Edelweiss: Fertilisers - subsidy increased significantly for non-urea fertilisers under NBS scheme;

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n  Substantial hike in subsidy for NBS fertilisers for FY12

·         Government of India (GoI) has increased the subsidy for various non-urea fertilisers under the Nutrient Based Subsidy (NBS) scheme for FY12 by ~10-15% from FY11 and by ~30-45% from its earlier announcement made for FY12 in November 2010.

·         This has been done on account of higher raw material prices for fertilizers, fueled by strong demand from geographies like US and Brazil and also to some extent on account of the unrest in some of the African countries that provide significant quantities of fertiliser raw materials.

n  NBS enabling fertiliser companies to innovate with enhanced flexibility

·         We have seen NBS being successful in encouraging companies to innovate and manufacture new grades of fertilisers for which they can approach the Department of Fertilizers and get those included under the subsidy net.

·         In this context, fertilisers under the subsidy net have been increased to 22 from the earlier 19.

·         This enables companies to have flexibility in terms of manufacturing new varieties of fertilisers depending upon soil requirement, to maximize the benefits to farmers as well to enhance the companies’ profitability.

n  New subsidy to help complex fertiliser companies to maintain margins

·         We expect that complex fertiliser companies like Coromandel International (Coromandel), Zuari Industries (Zuari) and GSFC will be able to maintain their margins in FY12 at par with those in FY11 on account of the higher subsidy announcement.    

·         However, while government has considered USD 580/MT for DAP to calculate the subsidy, the price of DAP has moved up further to USD 620/MT and if raw material prices do not come down in the next few months, we expect to see some farm gate price hikes. Nevertheless, we have considered farm gate prices, subsidy and raw material prices at current levels in our estimates,

n  Outlook and valuations: Upward revision in revenue and EPS

For major non-urea manufacturers in India like Coromandel, GSFC, and Zuari, the revenue contribution from manufactured NBS fertilisers in FY10 has been ~79%, 68% and 44%, respectively. Post the change in our fertiliser realisations on account of the farm gate price hikes taken by fertiliser companies, coupled with higher subsidy for FY12 and after considering higher raw material prices, we have revised up our EPS estimates for Coromandel and Zuari significantly. We have increased our EPS estimates for Coromandel by 27.4% to INR 28.0/share in FY12E and by 24.1% to INR 33.5/share in FY13E; and for Zuari by 15.4% to INR 118.3/share in FY12E and by 4.9% to INR 133.1/share in FY13E. As Chambal is predominantly into manufacturing of urea, we do not expect the latest development to have any significant impact on its financials. Based on DCF valuation, we arrive at a fair value of INR 395 for Coromandel (earlier INR 377) and INR 901 for Zuari (earlier 892). We maintain ‘BUY’ on Coromandel (CMP: INR 287) and Zuari (CMP: INR 596), and‘HOLD’ on Chambal (CMP: INR 70).