Fertiliser - Budget brightens prospects; :: Edelweiss PDF link

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The Budget 2012-13 provides for 150% investment linked deduction of capex for fertilisers from the current 100% deduction. In our view, the fertiliser companies incurring significant capex would eventually become MAT paying companies owing to these deduction benefits. Apart from this, govt announced various sops like custom duty exemption for fertiliser equipments, lowering of withholding tax on ECBs from 20% to 5% and moving towards direct subsidy payouts. While the budget is positive for the sector as a whole, Coromandel International (Coromandel) would be a key beneficiary in the near term.

Higher investment-linked deduction to boost investments

Allowing the investment linked deduction of capex for fertilisers at 150% against the current 100% (which was extended in last year’s budget) is extremely positive for new investments in the sector. This change is likely to result in EPS accretion as well as cash flow accretion for companies having significant capex vis-à-vis existing deduction @ 100% which is only cash-flow accretive. The hike of deduction to 150% is likely to yield immediate benefits for companies having smaller size capex plans like Coromandel; for new urea units where capex is huge, the benefit is likely to be back-ended. We expect incremental benefit INR570mn (~INR 2/share) accruing to Coromandel during FY13.

Over the long term, companies like Chambal Fertilisers, Zuari Industries, Tata Chemicals etc, which have plans to set-up new urea projects (subject to conducive policy) will be benefitted post commissioning of new urea units, which may take 3-4 years post commitment of capex. On account of the capex deduction benefit, we believe most fertiliser companies incurring huge capex would be eventually MAT paying companies.

Other key positives for fertilisers from the budget

·       Finance minister stated that during FY13, the subsidy transfer to wholesalers/retailers would be implemented (vis-à-vis the transfer being made to fertiliser companies currently). For this purpose, a mobile-based Fertilizer Management System has been designed to provide end-to-end information on movement of fertilisers and subsidies. Eventually, transfer of subsidy would happen directly to farmers over the next 2 years. This is likely to help fertiliser companies improve their working capital efficiency.

·       Withholding tax on ECBs is reduced from 20% to 5% for 3 years for the sector, which is likely to reduce funding cost for fertiliser companies.

·       Import of manufacturing equipment for fertilisers is exempted from custom duty (currently at 5%) for 3 years, which would lower project cost for new investments.

·       Govt reiterated that it would continue to pay subsidies in cash and not in bonds.

·       Govt also mentioned that it has taken steps to finalise pricing and investment policies for urea. However, no timeline has been provided for finalization of these two policies.

We currently have ‘BUY’ recommendation on Coromandel and Zuari Industries, and ‘HOLD’ on Chambal Fertilisers.

Fertiliser - Budget brightens prospects; sector update

Regards,