal partners. The JV has a
production capacity of 1.4k MT p.d. of Phosphoric acid that has huge scarcity in India.
CFCL has further diversified itself into shipping, textile and ITES. Through its 100% subsidiary,
Chambal Infrastructure Ventures Limited, CFCL has plans to set up 1200MW plant at
Chhattisgarh and Orissa.
BUSINESS DETAILS
CFCL has following major line of businesses:
z Fertilisers
Manufactured fertilisers
Traded fertilisers
z Phosphoric acid through its JV, IMACID
z Shipping division
z Textile
Contributions have remained significant from fertilisers, shipping and IMACID business.
Textile and other businesses are still contributing negative at PBIT level. Management
expects these divisions to turn positive and start contributing from FY11. However, no
capex is planned for these divisions.
Segment Contribution
Net Sales Mix (%) PBIT Mix (%)
Traded fertilisers
27 Shipping
29
Shipping
IMACID 9
14
Textile
5 Fertilisers
64
Others
3
IMACID
14
Manufactured fertilisers
43
RESEARCH
Business details continue….
IMACID
Despite having manufacturing facilities only for Nitrogen nutrients, CFCL has made significant
presence in Phosphorous nutrients through its Morocco JV, IMACID. CFCL, Tata Chemicals
Presence in high demand and Office Cherifien Des Phosphates (OCP) are equal partners in this JV. OCP is one of
Phosphoric acid business the world largest suppliers of Phosphate Rock and its derivatives. With a production capacity
through JV... of ~0.4 mn MT p.a. of Phosphoric acid, the JV should provide good returns to CFCL due to
higher demand for P2O5.
Shipping Business - to remain lack luster
Chambal Fertiliser’s shipping division has a fleet of five Aframax tankers with total capacity
of ~5lacs DWT. This segment contributed 9% and 29% to Net sales and PBIT respectively
in FY09. However, the scenario has completely changed with continuous drop in time
charter and spot rates in the last six months. Further adding to worries, order book for
tankers in the global market has increased significantly in FY09, which will further put
pressure on pricing.
Global Order Book for tankers

Tanker Fleet Order Book Order Inflow s Inflow s
400
300
200
100
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Platou
Chambal is relatively better positioned with four of its tankers on time charter at the rate of
USD26,000. Guideline to phase out single hull vessels from 2010 will have lower impact on
CFCL as only one of its tankers is single hull. We have done separate valuations for
CFCL’s shipping division in our valuation estimates.
Chambal Infrastructure Ventures Limited (CIVL)
This subsidiary is set to foray into the power generation business. It has set up two wholly
owned subsidiaries, Chambal Energy (Chhattisgarh) Ltd and Chambal Energy (Orissa) Ltd
that are looking at options of ~1200MW thermal plant at these two states. Currently talks
are going on regarding land acquisition, environmental clearance, utilities facilities and
coal linkages. The projects have not yet been finalised and we feel no ground level
development to take place in next two years. Hence, we have not considered power
project in our valuations.
RESEARCH
RIL KG Gas to improve profitability
CFCL being situated at HBJ pipeline has access to natural gas from all sources.
The company has received 1.15 mmscmd of natural gas in the first allocation of 15.4
mmscmd gas from RIL KG basin to fertiliser companies. Cost of RIL gas for CFCL is
USD6.21/mmbtu (including transportation).
Low cost gas to improve margins
Post availability of natural gas from RIL, the company has switched from higher cost fuels
like Naphtha and LSHS to gas. This will result in reduction in production cost and should
improve the profitability. With the increased usage of gases, plant’s operating efficiency
will improve and result in better operating margins for the company. Non-usage of liquid
fuels will also result in lower working capital requirements and result in higher profitability.
Capacity Addition
Favorable government policy of linking increased Urea production to international price

Capacity above cut-off to link
with IPP... and availability of natural gas post RIL KG development have motivated many fertiliser
companies to undertake debottlenecking. CFCL’s total production is expected to cross
2mn MT of Urea p.a. by FY10.
Energy reduction programme to boost top-line and bottom-line
After energy reduction measure taken by CFCL, energy consumption has decreased by
0.2Gcal/ MT to 5.3Gcal/ MT of Urea. CFCL will be doubly benefited as along with benefits
Energy reduction benefits from energy reductions, the added production will be linked with international price of
to be retained with Urea Urea.
manufacturer...
As per current guidelines, CFCL will be eligible for IPP for excess production over 1.84mn
MT (Target production – 1.94mn MT). Benefit will be to the extent of 85% of international
price with a floor and ceiling of USD250 and USD425 respectively.
Profits due to Energy reduction Profits due to capacity addition

Reduction in energy 0.20 Gcal/ MT Production 0.2 mn MT p.a.
Energy consumption 6.3 Gcal/ MT
Total Production 2.0 mn MT
Energy cost 6.21 USD/ mmbtu
Total Energy Saving 0.40 mn Gcal Urea realisation 250 USD/ MT
Total Saving 473 Rs mn Net Sales 2,400 Rs mn

Energy cost 1,490 Rs mn
Tax Paid 161 Rs mn Other Expenses 30 USD / MT
PAT 312 Rs mn Other Expenses 288 Rs mn
Operating profit 622 Rs mn
No of shares 416 mn
OPM % 25.9
EPS 0.8 Rs Depreciation 68 Rs mn
PBIT 554 Rs mn
Interest cost 50 Rs mn
PBT 505 Rs mn
Tax 172 Rs mn
PAT 333 Rs mn
No of shares 416 mn
EPS 0.8 Rs
RESEARCH
Financials set to accelerate
Margins to remain firm
Last two years saw exceptional volatility in prices of fertilisers and raw materials. Due to
significant rise in international prices of fertilisers during ’08, companies having substantial
trading volumes saw peak revenues in FY09. We expect CFCL net sales to decrease by
19% YoY in FY10, which should increase by 5% in FY11. As discussed earlier, availability
of more gases and energy reduction exercise will improve operating margins significantly.
Improving Operating Margins

Net Sales (Rs mn) OPM (%)
24.0 60,000
More natural gas should

improve operating margins... 18.0 45,000
12.0 30,000
6.0 15,000
- -
FY05 FY06 FY07 FY08 FY09 FY10E FY11E
CFCL has a very high D/E of 2:1 in FY09 as compared to its peers in fertiliser’s space,
mainly due to term loan on ships. Going forward, better working capital management and
higher cash generation with IPP linked realisations for fertiliser business should reduce D/
E ratio. We expect ROE to remain high at ~19% while ROCE should linger at ~11% due to
higher capital employed driven by shipping division.
Steady Returns
ROCE (%) ROE (%) D/E
24.0 2.4
Ease in working capital
should reduce short term 18.0 1.8
loan requirements...
12.0 1.2
6.0 0.6
- -
RESEARCH
Valuations
Shipping Business
For valuing shipping business, we have used the NAV methodology. Four of its tankers are
less than five year old and one is more than five years old. Current asset values of these
ships are at very low level due to lower freight rates in the market.
Current asset value:
Less than 5 years old– USD48mn
More than 5 years old – USD35mn
Value/ share from shipping business

Asset Value (Rs mn) 10,896
Term loan for ships (Rs mn) 10,628
Shipping business doing NAV (Rs mn) 268
breakeven at current rates... No of shares (mn) 416
NAV/ share (Rs) 0.6
Discount to NAV 70%
Value per share (Rs) 0.5
Source: Platou, PINC Research
At current rates, shipping is not adding substantially to the profit. In our valuations estimates,
we expect shipping division to contribute just enough to take care of its interest cost and
hence no addition to net profit.
Fertiliser Business
The existing business of CFCL should generate an earnings of Rs5.7 in FY11. Benefits
from de-bottlenecking are linked with international price of Urea with floor and ceiling of
USD250 and USD425.
Earnings sensitivity with Urea prices for FY11E

Urea Realisation, USD / MT —>
250 275 300 325 350 375 400 425
De-bottlenecking (Energy Saving) 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8
De-bottlenecking (Excess Production) 0.8 1.2 1.6 1.9 2.3 2.7 3.1 3.5
Others 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7
Total EPS 7.3 7.6 8.0 8.4 8.8 9.2 9.5 9.9
Taking most conservative scenario, we should have an EPS of Rs7.3 in FY11E, which can
go up to Rs9.9 depending on the prevailing international Urea prices.
Recommendations
At CMP of Rs52, CFCL is trading at 7.2x and 4.8x of P/E and EV/EBITDA respectively for
We initiate coverage with a
FY11 estimates of Rs7.3. With expected favourable development in Urea business, we
‘BUY’ recommendation and
a target price of Rs73... recommend ‘BUY’ for the stock with a target price of Rs73 in a time horizon of 18 months.
Concerns
z There should be a regular supply of gas and no further requirement of liquid fuels
z Losses from textile and decreasing day rates in shipping business can negatively
impact profitability
z Diversification into unrelated business (power generation) remains a concern
RESEARCH

Year Ended March (Figures in Rs mn)
Incom e Statement FY07 FY08 FY09 FY10E FY11E Cash Flow Statem ent FY07 FY08 FY09 FY10E FY11E
Net Sales 29,470 32,056 55,974 45,270 47,645 Pre-tax profit 1,826 3,119 3,270 3,587 4,407
Growth (%) (4.4) 8.8 74.6 (19.1) 5.2 Depreciation 2,181 2,458 2,817 3,080 3,136
Operating Profit 4,514 5,016 6,530 7,334 8,004 Total tax paid (940) (1,071) (1,357) (1,148) (1,410)
Other income 586 311 728 550 620 Chg in w orking capital (4,485) 1,010 5,105 (4,024) 1,184
EBITDA 5,101 5,328 7,259 7,884 8,625 Other items 949 (60) 2,379 667 462
Growth (%) 3.7 4.5 36.3 8.6 9.4 Cash from oper. (a) (469) 5,456 12,214 2,162 7,778
Depreciation 2,126 2,458 2,817 3,080 3,136 Capital ex penditure (7,729) (4,163) (10,630) (4,253) (300)
EBIT 2,975 2,870 4,443 4,804 5,489 Chg in inv estments 6 1,128 (3,916) (250) (250)
Interest paid 993 960 1,254 1,217 1,082 Other items (35) 32 512 550 620
PBT (before E/o items) 1,983 1,910 3,189 3,587 4,407 Cash flow from inv. (b) (7,759) (3,002) (14,034) (3,953) 70
Tax prov ision 689 756 1,027 1,148 1,410 Free cash flow (a+b) (8,228) 2,454 (1,820) (1,792) 7,848
E/o Income / (loss) 87 726 82 - - Equity raised/ (repaid) - 1,092 6 - -
Net Profit 1,402 2,375 2,256 2,458 3,022 Debt raised/ (repaid) 10,492 (1,322) 5,746 2,000 (4,500)
Adjusted net profit 1,315 1,165 2,175 2,458 3,022 Interest Paid (982) (1,372) (1,238) (1,217) (1,082)
Growth (%) (11) (11) 87 13 23 Div idend (incl. tax ) (854) (879) (871) (877) (877)
Basic EPS (Rs) 3.4 5.7 5.4 5.9 7.3 Other items 8 80 2 - -
Adj Dil EPS (Rs) 3.2 2.8 5.2 5.9 7.3 Cash flow from fin. (c) 8,663 (2,400) 3,645 (93) (6,458)
Growth (%) (10.9) (11.4) 86.7 13.0 22.9 Net chg in cash (a+b+c) 436 54 1,826 (1,885) 1,390
Balance Sheet FY07 FY08 FY09 FY10E FY11E Key Ratios FY07 FY08 FY09 FY10E FY11E
Equity Share Capital 4,162 4,162 4,162 4,162 4,162 OPM (%) 15.3 15.6 11.7 16.2 16.8
Reserves & surplus 4,990 7,528 8,681 10,262 12,408 Net margin (%) 4.8 7.4 4.0 5.4 6.3
Shareholders' funds 9,152 11,690 12,843 14,425 16,570 Div idend y ield (%) 3.5 3.5 3.5 3.5 3.5
Total Debt 20,154 18,545 25,038 27,038 22,538 Net debt/ Equity (x ) 2.2 1.6 2.0 1.9 1.4
Minority interest 22 1 2 (17) (42) Net w orking capital (day s) 88.5 (9.5) (102.8) (40.5) (46.2)
Def tax / pay ment liability 4,497 3,822 3,281 3,281 3,281 Asset turnov er (x ) 0.9 0.9 1.4 1.0 1.1
Capital Employ ed 33,825 34,058 41,164 44,727 42,347 ROCE (%) 10.4 8.5 11.8 11.2 12.6
Net fix ed Assets 25,102 26,527 34,037 35,210 32,374 RoE (%) 14.7 11.2 17.7 18.1 19.5
Cash & Cash Eq. 1,392 1,445 3,271 1,386 2,776 EV/Net sales (x ) 1.4 1.2 0.8 1.0 0.9
Net other current assets 7,114 5,862 664 4,689 3,505 EV/EBITDA (x ) 7.9 7.3 6.0 6.0 4.8
Inv estments 218 223 3,193 3,443 3,693 PER (x ) 16.5 18.6 10.0 8.8 7.2
Total assets 33,825 34,058 41,164 44,727 42,347 Price/Book (x ) 2.4 1.9 1.7 1.5 1.3
P/E Band Median PE Vs Daily PE
100 Daily PE Median PE

16X 40
14X
75
12X 30
10X
50 8X 20
25 10
0 0
Jan-04 Jun-05 Nov -06 Apr-08 Sep-09 Jan-04 Jun-05 Nov -06 Apr-08 Sep-09
RESEARCH
Company Update
COROMANDEL INTERNATIONAL LTD. BUY

Coromandel International (CIL), a subsidiary of EID Parry - a 12 October 2009
Murugappa group company, is one of the largest manufacturers of Chirag Dagli +91-22-6618 6462
complex fertilisers in India. With strong negotiating power and efficient chirag.dagli@pinc.co.in
inventory management, CIL proved its mettle in highly volatile price
scenario in FY09. Along with fertilisers, the company is increasing its Satish Mishra +91-22-6618 6488
presence in the fast growing pesticide and specialty nutrient business. satish.mishra@pinc.co.in
Among biggest beneficiary with change in fertiliser policy

Government's support for higher usage of non-Nitrogen nutrients by lowering
MRPs and changing policy pro manufacturers, should benefit CIL the most
in listed space, as it is the 2nd largest manufacturer of phosphatic and
complex fertilisers after IFFCO. Realisations linked with international prices
should further add to profitability of the company.
STOCK DATA
Strong tie-ups for raw material
Market Cap Rs29.8bn
Due to non-availability of indigenous raw materials for phosphorous and potash Book Value per share Rs86.6
nutrient, robustness of any complex and phosphatic manufacturer is decided Eq Shares O/S (FV Rs2) 139.9mn
with the tie-ups they have for sourcing raw materials. CIL is one of the most Free Float 35.8%
well positioned company due to strong tie-ups with international players like,
Foskar, GCT, ICL and Mitsubishi for sourcing raw materials. Bloomberg Code CRIN IN
Reuters Code CORF.BO
Capacity addition and foray into non-subsidy business
CIL's Tunisian JV (along with GSFC and GCT) is setting up a 380k MT p.a.
Phosphoric acid plant. This will cater to a planned capacity addition of
~450k MT p.a. of complex fertilisers at Kakinada commencing production TOP SHAREHOLDERS
from end of FY11. CIL has set up a JV with SQM, Chile, for manufacturing Name % holding
Water Soluble Fertilizers at Kakinada, AP. It has formed Coromandel Brasil LIC Of India 1.36
Limitada, Brasil in FY09 to tap export opportunity in Brazil. IDFC Premier Equity Fund 1.33
Hdfc Growth Fund 1.02
VALUATIONS AND RECOMMENDATION
CIL is well positioned with its inherent strength of strong tie ups and ongoing
expansion of complex fertilisers and high growing pesticide and specialty PERFORMANCE (%)
fertilisers. At the CMP of Rs213, CIL trades at a P/E of 6.7x, EV/EBIDTA of
1M 3M 12M
4.0x its estimated FY11E EPS of Rs31.7. We maintain our 'BUY with a
Absolute 20.7 12.7 34.2
revised target price of Rs285 on a time horizon of 18 months. Relative 9.5 (3.7) 2.3
FY07 FY08 FY09 FY10E FY11E RELATIVE PERFORMANCE
Net Sales 20,665 37,573 93,750 59,022 70,118
YoY Gr. (%) 11.6 81.8 149.5 (37.0) 18.8 CFL BSE Rebased
Op. Profits 1,994 4,128 6,521 4,818 6,059 300
OPM (%) 9.6 11.0 7.0 8.2 8.6
225
Adjusted Net Profit 1,167 2,101 4,718 3,559 4,439
YoY Gr. (%) 22.4 80.0 124.6 (24.6) 24.7 150
KEY RATIOS
75
Dil. EPS (Rs) 8.3 15.0 33.7 25.4 31.7
ROCE (%) 16.6 26.3 32.6 20.0 21.8 -
RoE (%) 23.1 31.2 47.0 26.2 26.2 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
PER (x) 25.5 14.2 6.3 8.4 6.7
EV/Net sales (x) 2.1 1.8 1.9 0.6 0.5
EV/EBDITA (x) 13.3 8.4 4.8 5.2 4.0
34
RESEARCH
Coromandel International Ltd.
BACKGROUND
Coromandel International Ltd. (CIL), incorporated in 1964 is a leading fertiliser manufacturing

company. CIL is a subsidiary company of Murugappa group company’s EID Parry (India)
Limited, which holds 62.9% equity in the company. CIL produces wide range of fertilisers,
pesticides and specialty nutrients. The company is also engaged in the rural retail business
Largest private manufacturer in the State of Andhra Pradesh through its ‘Mana Gromor Centres’ (MGC).
of phosphatic and complex
fertilisers... Post acquisition of Godavari fertilisers, combined fertilisers production capacity of CIL is
3.3mn MT p.a. (DAP-0.8mn, SSP-0.13mn and complex fertilisers-2.3mn). Its manufacturing
facilities are at Kakinada & Vizag in Andhra Pradesh and Ennore & Ranipet in Tamilnadu.
CIL is also present into high-margins, high-growth pesticide and specialty nutrient business.
Production facilities are located at Ranipet (Tamilnadu), Thane (Maharashtra), Ankleshwar
(Gujarat) and Jammu.
Government intention and policy to support growth
Skewed usage of nutrients
Due to comparatively lower cost of Urea and lack of knowledge among farmers, proportion
of usage of different nutrients were highly skewed towards Nitrogen (Urea) in the past. This
resulted in deficiency of other primary and secondary nutrients in soil over the period and
deteriorated the land fertility. Analyzing the situation, Fertiliser Ministry in 2008, came up
with policy of pricing of complex fertilisers based on nutrient content. This move has
Reduced MRP of complex resulted in reduction of MRP of complex fertilisers in the range of 15-25%, where as the
fertilisers should increase price of plain vanilla fertilisers like Urea and DAP remain unchanged. CIL with capacity of
usage... ~2.3mn MT p.a. of complex fertilisers is expected to gain significantly from this step, as
growth in complex fertilisers will be higher as compared to Urea in the coming years.
Fertiliser policy incentives
Almost 50% of P nutrients and 100% of K nutrients are imported. This made government
to change fertiliser policy in 2008 to bring domestic players at par with international players.
Linking the fertiliser’s prices with international price for subsidy calculations was a key
move favouring the domestic players. This move has removed the scope of limited profitability
for Indian players like CIL and should motivate for further expansion in complex fertiliser
space.
Strong tie-ups for sourcing raw materials
Despite having high dependency on imports and emphasis on higher usage of complex
fertilisers, capacity utilisation for complex fertilisers has always been very low. Even for
market leaders like CIL, capacity utilisation has been in the range 60-70%. As discussed
earlier, India is not self sufficient in any of the raw materials (Ammonia, Rock phosphate,
Strong tie-ups for raw
materials keep CIL ahead of Phosphoric acid, Potash, Suphur) used for the manufacturing of complex fertilisers. In
its peers... such scenario, linkages for raw materials determine the fertiliser manufacturer’s strength
and future revenue visibility.
CIL has strong tie-ups with its raw material providers. The company sources phosphoric
acid from FOSKAR, Groupe Chimique Tunisian (GCT), Israel Chemicals Ltd (ICL) and
RESEARCH
others. Long-term agreement is in place with Mitsubishi for sourcing Ammonia. CIL has
~14% stake in FOSKAR and providing technical assistance to them. Out of total produce
of Phosphoric acid by FOSKAR, CIL is the largest buyer with ~1/3rd share, and thus
command a good bargaining power.
Capacity addition of complex fertiliser
CIL along with GSFC and GCT is forming a JV “TIFERT” in Tunisia, which will produce 0.36
mn MT p.a. of phosphoric acid. Total project cost is estimated at USD 550mn with CIL
contribution towards 15% of equity stake. Total produce of 0.36mn MT of Phosphoric acid
will be divided into CIL and GSFC with 50% each. The plant is expected to be commissioned
by FY11.
To use the increased availability of Phosphoric acid post TIFERT, CIL is adding capacity of
0.45mn MT p.a. of complex fertilisers (along with DAP) at Kakinada. It is expected to start
production from FY11 end and will lead to a significant increase in top line and bottom line
Additional capacity of
of CIL as the total production capacity will increase by ~14%.
0.45mnMT p.a. to be
commissioned by FY11... In an attempt to make strategic investments aimed at securing uninterrupted supply of
phosphoric acid, CIL has set up a 50:50 JV along with Getax Ocean Trades Pte Ltd of
Singapore, “Coromandel Getax Phosphates Pte Ltd” in Singapore with an initial investment
of USD 0.5 mn from CIL. The JV will explore the opportunities for rock phosphate mining/
sourcing.
Higher contributions from non-subsidy business
CIL has forayed into high-margins, high-growth pesticide and specialty fertiliser business
via organic and inorganic route. This business is independent of government subsidy and
has higher margins of ~30%.
The company has technical tie-ups with multinationals like Dupont, BASF, FMC, Otsuka,
etc for marketing their products in India. Rural retail business of CIL, ‘Mana Gromor Centres’
Robust growth in high (MGC) should provide marketing network and we believe that this business should grow at
margins non-subsidy a CAGR of 20% in future and should contribute significantly in CIL’s earnings in the future.
business... CIL is setting up a JV with SQM, Chile, for manufacturing Water Soluble Fertilizers at
Kakinada, AP. It has also invested Rs10.5mn towards equity in Coromandel Brasil Limitada,
Brasil in FY09 with the aim of greater export opportunity in the Latin American Markets.
Robust Financials
Subsidy contribution to decrease
Extraordinary rise in prices of fertilisers and raw materials during 2008, resulted in fertiliser
companies making outstanding revenues and profits in FY09. However, the surge in
profitability of companies were at the cost of subsidy burden to the government. CIL’s net
sales grew by 150% to Rs93.8bn with subsidy contribution of 77%. This led to net profit
rising by 125% in FY09. After corrections in raw material prices, we believe that going
forward FY09 scenario is unlikely to repeat. We expect net sales to de-grow by 37% in
FY10 and further increase by 19% in FY11 driven by volume growth. Subsidy contribution
in total sales should come down to sub 60% with operating profit per MT likely to stabilise
at ~Rs2,100.
RESEARCH
Margins to remain impressive
Declining subsidy contribution

Net Sales Subsidy Contribution Operating Profit/ MT Net Profit
100,000 6,000
Non subsidy revenue to
increase...
75,000 4,500
50,000 3,000
25,000 1,500
- -
CIL with its effective working capital management and foray into high margins business
has always given excellent returns to shareholders. Going forward also, we believe operating
margins to be in the range of 8-9% and ROCE above 20%. With higher generations of cash
flow from operations, there should be no further debt requirement for ongoing capex and
ROE to be above 25% in the coming years.
Better Margins
ROCE ROE OPM
60.0 11.0
9.6
8.2 8.6
Best returns in the fertiliser 45.0 7.8 8.1
7.0
universe...
30.0
15.0
-
Valuations
Government emphasis on higher usage of complex fertilisers and higher dependency on

imports for P and K nutrients foretell bright future for efficient complex fertiliser manufactures
in India. CIL with its strong tie-ups for raw material sourcing is better placed amongst its
peers. Ongoing expansions and outlook for non-subsidy business also augur well for the
future earnings of the company. We believe CIL to post profit of Rs3.6bn and Rs4.4bn in
FY10 and FY11 respectively, which translates into an EPS of Rs25.4 and Rs31.7 for FY10
and FY11 respectively.
RESEARCH
Recommendation
We maintain our ‘BUY’ At the CMP of Rs213, CIL trades at a P/E of 6.7x, EV/EBIDTA of 4.0x its estimated FY11
recommendation with a EPS of Rs31.7. We maintain our ‘BUY’ recommendation for the stock; however, with
target price of Rs285... positive intrinsic and extrinsic factors, we have upgraded our target price to Rs285, which
is 9x PER of FY11 estimates on a time horizon of 18 months.
Concerns
z Dependency on imports for availability of raw materials
z Huge volatility in raw material prices
z Delays in ongoing expansions
– 38
RESEARCH

Net sales 20,665 37,573 93,750 59,022 70,118 Pre-tax profit 1,435 3,339 8,735 5,475 6,829
Growth (%) 11.6 81.8 149.5 (37.0) 18.8 Depreciation 399 522 562 583 611
Operating Profit 1,994 4,128 6,521 4,818 6,059 Total tax paid (571) (1,124) (3,238) (1,916) (2,390)
Other operating income - - - - - Chg in w orking capital (315) (293) (7,392) 1,773 (1,412)
EBDITA 2,154 4,560 8,587 6,944 8,326 Other items 278 809 1,491 (1,241) (1,381)
Growth (%) 33.3 107.0 58.0 (26.1) 25.8 Cash flow from oper. (a) 1,226 3,254 159 4,675 2,257
Depreciation 399 522 562 583 611 Capital ex penditure (294) (421) (1,161) (650) (250)
Other income 160 432 2,066 2,126 2,266 Chg in inv estments (135) (1,683) (1,490) (280) -
EBIT 1,755 4,038 8,025 6,361 7,715 Other inv esting activ ities 194 34 991 2,126 2,266
Interest paid 320 699 876 885 885 Cash flow from inv. (b) (235) (2,070) (1,661) 1,196 2,016
PBT (before E/o items) 1,435 3,339 7,149 5,475 6,829 Free cash flow (a+b) 991 1,184 (1,502) 5,871 4,274
Tax prov ision 486 1,238 3,140 1,916 2,390 Equity raised/(repaid) - - - - -
E/o Income / (loss) 189 - 1,586 - - Debt raised/(repaid) 983 (775) 7,082 - -
Net profit 1,167 2,101 5,595 3,559 4,439 Chg in Minorities int. - - - - -
Adjusted net profit 1,167 2,101 4,718 3,559 4,439 Div idend (incl. tax ) (246) (351) (1,529) (655) (655)
Growth (%) 22.4 80.0 124.6 (24.6) 24.7 Other financing activ ities (295) (682) (870) (885) (885)
Diluted EPS (Rs) 8.3 15.0 33.7 25.4 31.7 Cash flow from fin. (c) 443 (1,807) 4,683 (1,540) (1,540)
Growth (%) 22.4 80.0 124.6 (24.6) 24.7 Net chg in cash (a+b+c) 1,434 (624) 3,181 4,331 2,733
Equity capital 254 280 280 280 280 OPM(%) 9.6 11.0 7.0 8.2 8.6
Reserves & Surplus 5,257 7,675 11,840 14,744 18,528 Net margin (%) 5.6 5.6 5.0 6.0 6.3
Minorities interest - - - - - Net debt/Equity (x ) 0.7 1.2 1.1 0.6 0.3
Deferred Tax Liability 713 825 795 795 795 Net Working Capital (day s) 92.7 86.6 44.0 50.0 52.0
Total debt 5,493 10,431 17,708 17,708 17,708 Asset turnov er (x ) 1.2 1.1 0.7 1.8 1.9
Capital Employed 11,718 19,210 30,622 33,526 37,311 ROCE (%) 16.6 26.3 32.6 20.0 21.8
Net fix ed assets 3,873 7,402 7,966 8,033 7,672 ROE (%) 23.1 31.2 47.0 26.2 26.2
Cash & cash Eq. 1,695 1,072 4,253 8,584 11,317 EV/Net sales (x ) 2.1 1.8 1.9 0.6 0.5
Net other current assets 4,034 10,018 16,195 14,422 15,834 EV/EBITDA (x ) 13.3 8.4 4.8 5.2 4.0
Inv estments 2,115 718 2,208 2,488 2,488 PER (x ) 25.5 14.2 6.3 8.4 6.7

16
270
10X 12
8X
180 8
6X
90 4X
4
2X
- 0
Jul-04 Nov -05 Feb-07 Jun-08 Sep-09 Jul-04 Nov -05 Feb-07 Jun-08 Sep-09
RESEARCH
Company Update
DEEPAK FERTILISERS AND PETROCHEMICALS BUY

Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL) is in 12 October 2009
the business of chemicals, fertilisers and specialty retailing. DFPCL is Chirag Dagli +91-22-6618 6462
a leading manufacturer of mining and industrial chemicals with a set chirag.dagli@pinc.co.in
of niche products in portfolio. Fertilisers segment, lackluster so far, is
likely to revive with positive fertiliser policy and availability of natural Satish Mishra +91-22-6618 6488
satish.mishra@pinc.co.in
gas in India.
Niche products portfolio
Chemical business that contributed ~91% to PBIT in FY09 has mix of
products where DFPCL has made a niche for itself. The company is the
largest manufacturer of Technical Prilled Ammonium Nitrate in India, which
is used in mining and construction industries. In Isopropyl Alcohol, it is the STOCK DATA
first company to manufacture at a large scale where most of the requirements Market Cap Rs7.9bn
are met through imports. Book Value per share Rs91.1
Eq Shares O/S (FV Rs10) 88.2mn
Gas availability to boost earnings Free Float 57.4%
DFPCL is well connected to the national gas grid to receive gas from multiple Avg Traded Value (6 mnths) Rs39mn
sources like KG Basin, ONGC and others. Once regular gas supply starts, Bloomberg Code DFPC IN
the company should be able to increase its capacity utilisation for Ammonia Reuters Code DPFE.BO
& Methanol and eventually profitability will improve.
Capex - High margin business
Additional capacity of 300k MT p.a of Ammonium Nitrate at Taloja plant with TOP SHAREHOLDERS
a capex of Rs6bn, is expected to be commissioned in FY11. With Name % holding
commissioning of 450 MT p.d. Nitric acid facility in Aug’09, DFPCL has Tempetion Mutual Fund 2.88
become one of the largest producers of Nitric acid in Asia. Uti Dividend Yield Fund 2.34
Franklin India Smaller Companies Fund 1.63
VALUATIONS AND RECOMMENDATION
SBI MF - Magnum Comma Fund 1.36
Expected favourable fertiliser policy, capex plans & increased availability of Robust Marketing Services Pvt Ltd 1.18
gas, augurs well for DFPCL. At the CMP of Rs89, DFPCL is trading at a
PER of 5.9x and EV/EBITDA of 4.1x FY11E. We maintain our 'BUY'
recommendation for DFPCL with an increased target price of Rs114, which PERFORMANCE (%)
implies a P/E of 7.5x FY11 earnings. Stock also provides an additional support 1M 3M 12M
with a dividend yield of 4.4%. Absolute 11.1 2.2 24.9
Relative 0.8 (12.6) (4.8)
RELATIVE PERFORMANCE
Net Sales 8,331 10,409 13,881 13,398 15,519
YoY Gr. (%) 48.0 24.9 33.4 (3.5) 15.8
Deepak Fert BSE (Rebased)
Op. Profits 1,437 1,745 2,482 2,342 2,708 160
OPM (%) 17.2 16.8 17.9 17.5 17.5
Adjusted Net Profits 939 1,030 1,521 1,226 1,335 120
YoY Gr. (%) 40.1 9.7 47.6 (19.4) 8.9
80
KEY RATIOS
Dil. EPS (Rs) 10.5 11.4 16.9 13.9 15.1 40
ROCE (%) 19.9 20.0 24.4 17.7 16.5
ROE (%) 15.4 15.0 19.8 14.5 14.3 0
PER (x) 8.4 7.8 5.3 6.4 5.9 Oct-08 Jan-09 Apr-09 Jul-09 Sep-09
EV/ Net Sales (x) 1.0 0.9 0.8 0.9 0.9
EV/ EBDITA (x) 4.8 4.5 3.5 4.3 4.1
40
RESEARCH
Deepak Fertilisers and Petrochemicals Corporation Ltd.
BACKGROUND
Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL), a Pune-based company,

was founded in 1979 as Ammonia manufacturer. Later in 1992, the company started
production of various mining & industrial chemicals and complex fertilisers. DFPCL is the
largest manufacturer of Technical Prilled Ammonium Nitrate in India with capacity of 132k
MT p.a. and the only large scale manufacturer of Iso Propyl Alcohol in India with capacity
of 70k MT p.a. It has carved out a niche for itself in these chemicals with significant
presence. The company has production capacity of 0.23mn MT p.a. of Nitro-phosphate
fertilisers and 25k MT p.a. of Sulphur Bentonite (specialty fertilisers). The company’s
manufacturing unit is located at Taloja (Maharashtra).
DFPCL’s recent foray is into specialty retailing with Ishanya, India’s largest Design Centre
and Specialty Mall for interiors and exteriors in Pune. It has an area of 5.5lacs sq.ft and is
home to 52 product and service categories in interiors and exteriors. It saw footfalls of
1.5mn with over 35% conversions in FY09.
BUSINESS DETAILS
The company has mainly three lines of business,
z Chemicals (Mining & Industrial)
z Agribusiness (Complex fertilisers, specialty fertilisers)
z Specialty Retailing (Ishanya)
Chemical’s business is the major contributor in the company’s operations with contribution
of 58% and 91% respectively in Net sales and PBIT. Fertiliser’s business remains laggard
so far, mainly due to issues regarding availability of raw materials and government policies,
which is likely to improve in the coming years. Under its fertiliser’s business, DFPCL
markets a host of traded products to offer the complete basket to its customers.
Segment Contribution (%)
Fertilisers Reality
40 1 Others
Others 2
1 Reality
1
Fertilisers Chemicals
7 91
Chemicals
58
RESEARCH
Chemicals product portfolio – Blended with niche products
DFPCL is a leading producer of mining and industrial chemicals in India. This segment
contributes ~60% of total net sales and is further diversified with different products for
different industries. Around 3/4th of its segment revenues come from Ammonium nitrate,
Iso-propyl alcohol and Nitric acid, where the company has made a niche for its product in
the market.
Ammonium Nitrate (AN)
AN is mainly used in mining and construction industries. Indian government is poised to

bring GDP back on 8-9% growth trajectory. Emphasis on construction & mining industry
Largest manufacturer of and sequentially better IIP numbers augur well for the demand of Ammonium nitrate in
prilled Ammonium Nitrate... India. Prominence on electricity generation in 11th Five-Year Plan should lead to higher
domestic coal production and hence more usage of AN. DFPCL is the largest manufacturer
of Technical Prilled AN in India (Capacity: 132k MT p.a.) and fetch higher realisations
compared to its peers, as most of the manufacturers prepare AN in liquid form.
Isopropyl Alcohol (IPA)
IPA is used as specialty chemicals in manufacturing of paints, inks, rubber chemicals, fuel
additives and pharmaceutical industry. DFPCL is the first company to manufacture IPA at
large scale (capacity: 70k MT p.a.), as most of the demand is met through imports. With
US Pharmacopoeia softened crude oil prices, realisation of IPA is likely to improve as Propylene (main raw
certification for IPA... material) prices are directly linked with crude price. DFPCL is the first company in the
world to obtain US Pharmacopoeia certification for IPA and this entail future demand of its
product in the global pharmaceutical industry.
Capacity addition of High margin product
Ammonium Nitrate (AN)
Currently one-third of Ammonium Nitrate’s requirement in India is met through lower quality
grade imports substitutes. DFPCL augmented its technical AN capacity to 132k MT from
90k MT p.a. in FY09. It further plans to raise its capacity of Ammonium Nitrate by 300k MT
p.a. at Taloja plant with a capex of Rs6bn (D/E-2/1), which is expected to be commissioned
by Oct’10.
Capacity addition should DFPCL entered in a 51:49 JV with Yara International ASA (YIA), a Norway based company
improve topline and in Q3FY08 to invest in the 0.3 mn mtpa AN plant at Paradip in Orissa. YIA is the global
profitability significantly... leader in ammonia, specialty and bulk fertilizers and Ammonium Nitrate (AN), industrial
gases and other diversified chemical and pollution control products. Even after due diligence,
the JV did not materialise due to global melt down in FY09. It will be a positive surprise if
Yara shows interest in the ongoing expansion at Taloja.
Nitric Acid
Nitric acid facility with 450 MT p.d. got commissioned in Aug’09 and now DFPCL is among
the largest producer of Nitric acid in Asia.
RESEARCH
Higher gas availability to boost top-line and profitability

DFPCL is well connected to the national gas grid with its Dahej-Uran pipeline, to receive
gas from multiple sources like KG Basin, ONGC and others. Due to lower availability of
gas, Methanol’s share in the total portfolio has reduced significantly in the last two years.
Methanol contribution's in Net sales
40%
30%
Availability of gas should

increase capacity 20%
utilisation...
10%
0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
DFPCL’s gas requirement is about 0.9-1 mmscmd for full utilisation of its capacities as
against current receipt of ~0.4 mmscmd from GAIL. Post RIL KGD6, gas scenario should
improve and once regular gas supply starts, company will be able to increase its capacity
utilisation, which decreased from ~80% in FY05 to ~12% in FY09 and eventually profitability
will improve.
Agribusiness – yet to turnaround
Contribution of fertiliser’s business in the total portfolio has been on decreasing trend for
DFPCL. This segment has hardly made positive PBIT in the last couple of years. Credit for
contribution of ~7% to PBIT in FY09 goes to exceptional rise in prices of fertilisers.
Manufactured fertiliser's contribution in Net sales
40%
30%
20%
10%
0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
We believe that going forward, there is significant scope of improvement in this segment
driven by internal and external factors, however, availability of Phosphoric acid on continuous
basis remains a concern for the company.
RESEARCH
Supporting extrinsic factors:

z Higher availability of natural gas in India
z Positive changes in fertiliser policy,
Policy changes & softened
raw material prices should Linking complex fertiliser prices with international prices
improve fertiliser’s Emphasis on usage of nutrients other than Nitrogen
production...
Reduction in MRP of complex fertilisers
Supporting Intrinsic factors:
z Capacity utilisation at only 25%
z Commissioning of Ammonia tank (capacity: 15k MT) at JNPT is over and now company
should be able to limit its exposure to highly volatile ammonia prices
Other positive development in this segment
Specialty Fertiliser
Commissioning of Sulphur Bentonite plant (25k MT p.a.) at Taloja, which is a specialty
fertiliser and has a robust growth in demand.
Export of fruits & fresh produce
DFPCL has initiated ‘Mahadhan Saarthie’ to tap the retail growth in rural India. It utilizes
its existing relationships with farmers for procuring fresh produce and selling it to exporters.
Under this model, it has entered into an alliance with ITC for exporting grapes to Europe.
Ishanya Mall
Ishanya mall, the design centre and specialty mall for interiors and exteriors is making its
mark in western Maharashtra. It has more than 5000 brands and has a footfall of 1.5mn
with 35% conversion in FY09. Revenue from the segment is growing steadily with ~20%
PBIT margins in FY09. As per the management, current utilisation level of ~55% expected
to reach ~90% by the end of FY10.
Robust financials
Positive cash flow from operations
DFPCL has generated positive cash from operations in the last five years and we believe
cash generation of ~Rs2bn each in next two years. Net sales are likely to remain flat in
FY10 due to sharp reduction in realisations of fertilisers and methanol and then grow at
~16% in FY11 driven by volume growth.
Cash Generation (Rs mn)

Cashflow from operation Net Profit Net Sales
2,400 16,000
History of positive cash flow 1,800 12,000

from operations...
1,200 8,000
600 4,000
- 0

RESEARCH
Healthy Margins
With higher operating margins of ~20%, DFPCL has given robust returns in the past.
Going forward we believe ROCE and ROE in the range of 15%-20% even with all planned
capex. Being conservative, we have taken OPM flat in our estimates, which is likely to
improve with higher availability of natural gas.
Margins (%)
ROCE ROE OPM
28
21
Strong margins to continue... 14
0
Valuations
Expected favourable fertiliser policy, capex plans & increased availability of gas, augurs
well for DFPCL. We expect net profit of to be Rs1.2bn and Rs1.3bn in FY10 and FY11
respectively, which translates into an EPS of Rs13.9 and Rs15.1 respectively.
Recommendation
At the CMP of Rs89, DFPCL is trading at a P/E of 5.9x and EV/EBITDA of 4.1x FY11E.
We maintain our ‘BUY’ We maintain our ‘BUY’ recommendation with an increased target price of Rs114, which
recommendation with a target implies a P/E of 7.5x FY11E earnings. Stock also provides additional support with a dividend
price of Rs114...
yield of 4.4%.
Concerns
z Availability of natural gas at lower price
z Huge volatility in raw material prices
z Delays in ongoing expansions
z Lower turnaround for Ishanya mall
RESEARCH

Operating Profit 1,437 1,745 2,482 2,342 2,708 Total tax paid (344) (501) (542) (525) (572)
Other operating income 113 190 240 245 255 Chg in w orking capital (723) (6) (793) 34 (380)
EBDITA 1,800 2,149 3,082 2,867 3,263 Other items 38 102 412 231 311
Growth (%) 32.1 19.4 43.4 (7.0) 13.8 Cash from oper. (a) 655 1,557 1,720 2,096 2,012
Depreciation 391 447 524 606 747 Capital ex penditure (1,716) (2,172) (2,343) (2,850) (2,500)
Other income 250 214 360 280 300 Chg in inv estments 185 699 (153) - 200
EBIT 1,409 1,702 2,558 2,261 2,517 Other items (1) 131 431 280 300
Interest paid 115 159 405 510 610 Cash flow from inv. (b) (1,532) (1,342) (2,066) (2,570) (2,000)
PBT (before E/o items) 1,294 1,543 2,153 1,751 1,907 Free cash flow (a+b) (877) 216 (346) (474) 12
Tax prov ision 355 512 632 525 572 Equity raised/ (repaid) - - - - -
E/o Income / (loss) (10) (28) (33) - - Debt raised/ (repaid) 1,477 241 2,584 200 1,000
Net profit 929 1,003 1,487 1,226 1,335 Interest Paid (130) (151) (339) (510) (610)
Adjusted net profit 939 1,030 1,521 1,226 1,335 Div idend (incl. tax ) (301) (308) (328) (413) (406)
Growth (%) 16.5 7.9 48.3 (17.5) 8.9 Other items (46) (48) (282) (1) (1)
Diluted EPS (Rs) 10.5 11.4 16.9 13.9 15.1 Cash flow from fin. (c) 1,001 (266) 1,635 (724) (17)
Diluted EPS Growth (%) 16.5 7.9 48.3 (17.5) 8.9 Net chg in cash (a+b+c) 124 (50) 1,289 (1,197) (5)
Equity Share Capital 882 882 882 882 882 OPM (%) 17.2 16.8 17.9 17.5 17.5
Reserves & surplus 5,473 6,106 7,149 7,962 8,891 Net margin (%) 11.2 9.6 10.7 9.2 8.6
Total Debt 3,253 3,494 6,078 6,278 7,278 Net debt/ Equity (x ) 0.5 0.5 0.8 0.7 0.7
Net Deferred tax liability 658 617 651 651 651 Net w orking capital (day s) 85.2 58.7 67.4 68.3 70.2
Capital Employed 10,265 11,099 14,759 15,772 17,701 Asset turnov er (x ) 0.9 1.0 1.1 0.9 0.9
Net fix ed Assets 6,271 7,997 9,727 11,971 13,725 ROCE (%) 19.9 20.0 24.4 17.7 16.5
Cash & Cash Eq. 1,075 641 1,690 493 488 RoE (%) 15.4 15.0 19.8 14.5 14.3
Net other current assets 1,529 1,361 1,893 1,859 2,239 EV/Net sales (x ) 1.0 0.9 0.8 0.9 0.9
Inv estments 1,372 1,087 1,444 1,444 1,244 EV/EBITDA (x ) 4.8 4.5 3.5 4.3 4.1
Misc Ex p 19 12 5 5 5 PER (x ) 8.4 7.8 5.3 6.4 5.9
Total Assets 10,265 11,099 14,759 15,772 17,701 Price/Book (x ) 1.2 1.1 1.0 0.9 0.8

20
180
12X 15
10X
120 10
8X
6X
60 4X 5
0 0
May -04 Sep-05 Jan-07 May -08 Sep-09 May -04 Sep-05 Jan-07 May -08 Sep-09
RESEARCH
Initiating Coverage
NAGARJUNA FERTILISERS BUY

Nagarjuna Fertilisers and Chemicals Ltd (NFCL) is one of the largest 12 October 2009
Urea producers in south India with production capacity of 1.2mn MT
Chirag Dagli +91-22-6618 6462
p.a. The company's proximity to RIL KG basin provides an ensured
chirag.dagli@pinc.co.in
supply of natural gas. NFCL is also engaged in marketing of
micronutrients and specialty fertilisers in association with recognized Satish Mishra +91-22-6618 6488
international players. NFCL is diversifying its business by foraying satish.mishra@pinc.co.in
into refinery business with partners like Tata Petrodyne.
RIL KG basin to improve margins
NFCL has received ~1.55mmscmd of natural gas in the first allocation from
RIL KG D6. Availability of low cost gas is likely to reduce production cost by
~20%, which should lead to significant improvement in operating margins.
Non-usage of liquid fuels will also result in lower working capital requirements
and result in higher profitability.
STOCK DATA
De-bottlenecking to boost profitability
Market Cap Rs14.6bn
Nagarjuna Fertiliser will get IPP benefit for added capacity of ~0.2mn MT of Book Value per share Rs37.9
Urea post de-bottlenecking, which will provide an EPS of Rs0.8 to Rs3.1, Eq Shares O/S (FV Rs10) 428.2mn
depending on the existing international Urea prices. Along with capacity Free Float 64.7%
addition, there will be ~0.45Gcal/ MT of energy saving (EPS of Rs1.1) that
will be completely retained by the company. Bloomberg Code NFCL IN
NOCL - Future revenue generator Reuters Code NGFR.BO
Nagarjuna Oil Corporation Ltd (NOCL), a 51% subsidiary of Nagarjuna

Fertilisers & Chemicals Ltd, is putting up a 6mnMT p.a. petroleum refinery at
Cuddalore, Tamil Nadu. Refinery would process 1.25 lacs barrels per day TOP SHAREHOLDERS
and has high complexity factor, to take advantage of processing heavy and Name % holding
sour crude oil. Saveri Chemicals Pvt.Ltd. 2.66
VALUATIONS AND RECOMMENDATION Sundaram Bnp Paribas Mutual Fund 1.39
Availability of natural gas and de-bottlenecking should increase profits by Life Insurance Corporation Of India 1.34
4.3x in FY11 from Rs324mn in FY09. At CMP of Rs34, NFCL is trading at Credit Suisee (Singapore) Limited 1.23
10.4x and 9.1x of P/E and EV/EBITDA respectively for FY11 estimated EPS
of Rs3.3. We initiate coverage on NFCL with a 'BUY' recommendation and
PERFORMANCE (%)
SOTP price target of Rs47 (10x PER for fertiliser business and Rs14 for
NOCL with GRM of USD6.5/bbl against management guidance of USD8.5/ 1M 3M 12M
Absolute 1.1 (17.0) 20.7
bbl) with a time horizon of 18 months. Relative (8.3) (29.0) (8.0)
Net Sales 18,152 21,936 23,719 18,742 21,205
YoY Gr. (%) 24.9 20.8 8.1 (21.0) 13.1
Nagarjuna Fert BSE Rebased
Op. Profits 2,799 3,034 3,286 3,665 4,689 60
OPM (%) 15.4 13.8 13.9 19.6 22.1
Adjusted Net Profit 317 225 324 736 1,394 45
YoY Gr. (%) 22.4 (29.1) 44.1 126.9 89.5
30
KEY RATIOS
Dil. EPS (Rs) 0.7 0.5 0.8 1.7 3.3 15
ROCE (%) 6.4 7.5 8.1 7.6 8.2
-
RoE (%) 1.8 1.3 2.0 4.4 7.9
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
PER (x) 45.9 64.7 44.9 19.8 10.4
EV/Net sales (x) 1.6 1.4 1.3 2.0 2.0
EV/EBDITA (x) 9.6 9.4 9.3 10.3 9.1
47
RESEARCH
Nagarjuna Fertilisers and Chemicals Ltd
BACKGROUND
Incorporated in 1985, Nagarjuna Fertilisers and Chemicals Ltd (NFCL) is one of the largest
Urea producers in south India. Along with production, the company is also engaged in the
marketing of primary and wide range of micronutrients & specialty fertilisers. NFCL has
current production capacity of 1.2mn MT p.a. for Urea at Kakinada, Andhra Pradesh.
NFCL has association with international players like Haifa Chemicals Ltd, Israel and Yara,
Norway for importing and marketing water-soluble specialty fertilisers. The company is
also engaged in the business of Micro Irrigation solutions.
NFCL has an added advantage of location due to its proximity to RIL KG basin, which
ensures regular supplies of natural gas at lower transportation cost against its peers.
Taking full advantage of assured gas availability post RIL KG development, NFCL is de-
bottlenecking its existing plant to increase production capacity by 0.18mn MT and reducing
energy consumptions by ~0.45Gcal/MT, which has got commissioned in Sept’09.
BUSINESS DETAILS
Nagarjuna Fertilisers has three lines of businesses,
z Urea manufacturing
z Marketing of primary, secondary and specialty fertilisers
z Micro irrigation solution
NFCL has two subsidiaries,
Jaiprakash Engineering and Steel Company ltd (JESCO): NFCL in attempt to diversify
its business entered into steel through JESCO. However, it did not materialised due to
issues regarding partners and lack of funds. Currently nothing significant is happening in
JESCO and hence we have excluded it from our valuations.
Diversification into unrelated
Nagarjuna Oil Corporation Limited (NOCL): It is a 51% subsidiary of NFCL and is
businesses...
currently involved in developing a Petroleum Refinery project at Cuddalore, Tamilnadu.
This venture was delayed initially due to lack of business partners, however, things gathered
speed post involvement of the Tata Group (Tata Petrodyne) with a 30% equity holding in
the company. NOCL has achieved financial closure for Rs32bn and project is expected to
be commissioned by FY12. We have included NOCL in our valuations and it is dealt in
detail in later part of the report.
RESEARCH
RIL KG Gas to improve profitability
Nagarjuna Fertilisers has received 1.55 mmscmd of natural gas in the first allocation of
15.4 mmscmd gas from RIL KG basin to fertiliser companies. Cost of RIL gas for NFCL is
USD5.34/mmbtu (including transportation), lowest among fertiliser companies due to its
proximity to RIL KG basin.
Post availability of natural gas from RIL, the company has switched completely from higher
cost fuels like Naphtha and LSHS to gas. This will result in reduction in production cost to
~20% and improvement in margins. Non-usage of liquid fuels will also result in lower
working capital requirements and result in higher profitability. With usage of higher gases,
plants operating efficiency will improve and result in better operating margins for the
company.
Capacity Addition
Favourable government policy of linking increased Urea production to international price
and availability of natural gas post RIL KG development have motivated many fertiliser
Capacity above cut-off to link
with IPP... companies going for debottlenecking. NFCL is also increasing its capacity through de-
bottlenecking. Urea production is likely to reach 1.58mn MT p.a. from current production
of 1.38mn MT p.a.
Impact of De-bottlenecking to boost top-line and bottom-line
NFCL will be doubly benefited from de-bottlenecking with excess production linked with
international price and reduction in energy consumption of the new as well as the existing
capacities. As per current guidelines, NFCL will be eligible for IPP for excess production
Energy reduction benefits
over 1.4mn MT. Benefit will be to the extent of 85% of international price with collar and
to be retained with Urea
manufacturer... cap of USD250 and USD425 respectively.
Energy consumption post debottlenecking should reduce to ~5.2Gcal/MT of Urea. This
will result in reduction of ~0.45Gcal/MT. As per current policy, the company will retain this
benefit. Plant got commissioned after de-bottlenecking from Oct’09.
Profits due to Energy reduction Profits due to capacity addition

Reduction in energy 0.45 Gcal/ MT Net Sales 2,160 Rs mn
Energy cost 952 Rs mn
Total Production 1.58 mn MT Other Expenses 40 USD / MT
Other Expenses 346 Rs mn
Total Energy Saving 0.71 mn Gcal Operating profit 862 Rs mn
OPM % 39.9
Total Saving 723 Rs mn
Depreciation 150 Rs mn
PBIT 712 Rs mn
Tax Paid 246 Rs mn
PBT 492 Rs mn
PAT 477 Rs mn
Tax 167 Rs mn
No of shares 428 mn PAT 325 Rs mn
No of shares 428 mn
EPS 1.1 Rs EPS 0.8 Rs
RESEARCH
Improving Financials
Margins to expand
Last two years saw exceptional volatility in prices of fertilisers and raw materials. Due to
significant rise in international prices of fertilisers during ’08, companies having substantial
trading volumes saw peak revenues in FY09. We expect NFCL net sales to decrease by
21% YoY in FY10, which should later increase by 13% in FY11.
As discussed earlier, availability of more gases and de-bottlenecking exercise will improve
operating margins significantly from ~14% to ~20+% level. ROE will increase by 4x in
FY11 from its FY09 level. However, ROCE should remain flat due to increasing capex for
51% subsidiary NOCL (discussed later).
Margins to improve
Net Sales (Rs mn) ROCE (%) ROE (%) OPM (%)
24.0 24,000
Availability of more gas
should improve margins... 18.0 18,000
12.0 12,000
6.0 6,000
- -
Positive cash flow from operations
With operating profit per MT of Urea increasing to 1.5x and PAT becoming 4x in FY11 (from
FY09), there should be significant cash flow generation for the company. Better working
capital management with no usage of Naphtha and LSHS will also reduce the interest cost
burden drastically for NFCL and lead the higher profitability.
Exponential growth in profitability
Cashflow from op. (Rs mn) Operating Profit / MT Net Profit (Rs mn)
6,000
1,394
4,500
736
3,000 669
295
317 324
1,500 225
-
RESEARCH
Nagarjuna Oil Corporation Ltd. (NOCL) – a Growing Cash-Cow
Nagarjuna Oil Corporation Limited, a 51% subsidiary of Nagarjuna Fertilisers & Chemicals
Ltd, is putting up a 6mnMT p.a. petroleum refinery at Cuddalore, Tamil Nadu. This is a
relocated unit of Mobil Refinery from Woerth, Germany with new balancing units. It would
process 1.25 lacs barrels per day. As per management, the Refinery with high complexity
Refinery business - A future factor is designed to take advantage of processing heavy and sour crude oil and products
revenue generator...
that will meet Indian and International specifications.
Total capex for the project will be Rs47.9bn with equity contribution of Rs15.9bn. Financial
closure has been achieved for Rs32bn under consortium of 16banks led by IDBI and project
work has started. Plant is expected to be commissioned by end of FY11 and NOCL has
plans to increase Refinery capacity to 15mnMT p.a. by FY15.
Equity Partners - NOCL
Nagarjuna Fert. Tata Petrodyne TNIDC Cuddalore Port Co. Udhe, Germany
51% 30% 5% 10% 4%
GRM-Indian Refineries (Complexity wise), USD/ bbl

av erage High Medium Low
16.0
12.0
8.0
4.0
-
FY07 FY08 FY09 FY10 FY11E FY12E
Assumption for revenue projections for NOCL:
z GRM of USD6.5/bbl against management guidance of USD8.5/bbl
z Considering delay in execution and commencement from FY13
z Crude price of USD60/bbl
z Repayment of all loans in the first seven years
z Interest cost of 10%
z Discount rate of 16% and terminal growth of 0.5%
RESEARCH
DCF Valuations - NOCL

FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E
PAT 1,185 2,886 3,737 5,226 6,502 9,480 10,969 11,820 13,096 14,798
Dep 2,036 2,036 2,036 2,036 2,036 2,036 2,036 2,036 2,036 2,036
Net Capex (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000)
Ch in Work Cap (5,951) (1,831) (916) (1,602) (1,373) (3,204) (1,602) (916) (1,373) (1,831)
Ch in Debt (6,000) (6,000) (6,000) (6,000) (6,000) (6,000) (5,000) - - -
FCFE (10,730) (4,909) (3,143) (2,340) (835) 312 4,403 10,940 11,759 13,003
PV @ FY11 (7,974) (3,145) (1,736) (1,114) (343) 110 1,343 2,877 2,666 2,541
Sensitivity of NOCL's value / share of Nagarjuna Fertilisers in FY11E

GRM (USD/bbl)
6.0 6.5 7.0 7.5 8.0 8.5
1.0 12 20 28 36 44 52
Other Expenses
1.1 11 19 27 34 42 50
1.2 9 17 25 33 41 48
1.3 8 16 23 31 39 47
1.4 6 14 22 30 37 45
1.5 5 12 20 28 36 44
1.6 3 11 19 26 34 42
1.7 1 9 17 25 33 40
Circled portion is the most likely value of NOCL per share of Nagarjuna Fertilisers in FY11.
Taking the most conservative scenario, we have taken the minimum contribution of Rs14/
share of NFCL from NOCL in our valuations.
Valuations
We are adopting SOTP methodology for valuing fertiliser business and the upcoming refinery
business of its subsidiary NOCL.
Fertiliser Business
Current existing facilities of NFCL should generate earnings of Rs1.4 in FY11. Upcoming
Higher IPP for Urea will development of de-bottlenecking should be commissioned by Oct’09 and will contribute
increase profitability
full year in FY11. Benefits from de-bottlenecking are linked with international price of Urea
significantly...
with floor and ceiling of USD250 and USD425.
Earnings estimates (Rs / share) for FY11E
Earnings estimates (Rs / share) for FY11E

Urea Realisation, USD / MT
250 275 300 325 350 375 400 425
Earlier Capacity 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
Total EPS 3.3 3.6 3.9 4.3 4.6 4.9 5.3 5.6
RESEARCH
Taking most conservative scenario, we have taken earnings from fertiliser business to be
Rs3.3 in FY11E, which can go up to Rs5.6 depending on prevailing international Urea
prices.
NOCL Valuations
As discussed earlier, in conservative scenario, NOCL is delivering a value of Rs14 per

share of NFCL in FY11E.
Recommendation
At CMP of Rs34, NFCL is trading at 10.4x and 9.1x of P/E and EV/EBITDA respectively for
We initiate coverage with FY11E EPS of Rs3.3. With 10x PER for fertiliser business and Rs14 for NOCL in FY11,
a ‘BUY’ recommendation and
we recommend a ‘BUY’ for NFCL with a target price of Rs47 for a time horizon of 18
a target price of Rs47...
months.
Concerns
z There should be regular supplies of natural gas and no further requirements of liquid
fuels
z Diversification into unrelated business (Refinery) remains a concern
z Undue delay in expansion projects
RESEARCH

Net sales 18,152 21,936 23,719 18,742 21,205 Pre-tax profit 460 401 503 1,115 2,112
Growth (%) 24.9 20.8 8.1 (21.0) 13.1 Depreciation 1,241 1,202 1,210 1,308 1,372
Operating Profit 2,799 3,034 3,286 3,665 4,689 Total tax paid (470) (389) (396) (379) (718)
Growth (%) (2) 8 8 12 28 Chg in w orking capital 2,145 535 942 (290) 814
Other income 280 198 120 45 65 Other items 1,344 1,630 1,693 1,242 1,205
EBDITA 3,079 3,232 3,406 3,710 4,754 Cash flow from oper. (a) 4,721 3,380 3,952 2,996 4,785
Growth (%) 1 5 5 9 28 Capital ex penditure (1,960) (1,923) (7,116) (8,000) (8,000)
Depreciation 1,241 1,202 1,210 1,308 1,372 Chg in inv estments 23 353 - - -
EBIT 1,838 2,031 2,196 2,402 3,382 Other inv esting activ ities 1 - - (355) (335)
Interest paid 1,378 1,630 1,693 1,287 1,270 Cash flow from inv. (b) (1,936) (1,570) (7,116) (8,355) (8,335)
PBT (before E/o items) 460 401 503 1,115 2,112 Free cash flow (a+b) 2,784 1,810 (3,164) (5,359) (3,550)
Tax prov ision 143 176 179 379 718 Equity raised/(repaid) 0 375 0 - -
E/o Income / (loss) - - - - - Debt raised/(repaid) (1,908) 241 3,680 6,500 6,000
Net profit 317 225 324 736 1,394 Interest Paid (1,370) (1,624) (1,667) (1,287) (1,270)
Adjusted net profit 317 225 324 736 1,394 Div idend (incl. tax ) (16) (12) 0 (0) (0)
Growth (%) 22.4 (29.1) 44.1 126.9 89.5 Others 41 53 2,357 - -
Diluted EPS (Rs) 0.7 0.5 0.8 1.7 3.3 Cash flow from fin. (c) (3,254) (967) 4,371 5,212 4,730
Growth (%) (52.6) (29.1) 44.1 126.9 89.5 Net chg in cash (a+b+c) (469) 843 1,206 (146) 1,180
Equity capital 4,652 4,652 4,652 4,652 4,652 OPM(%) 15.4 13.8 13.9 19.6 22.1
Deferred Tax Liability 2,249 1,966 1,812 1,812 1,812 Net debt/Equity (x ) 0.9 1.0 1.2 1.5 1.7
Total debt 15,536 16,721 19,250 25,750 31,750 Net Working Capital (day s) (71.7) (50.1) (71.1) (90.0) (90.0)
Minority Interest 0 0 2,848 2,848 2,848 Asset turnov er (x ) 0.5 0.6 0.6 0.4 0.4
Capital Employed 35,500 35,734 40,686 47,921 55,315 ROCE (%) 6.4 7.5 8.1 7.6 8.2
Net fix ed assets 30,330 29,556 33,114 39,806 46,433 ROE (%) 1.8 1.3 2.0 4.4 7.9
Cash & cash Eq. 926 1,950 2,953 3,097 3,463 EV/Net sales (x ) 1.6 1.4 1.3 2.0 2.0
Net other current assets 335 2 2 2 2 EV/EBIDTA (x ) 9.6 9.4 9.3 10.3 9.1
Ex p pending allocation 3,909 4,226 4,617 5,017 5,417 PER (x ) 45.9 64.7 44.9 19.8 10.4
P/E Band EV/EBITDA Band

270
90
180
60
30X
25X 90
30 20X
15X
10X
- 0
Jan-04 Jun-05 Nov -06 Apr-08 Sep-09 Jan-04 Jun-05 Nov -06 Apr-08 Sep-09
RESEARCH
Initiating Coverage
RASHTRIYA CHEMICALS AND FERTILISERS LTD HOLD

Rashtriya Chemicals and Fertilisers Ltd (RCF), with a capacity of 2mn 12 October 2009
MT p.a. of Urea is one of the largest PSUs contributing ~10% of the
Chirag Dagli +91-22-6618 6462
country's total Urea production. Rising fertiliser subsidy burden,
chirag.dagli@pinc.co.in
discovery of huge reserve of natural gas in India and government's
emphasis on self-sufficiency in fertiliser production, augurs well for Satish Mishra +91-22-6618 6488
the growth of fertiliser sector and RCF being one of the largest players satish.mishra@pinc.co.in
and with 92.5% of government's stake is likely to benefit the most.
RIL KG basin to change the dynamics
RCF has received ~3mmscmd of natural gas in the first allocation from RIL
KG D6. Availability of more gas has resulted in resumption of Trombay Urea
unit (0.33mn MT p.a.) that was closed for the last 8 years and switch from
costlier fuel like Naphtha and LSHS to natural gas should result in improvement
of operating margins.
De-bottlenecking to boost profitability STOCK DATA
Market Cap Rs35.9bn
RCF is increasing its Urea capacity at Thal unit by 0.27mn MT. Production
Book Value per share Rs30.3
above cut-off limit will be linked to IPP and provides possibility of significant Eq Shares O/S (FV Rs10) 551.7mn
upsides in earnings. De-bottlenecking will further lead to saving of ~0.4Gcal/ Free Float 7.5%
MT of Urea for the whole unit, which will be completely retained by RCF as Avg Traded Value (6 mnths) Rs124mn
per current policy. 52 week High/Low Rs90/25
Bloomberg Code RCF IN
Key contender for brownfield expansion Reuters Code RSTC.BO
Post availability of gas, there will capacity addition through brown-field
expansion and resumption of sick units. RCF, with PSU status is ahead in
the race to grab this opportunity. RCF is already part of the team for resumption
of sick units of FCI. Brown-field expansion will create a blue-sky scenario for TOP SHAREHOLDERS
RCF, as Urea realisations will be linked to the international prices.
Name % holding
VALUATIONS AND RECOMMENDATION Tata Mutual Fund 0.07
At CMP of Rs65, RCF is trading at P/E and EV/EBITDA of 13.6 and 7.8 Birla Sun life Mutual Fund 0.04
respectively for FY11E EPS of Rs4.8. De-bottlenecking and brown-field
expansion should generate an additional EPS of Rs2.5 to Rs10.7 depending
on the prevailing international Urea prices. We initiate coverage with a 'HOLD'
recommendation for the stock with a price target of Rs73. However any PERFORMANCE (%)
favourable policy change regarding expansion, increase in international price
1M 3M 12M
for Urea or any development regarding the commercial usage of large land Absolute 4.0 (10.7) 45.2
bank at Chembur (Not valued in our estimates) will be the positive triggers. Relative (5.6) (23.7) 10.6
FY07 FY08 FY09P FY10E FY11E
Net Sales 34,880 51,403 83,660 59,655 64,260
YoY Gr. (%) 14.5 47.4 62.8 (28.7) 7.7 RCF BSE Rebased
Op. Profits 2,801 2,885 4,042 4,057 4,820 120
OPM (%) 8.0 5.6 4.8 6.8 7.5
90
Adjusted Net Profit 1,487 1,582 2,116 2,113 2,644
YoY Gr. (%) 22.4 6.3 33.8 (0.1) 25.1 60
KEY RATIOS
Dil. EPS (Rs) 2.7 2.9 3.8 3.8 4.8 30
ROCE (%) 13.8 11.7 12.7 11.2 15.5 -
RoE (%) 10.6 10.6 13.2 12.1 13.9 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
PER (x) 24.1 22.7 16.9 17.0 13.6
EV/Net sales (x) 1.2 0.9 0.6 0.7 0.7
EV/EBDITA (x) 11.8 12.2 10.8 9.7 7.8
55
RESEARCH
Rashtriya Chemicals and Fertilisers Ltd
BACKGROUND
Rashtriya Chemicals and Fertilisers Ltd (RCF) is one of the largest PSUs engaged in the
production and marketing of nitrogenous & complex fertilisers and industrial chemicals.
Among the largest Urea RCF was formed in 1978 after reorganisation of Fertilizer Corporation of India into five
manufacturing PSU... companies. RCF, a wholly owned PSU until ’92, later, 7.5% of the equity has been
disinvested to Financial Institutions, Public etc.
The company has its manufacturing facilities at Trombay (Mumbai) and Thal (Raigadh) in
Maharashtra. RCF has production capacity of 2mn MT p.a. for Urea (1.7mn at Thal and
0.33 mn at Trombay) and 0.65mn MT p.a. for complex fertilisers. The company also produces
chemicals like Methanol, Ammonia, Sodium Nitrate, Ammonium Nitrate etc. RCF shutdown
its Urea manufacturing plant at Trombay in 2001 due to shortage of natural gas, however
production has resumed in ’09 post natural gas availability from RIL KG basin.
BUSINESS DETAILS
RCF has three lines of business
z Fertilisers manufacturing (Urea and complex fertilisers)
z Manufacturing host of industrial chemicals
z Trading of fertilisers (DAP, MOP and Urea)
Fertiliser companies irrespective of not having manufacturing facilities for fertilisers of all
types of primary nutrients (N, P and K), try to project themselves as one-stop shop for all
kind of fertilisers. This results in significant portion of trading sales in the fertiliser company’s
top-line.
Segment Contribution
Trading
31
Trading Fertiliser
Fertiliser 10 40
59
Chemicals Chemicals
10 50
RESEARCH
RIL KG Gas to boost top-line and bottom-line
As per first allocation of 15.4 mmscmd gas from RIL KG basin to fertiliser companies,
RCF has received 0.95 mmscmd and 2.1 mmscmd of gas respectively for its Trombay and
Thal plant. Cost of RIL gas for RCF including transportation is USD 5.87 per mmbtu.
Resumed Urea facility at Trombay
Urea production facility at Trombay was shut in ’01 due to nonavailability of natural gas.
Resumption of Urea Post allocation of gas from RIL KG basin in 2009, RCF has restarted Urea production at
production at Trombay... Trombay. This will lead to production of additional 3.3 lacs MT of Urea from this facility,
which will add to ~Rs 3bn to top-line.
With availability of natural gas, RCF has switched completely from higher cost fuels like
Naphtha and LSHS to gas. This will result in lower production cost and improvement in
margins. Average cost of production of Urea has reduced from ~Rs11,500 per MT in FY09
to ~Rs8,500 currently. This will result in lower working capital requirement and result in
higher profitability. With usage of more gas, plant’s operating efficiency should improve
and result in better operating margins for the company.
De-bottlenecking to increase profitability
Capacity Addition
Availability of Gas is the major concern for Urea plants in India. Post assurance of gas
from RIL KG basin, RCF is increasing its existing Urea production capacity at Thal through
Capacity above cut-off to be
debottlenecking. Realisation of excess Urea produced will be linked with international
linked with IPP...
price to the extent of 85% of IPP with a bottom and cap of USD250 and USD425 per MT of
Urea respectively.
Details of De-bottlenecking
Project Cost 5.0 Rs bn Net Sales 3,240 Rs mn
Energy cost 1,841 Rs mn
D/ E 2:1
Other Expenses 40 USD/ MT
Loan 3.3 Rs bn Other Expenses 518 Rs mn
Average cost 8.25% Operating profit 880 Rs mn
OPM % 27.2
Production 0.27 mn MT p.a. Depreciation 188 Rs mn
Energy consn 6.1 Gcal/ MT PBIT 693 Rs mn
Energy cost 5.87 $/ mmbtu
PBT 418 Rs mn
Urea realisation 250 $/ MT Tax 142 Rs mn
PAT 276 Rs mn
Rs-USD 48
No of shares 552 mn
Time line 18-20 months EPS (Rs) 0.5 Rs
RESEARCH
Energy Reduction
Along with capacity addition of 0.27mn MT of Urea p.a., debottlenecking will also reduce
the overall energy consumption for the Urea plant at Thal. Post debottlenecking, energy
Energy reduction benefits consumption is expected to reduce from the current level of ~6.5 Gcal/ MT to ~6.1 Gcal/
to be retained with Urea MT. Energy saving of ~0.4 Gcal/MT on the capacity of 2.0mn MT Urea will result in substantial
manufacturer... profitability for RCF. As per current Urea policy, benefits of energy saving arrived from
debottlenecking is retained with the company for the first five years without any sharing
with the government.
Benefit from reduction in energy consumption

Reduction in energy 0.40 Gcal/ MT
Total Production 2.0 mn MT
Total Energy Saving 0.80 mn Gcal
Total Saving 894 Rs mn
Tax Paid 304 Rs mn
PAT 590 Rs mn
No of shares 552 Rs mn
EPS 1.1 Rs
Brownfield Expansion creating Blue-sky scenario
As discussed earlier, India is highly dependent on imports to meet its fertiliser’s requirement.
Government of India is looking at all possibilities to become self-sufficient in fertilisers
production and to reduce its subsidy burden. Although the company has not yet formally
announced, but looking at the present situation of fertiliser industry, we are sure that there
will be brown-field capacity expansion for Urea in the coming years and RCF is ahead in
the pack to reap its benefit.
Factors favuoring RCF for brown-field expansion
Raw material availability
Key for any Urea manufacturer is the availability of natural gas. RCF is well connected with
the existing gas pipe network. Currently 100% of its energy requirement is met through
natural gas. Post RIL KG development and categorisation of gas to fertiliser industry on
first priority, augurs well for the sector.
Government Support
RCF being a PSU company (Govt. stake-92.5%) has higher interference of Fertiliser ministry
RCF is ahead in race for in decision making as compared to its peers. Government emphasizing on self-sufficiency
revival of sick Urea units... will take policy measures to increase domestic production of fertilisers. We feel that RCF
will be among the first fertiliser company to take any action regarding brown-field expansion
due to high government stake and most likely to receive capital infusion by the government
in the beginning. This can also lead to a likely situation of dilution or sale of Govt’s stake
in RCF to the extent of 10-15%.
RESEARCH
Cost advantage compared to peers
RCF has 1.7mn MT p.a. Urea plant operating at ~110% capacity utilisation at Thal. This
way RCF has all technical and marketing expertise to handle new brown-field facility.
Ample land is also available at Thal facility. This way, brown-field expansion at RCF-Thal
will save cost of extra land along with saving due to sharing of utilities and supporting
departments.
Project cost for Urea plants

Company Plant Feedstock Sector Year of Capacity Project
commissioning (mn MT p.a.) cost (Rs million)
Chambal Fert Kota I NG Private 1993 0.87 12,670
Tata Chemicals Babrala NG Private 1994 0.87 14,797
IFFCO Aonla II NG Co-op 1996 0.87 9,547
IFFCO Phulpur II NG Co-op 1997 0.87 11,900
Source: Crisil Research, PINC Research
We can observe the cost advantage that RCF will have as compared to new plant, from the
above numbers. Cost of first plant for Chambal Fertilisers and Tata Chemicals were
~Rs12.7bn and ~Rs14.7bn. However, for the same capacity plant commissioned after
three years, the cost of brown-field expansion for IFFCO was only ~Rs9.5bn and ~Rs11.9bn.
This way, RCF will have a cost benefit of 15-20% as compared to greenfield players if it
goes for brown-field expansion.
Profits from brown-field expansion

Project cost 42 Rs bn Net Sales 13,200 Rs mn
Debt: Equity 2:1 Energy cost 6,395 Rs mn
Debt 28 Rs bn Other Expenses 30 USD / MT
Equity 14 Rs bn Other Expenses 1,584 Rs mn
Production-Urea 1.1 Mn MT p.a. Operating profit 5,221 Rs mn
Brown-field expansion has
Cost of loan 8.25% OPM % 39.6
significant potential due to
Energy consumption 5.2 Gcal/ MT Depreciation 1,260 Rs mn
IPP linkages...
Energy cost 5.87 $ / mmbtu PBIT 3,961 Rs mn
Urea realisation 250 $ / MT Interest cost 2,310 Rs mn
Rs-USD 48 PBT 1,651 Rs mn
Time-line 38-40 months Tax 561 Rs mn
Govt. stake in Equity 51% PAT 1,090 Rs mn
7.14 Rs bn RCF stake 534 Rs mn
RCF stake in Equity 49% No of shares 552 mn
6.86 Rs bn EPS (Rs) 1.0 Rs
RESEARCH

Strong financials
Cash flow from operations
With MRP fixed for all fertilisers, subsidy from government contributes significantly to
fertiliser companies’ top-line. Very often, irregularities in subsidy disbursement led to higher
receivables in the balance sheet. Fertiliser bonds in place of cash subsidy also create
difficulties in managing working capital for the companies. Along with subsidy problems,
due to usage of Naphtha in the absence of natural gas leads to higher inventory and again
exert pressure on the working capital.
It can be seen in the chart below that cash flow from operations before working capital has
always been positive (~Rs3bn) for RCF but including working capital it has been very
volatile. Going forward, we believe that regular availability of RIL KG gas and cash subsidy
will lead to better working capital management and consequently significant cash flow
from operations in the coming years.
Cash flow from operations (Rs mn)

Cashflow from operation before WC Cashflow from operation D/E
1.2
11,500
8,500 0.9
Ease in working capital
should reduce short term 5,500
loan requirements... 0.6
2,500
0.3
(500)
(3,500) -
Margins to improve
Better working capital management along with improvement in operating efficiency post
RIL gas should help RCF post better operating margins in the years to come and will result
in healthier returns to shareholders.
Margins (%)
ROCE ROE OPM
20.0
15.0
More natural gas should

improve operating margins... 10.0
5.0
-

RESEARCH
Huge land bank: A Dark horse – Not yet valued

RCF has huge surplus land at its Thal and Trombay unit. Excess land at Thal will be used
for brown-field expansion for 1.1 mn MT p.a. Urea plant (discussed in earlier part of the
report).
Total land bank at Trombay unit is 600-700 acre. This unit is located in Chembur-near
Mumbai and hence is considered a hot property. However, there are lot of hindrances in
Huge land bank at Chembur the usage of this land for commercial purpose.
(Mumbai) - Sitting on the
gold mine... z Surplus land available in patches and not in a stretch
z As per the current government instructions, land has to be used for industrial or
employee’s residential purpose
With these constraints, we feel that chances of selling these land or its usage for commercial
purpose are very remote in the near future and hence, we have not valued the option value
of land bank in our estimates. However, any positive guidelines from government for usage
of these lands will increase earnings manifold due to its prime location.
Valuations
Resumption of Urea plant at Trombay unit and complete switch from Naphtha to Natural
gas will result in better profitability for RCF. We believe the current operating business
should yield an EPS of Rs3.8 and Rs4.8 in FY10E and FY11E respectively.
Extra EPS from the upcoming developments

Urea Realisation, USD / MT —>
250 275 300 325 350 375 400 425
Brown-field Expansion 1.0 1.7 2.5 3.3 4.1 4.8 5.6 6.4
Total EPS 2.5 3.7 4.9 6.0 7.2 8.3 9.5 10.7
On-going developments of debottlenecking at RCF should start contributing to earnings

from FY12 onwards. Profitability from these projects is linked with international price of
Urea and after full-blown implementation of these projects; it should contribute EPS in the
range of Rs2.5 to Rs10.7.
Recommendation
At CMP of Rs65, RCF is trading at P/E and EV/EBITDA of 13.6 and 7.8 respectively for
FY11E EPS of Rs4.8. Most conservative scenario from ongoing developments should
We initiate coverage with a
yield an EPS of Rs2.5, which can go up to Rs10.7 in the most optimistic scenario. We
‘HOLD’ recommendation and
a target price of Rs73... recommend ‘HOLD’ for the stock with a price target of Rs73. However, any favourable
policy change regarding expansion or increase in international price for Urea will result in
increase in profitability for the company.
Concerns
z There should be regular supplies of natural gas and no further requirements of liquid
fuels
z Firm allocation of natural gas for future projects
z Being a PSU, Involvement in revival of sick Urea units without any further incentive
RESEARCH

Incom e Statem ent FY07 FY08 FY09P FY10E FY11E Cash Flow Statem ent FY07 FY08 FY09P FY10E FY11E
Operating Profit 2,801 2,885 4,042 4,057 4,820 Total tax paid (618) (895) (1,141) (906) (1,362)
Growth (%) 41 3 40 0 19 Chg in w orking capital (3,787) (1,712) (5,971) 8,059 (865)
EBDITA 3,654.3 3,915.0 4,872.9 4,456.5 5,419.5 Other items 511 695 (82) 145 (111)
Growth (%) (16) 21 (19) (52) 50 Cash flow from oper. (a) (729) 1,378 (3,071) 11,210 2,592
Depreciation 754 832 866 893 923 Capital ex penditure (1,742) (1,211) (853) (1,000) (1,000)
Other income 853.7 1,030.2 831.1 400.0 600.0 Chg in inv estments - (3,600) 0 0 0
EBIT 2,900 3,083 4,007 3,563 4,496 Other inv esting activ ities 19 91 831 400 600
Interest paid 488 663 749 545 490 Cash flow from inv. (b) (1,723) (4,720) (22) (600) (400)
PBT (before E/o items) 2,412 2,421 3,257 3,019 4,007 Free cash flow (a+b) (2,452) (3,342) (3,093) 10,610 2,192
Tax prov ision 925 839 1,141 906 1,362 Equity raised/(repaid) - - - - -
E/o Income / (loss) - - - - - Debt raised/(repaid) 5,180 2,872 4,965 (7,500) (1,000)
Net profit 1,487 1,582 2,116 2,113 2,644 Interest Paid (459) (697) (749) (545) (490)
Adjusted net profit 1,487 1,582 2,116 2,113 2,644 Div idend (incl. tax ) (629) (645) (775) (775) (775)
Growth (%) 22 6 34 (0) 25 Cash flow from fin. (c) 4,092 1,530 3,441 (8,819) (2,264)
Diluted EPS (Rs) 2.7 2.9 3.8 3.8 4.8 Net chg in cash (a+b+c) 1,640 (1,812) 348 1,791 (72)
Balance Sheet FY07 FY08 FY09P FY10E FY11E Key Ratios FY07 FY08 FY09P FY10E FY11E
Equity capital 5,517 5,517 5,517 5,517 5,517 OPM(%) 8.0 5.6 4.8 6.8 7.5
Deferred Tax Liability 1,670 1,661 1,661 1,661 1,661 Net debt/Equity (x ) 0.7 0.8 1.0 0.5 0.4
Total debt 9,552 12,435 17,400 9,900 8,900 Net Working Capital (day s) 170.6 120.1 90.0 69.0 68.0
Capital Employed 25,725 29,485 35,792 29,630 30,500 Asset turnov er (x ) 1.4 1.7 2.3 2.0 2.1
Net fix ed assets 11,353 11,688 11,675 11,782 11,858 ROCE (%) 13.8 11.7 12.7 11.2 15.5
Cash & cash Eq. 2,305 493 841 2,633 2,561 ROE (%) 10.6 10.6 13.2 12.1 13.9
Net other current assets 12,035 13,691 19,663 11,603 12,469 EV/Net sales (x ) 1.2 0.9 0.6 0.7 0.7
Inv estments 2 3,597 3,597 3,597 3,597 EV/EBIDTA (x ) 11.8 12.2 10.8 9.7 7.8
Misc Ex p 30 15 15 15 15 PER (x ) 24.1 22.7 16.9 17.0 13.6

60
90 24X
45
20X
60 16X
30
12X
30 8X 15
- 0
Jan-04 Jun-05 Nov -06 Apr-08 Oct-09 Jan-04 Jun-05 Nov -06 Apr-08 Oct-09
ANNEXURES
63
RESEARCH
Annexure - I
CUT-OFF AND TARGET PRODUCTION FOR RECEIVING IPP BASED PRICING FOR UREA UNITS
Name of Fertiliser Reassessed Urea Highest rate Max. achieved Cut off for revamp Target prod. for
Units Capacity of prod. prod. for 330 days capacity receiving IPP
achieved (2003-04 to 2006-07) based price
mn MT/ yr 2003-07 MT/day mn MT/ yr mn MT mn MT
Group-I: Pre-1992 gas

1 BVFCL - Namrup-III 0.32 855 0.26 0.30 0.35
2 IFFCO-Aonia-I 0.86 2783 0.92 0.92 0.96
3 Indo-Gulf-Jagdishpur 0.86 3000 0.99 0.99 1.04
4 Kribhco-Hazira 1.73 5335 1.76 1.76 1.90
5 NFL - Vijaipur-I 0.86 2731 0.90 0.90 0.95
Group-II: Post-1992 gas
1 NFCL-Kakinada-I 0.57 2173 0.72 0.72 0.75
2 CFCL Gadepan-I 0.86 2862 0.94 0.94 0.99
3 TCL-Babrala 0.86 2901 0.96 0.96 1.01
4 KSFL-Shahjahanpur 0.86 2757 0.91 0.91 0.96
5 NFCL-Kakinada-II 0.60 2083 0.69 0.69 0.72
6 IFFCO-Aonia-II 0.86 2776 0.92 0.92 0.96
7 NFL - Vijaipur-II 0.86 2731 0.90 0.90 0.95
Group-III: Pre-1992 naphtha
1 SFC-Kota0.38 1158 0.38 0.38 0.42
2 IFFCO-Phulpur-I 0.55 1764 0.58 0.58 0.61
3 MCFL-Managalore 0.38 1228 0.41 0.41 0.43
4 MFL-Madras 0.49 1480 0.49 0.49 0.54
5 SPIC-Tuticorin 0.62 2036 0.67 0.67 0.71
6 ZIL-Goa 0.40 1330 0.44 0.44 0.46
Group-IV: Post-1992 naphtha
1 IFFCO-Phulpur-II 0.86 2864 0.95 0.95 0.99
2 CFCL-Gadepan-II 0.86 2731 0.90 0.90 0.95
Group-V: FO/LSHS
1 GNVFC-Bharuch 0.64 2050 0.68 0.68 0.71
2 NFL-Bhatinda 0.48 1548 0.51 0.51 0.54
3 NFL-Bhatinda 0.51 1589 0.52 0.52 0.56
4 NFL-Panipat 0.51 1629 0.54 0.54 0.56
Group-VI: Mixed feedstock
1 GSFC-Baroda 0.37 1155 0.38 0.38 0.41
2 IFFCO-Kalol 0.54 1707 0.56 0.56 0.60
3 RCF-Thal 1.71 5363 1.77 1.77 1.88
Total 19.46 20.64 20.70 21.90
Source: FAI
RESEARCH
Annexure - II
ENERGY NORMS FOR UREA UNITS DURING STAGE-III OF NEW PRICING SCHEME
S No. Urea Unit Energy (Gcal/ MT Urea)
Group-I: Pre-1992 gas
1 BVFCL - Namrup-III 12.688

2 IFFCO-Aonia-I 5.690
3 Indo-Gulf-Jagdishpur 5.534
4 Kribhco-Hazira 5.952
5 NFL - Vijaipur-I 5.952
Group-II: Post-1992 gas
1 NFCL-Kakinada-I 5.712
2 CFCL Gadepan-I 5.621
3 TCL-Babrala 5.417
4 KSFL-Shahjahanpur 5.712
5 NFCL-Kakinada-II 5.712
6 IFFCO-Aonia-II 5.522
7 NFL - Vijaipur-II 5.712
Group-III: Pre-1992 naphtha
1 SFC-Kota 7.847
2 IFFCO-Phulpur-I 7.584
3 MCFL-Managalore 7.356
4 MFL-Madras 8.337
5 SPIC-Tuticorin 7.382
6 ZIL-Goa 7.308
Group-IV: Post-1992 naphtha
1 IFFCO-Phulpur-II 5.883
2 CFCL-Gadepan-II 5.678
Group-V: FO/LSHS
1 GNVFC-Bharuch 7.989
2 NFL-Bhatinda 9.517
3 NFL-Bhatinda 10.221
4 NFL-Panipat 9.654
Group-VI: Mixed feedstock
1 GSFC-Baroda 6.935
2 IFFCO-Kalol 6.607
3 RCF-Thal 6.938
Source: FAI
RESEARCH
Annexure - III
RIL KG D6 NATURAL GAS ALLOCATED TO FERTILISER PLANTS (OUT OF FIRST 40MMSCMD)
HBJ Pipeline MMSCMD
National Fertiliser 0.65
Chambal Fertiliser 1.15
IFFCO-Aonla 1.75
IFFCO-Phulpur 0.52
KRIBH-Shah 0.978
Tata-Babrala 0.88
Indo gulf-Jagdishpur 0.48
SriramFert-kota 0.62
7.028
Non HBJ line
KRIBH-Hazi 1.37
GSFC-Varodra 0.72
RCF-Trombay 0.95
RCF-Thal 2.1
Nagarjuna Fertiliser 1.55
GNFC 0.342
IFFCO-Kalol 1.3
8.332
TOTAL 15.36
Source: FAI
Price per mmbtu:
Companies on HBJ pipeline USD 6.21
Companies Non-HBJ pipeline

AP USD 5.34
Maharashtra USD 5.87
Gujarat USD 5.87
RESEARCH
Annexure - IV
PIPELINE CONNECTIVITY PLAN (AS PROVIDED BY GAIL AND MOPNG)
S.No. Proposed pipeline Agency for Fertilizer unit proposed Expected

connecting Plants to be connected Year of connectivity
Naphtha based plants
1 Dhabol, Bangalore. GAIL ZIL, Goa 2009-10
2 Kochi-Mangalore-Bangalore GAIL MFCL, Mangalore 2010-11.
3 Kochi-Mangalore-Bangalore
(Also from Kochi LNG Terminal) GAIL FACT,Cochin 2009-10.
4 Kakinada-Tuticorin via Chennai RIL SPIC, Tuticorin MFL, Chennai 2009-10
Fuel Oil/LSHS based plants
5 Dadri-Bawana-Nangal GAIL NFL- Nangal, Panipat, Bhatinda 2009-10
Closed units
6 Spur on Kakinda to Uran via RIL FCI, Ramagundam 2009-10
Hyderabad
7 Spur from the following pipeline : GAIL FCI, Sindri 2009-10
Jagdishpur-Haldia FCI, Gorakhpur
HFC, Barauni
HFC, Durgapur
HFC, Haldia
8 Spur from Kakinada-Haldia Pipeline RIL FCI,Talcher
Source: FAI
RESEARCH
Annexure - V
PRODUCTION CAPACITY FOR DAP AND COMPLEX FERTILISERS
Company Products Installed Capacity (mn MT)
CFL DAP/Complex 3.1
DFCL Complex 0.3
FACT Complex 0.6
GNFC ANP 0.1
GSFC DAP/Complex 0.9
IFFCO DAP/Complex 4.3
MFL DAP/Complex 0.8
PPL DAP/Complex 0.7
RCF Complex 0.4
SPIC DAP/Complex 0.6
TCL DAP/Complex 0.7
ZIL DAP/Complex 0.7
Source: FAI, PINC Research
RESEARCH
T E A M
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COMPLIANCE
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69
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RESEARCH

Dawn of a new era...

Investment Summary .............................................................................. 1

Investment Rationale ............................................................................... 2

Sector Background .................................................................................. 10

Chambal Fertilisers and Chemicals Ltd. ................................................. 27

Coromandel International Ltd. .................................................................. 34

Deepak Fertilisers and Petrochemicals Corporation Ltd. ........................ 40

Nagarjuna Fertilisers and Chemicals Ltd ................................................ 47

Rashtriya Chemicals and Fertilisers Ltd ................................................. 55

FERTILISERS Sector View - Attractive

Investment Summary 12 October 2009

Beginning of a new Era

Over the last 5 years fertilisers’ consumption has grown at a

Capacity and Production of Fertilisers (mn MT)

Stagnant production 12.0

Source: Fertiliser Association of India (FAI)

Increasing dependency on imports

Share of imports in fertiliser consumption (mn MT)

Increasing share of 14.0

Mounting subsidy burden

Subsidy granted to fertiliser sector (Rs bn)

Ballooning subsidy bill... 750

Source: Crisil Research

Positive policy changes

Ammonia (USD/MT) Phosphoric Acid (USD/MT)

Source: Crisil Research Source: Crisil Research

Urea (USD/MT) DAP (USD/MT)

Source: Crisil Research

Fertiliser subsidy to decline (Rs bn)

Source: Crisil Research

Benefits to Urea Manufacturers

Reduced Energy Consumption

Benefits from Capacity addition and energy reduction

Ease in Working Capital management

Cash flow from operations (Rs bn)

ROCE (%) ROE (%)

Source: Company, PINC Research

BSE Vs Fertiliser sector

Fertiliser Index Vs BSE

Fertiliser index under-

Source: Capitaline Plus, PINC Research

Dividend Yield (%)

Higher dividend yield-

Source: Company, PINC Research

What are the top picks => here is the answer

Factors impacting Fertiliser sector

Source: PINC Research

Existing production capacity, availability of raw materials, government policies, international

Production and Yield of food grains

Food grain production

Grain production increased

Growth in Indian population Agricultural land& irrigation coverage

Indian Population (Bn) Area (mn Hectare) Irrigation Cov erage

Current irrigation penetration

Source: Populstat Source: Indiastat, DoF

Proportion of Urea in total fertiliser (‘000 MT)

Urea being cheaper was 30,000

Fertiliser consumption in India (’000 MT)

Fertiliser consumption in India ('000 MT)

FERTILISER PRODUCTION CAPACITY

Nutrient wise production and consumption of nutrients in India

Demand-Supply for Nitrogen (mn MT)

Revamping – Investment of ~Rs10bn – Realisation linked to 85% of IPP*

Expansion – Investment of ~30bn – Realisation linked to 90% of IPP*

Greenfield projects – Prices decided through bidding route