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Zuari Industries (ZUAR IN, INR 481, Buy)
We spoke to Mr. Suresh Krishnan, MD, Zuari Industries (Zuari), to get his views on the new urea investment policy approved by the Group of Ministers (GoM) and also an update on the company. The policy, which the company perceives to be balanced, is expected to spur new urea capacities and envisages good returns from capex in new urea projects. Zuari will take a final decision on the proposed greenfield urea project post the policy gets cabinet nod.Maintain ‘BUY’.
New policy likely to kick start urea capex
Management believes that the GoM approved new investment policy, which links gas price to floor and ceiling prices, will spur the much-needed urea capex in India. During FY11, India imported ~7mn MT of urea (~24% consumption), which is likely to jump to 10mn MT over the next three years. With the new policy likely to yield healthy RoEs of 12-20% for new urea projects, fresh plants are likely to come on stream to displace imports. Moreover, we believe with operational and capital efficiencies coupled with fiscal incentives, new urea units are likely to earn higher RoEs. While the fertiliser industry seems concerned about the upper cap of USD14/mmBTU on gas price for subsidy under this policy, we believe that the government will make suitable changes to the policy in case the price goes beyond this threshold.
Long-term gas agreements key
While individual urea companies will be free to enter into long-term agreements for gas linkages for new urea projects, the government is likely to scrutinise and approve these agreements. However, we believe gas agreements with GAIL would be the most feasible, more so in the context of the latter having the necessary infrastructure to import gas and supply it. With the new policy in place, the only threshold for financial closure of new urea projects will be long-term gas agreements.
Outlook and valuations: Capex on the way; maintain ‘BUY’
While Zuari is upbeat about the new urea investment policy, it is likely to take a final call regarding its proposed greenfield urea plant post final approval for the policy by the cabinet. Management guides for four year’s timeframe for the completion of the project from the start of capex. We currently have a ‘BUY’ recommendation on the stock.
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