Fertilisers - New investment policy for urea structurally positive ::Edelweiss (PDF Link)

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

The new investment policy for urea approved by a Group of Ministers (GoM) links gas price to floor and ceiling prices and is expected to drive new urea capacities. This is likely to be positive for companies like Chambal Fertilisers, Zuari Industries, RCF, and Tata Chemicals, which had announced new capacity plans. However, fertiliser companies had requested the cap on gas prices to be raised to USD20/mmBTU from USD14/mmBTU considered in this policy. Now, the policy awaits the Cabinet Committee for Economic Affairs’ (CCEA) approval.

GOM approves new investment policy; CCEA nod next step

·       A GoM headed by Mr. Pranab Mukerjee cleared the new investment policy for urea proposed by the Saumitra Chaudhuri Committee.

·       The policy will now go to the CCEA for approval, post which it will be implemented.

·       The policy links floor and ceiling for urea prices for pegging of subsidy based on gas price. For every USD1 movement in gas price, floor and ceiling prices will move USD20. At a gas price of USD6.5/mmBTU for greenfield investments, floor price has been fixed at USD310/tonne and ceiling price at USD340/tonne (USD460/tonne and USD490/tonne respectively at gas price of USD14/mmBTU); for brownfield investments, prices will be USD290/tonne and USD320/tonne, respectively (USD440/tonne and USD470/tonne respectively at gas price of USD14/mmBTU). The existing urea investment policy links urea price to floor and ceiling prices of USD250/MT and USD425/ MT respectively, irrespective of the gas price.

·       All these numbers have been arrived at by the Saumitra Chaudhuri Committee based on the agenda of new urea investments to be allowed to earn RoE in 12-18% range.

Structurally positive for new investments

·       While the new investment policy continues to link the price of urea from new capex to import price parity (IPP) subject to floor and ceiling prices, linking these floor and ceiling prices to gas price as well is a key positive. This is likely to spur new capex in the urea space and the new projects are likely to earn handsome RoEs (refer to rough cut calculation in Table 1).

·       The only point of contention remains the cap on gas price which is currently at USD14/mmBTU against the Department of Fertilisers’ (DoF) demand of USD20/mmBTU.

·       The GoM mentions that the new investment policy is likely to be tweaked slightly taking into consideration requests from DoF, post which the CCEA is expected to approve it.

·       The new policy, coupled with the investment-linked deduction (incremental capex to be eligible for 100% deduction against taxable profits) announced by the government in last year’s budget are expected to drive new urea capacities.

Fertilisers - New investment policy for urea structurally positive; sector update