Tata Chemicals- Key takeaways from fertilizer policy announcements: Kotak Sec

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Tata Chemicals (TTCH)
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Key takeaways from fertilizer policy announcements. DOF rejects (1) decontrol of
urea, we think a key reason is that 18% capacity is still non-gas-based; however
(2) allows increase of Rs350/tonne in fixed cost for all urea firms and (3) reduces subsidy
rates for NBS fertilizers (we discuss why inside). Subsidy for DAP is cut by 20% effective
April 2011E, implying margin pressure unless (1) farmgate price is increased—major
hike is unlikely in our view—or (2) raw material prices decline. We believe impact from
urea fixed cost increase is marginally positive while raw material linkage through its
IMACID JV may limit major negative impact for TCL. Our est. remains unchanged.




No decontrol in urea; however increase of Rs350/tonne in fixed cost for all urea companies
The department of fertilizers (DoF) has rejected recommendation for decontrolling urea. The DOF
has allowed an increase of Rs350/tonne in fixed cost for all urea companies, irrespective of
whether units are gas-based. We believe this will translate into higher RPS of 3% and is marginally
positive for TCL.

18% of urea capacity is still on non-gas feedstock, urea decontrol likely post conversion
We believe a key reason for urea decontrol being postponed is given the import dependence of
urea, 18% of urea capacity is still on non-gas feedstock. At current international urea price of
US$330/tonne, operations of naphtha/fuel-oil based units which enjoy higher RPS of
Rs17,000/tonne (above US$380/tonne) are clearly unsustainable. We believe decontrol is likely
post conversion of these units. According to media reports, deadline for conversion is likely to be
fixed as 2012E.

DOF reduces subsidy rates for fertilizers under NBS
DOF has cut subsidy rates for P&K fertilizers. Subsidy for DAP has been cut by 20%, which implies
margin pressure unless (1) farmgate price is increased, a major hike in 2011E is unlikely in our view
or (2) raw material prices decline. Given the 30% increase in phos. acid YTD, it remains to be seen
whether any decline is possible. We believe strong raw material linkage TCL has through its
IMACID JV may limit major negative impact from the subsidy cut.

We believe cut in subsidy rates is to realign the domestic price to international price
We believe cut in subsidy is to (1) realign domestic price to international price, as seen in DAP.
In 1HFY11, DAP RPS amounts to Rs26,218/tonne, higher than the average international price of
US$473/tonne; therefore, the revised subsidy rates have been arrived at by using lower
benchmarks for international prices and (2) to correct the anomaly in international DAP prices,
which have risen by 55% in 1HFY11, higher than the 30% increase in phos. acid prices.


We believe cut in subsidy rates is to realign the domestic price to global price
We believe cut in subsidy rates is to
�� Realign the domestic price to international price, as seen in DAP.
Post implementation of NBS, (1) the farmgate price for fertilizers such as DAP increased by
Rs600/tonne and (2) the subsidy/tonne for DAP was fixed at Rs16,268 for FY2011E. This
lead to RPS of Rs26,218/tonne, higher than the average international price of DAP of
US$473/tonne seen in 1HFY11. Accordingly, the new rates have been arrived at by using
lower benchmarks for international prices.
�� Correct steep price hike in international DAP prices.
�� We notice that while phos. acid prices have increased 30% yoy in 1HFY11, DAP has shot
up by 55%. The Government wants to keep in check this steep price hike through its
large buyer status in DAP. India is a major player in global trade of DAP and historically
there has been a strong linkage in international DAP price and cost of production of DAP
in India.