indian fertilizer sector annual report analysis

8/12/2019 Indian Fertilizer Sector Annual Report Analysis

1/41INDUSTRY REPORT

Fertilizer Sector

Annual Report Analysis

Rohan [email protected]

+91-22-66121248

Chetan [email protected]+91-22-66121272

September 25, 2013


2/41

Fertilizer Sector Annual Report Analysis

Emkay Research September 25, 2013 2

Contents

Synopsis ...................................................................................................................................................................................................................................3

Chambal Fertilizers................................................................................................................................................................................................................ 13

Coromandel International..................................................................................................................................................................................................... 16

Deepak Fertilizers................................................................................................................................................................................................................. 19

GNFC....................................................................................................................................................................................................................................... 22

GSFC....................................................................................................................................................................................................................................... 27

Mangalore Chemicals .......................................................................................................................................................................................................... 31

NFL .......................................................................................................................................................................................................................................... 34

RCF.......................................................................................................................................................................................................................................... 37


3/41

Your success is our success

Emkay

3

AnnualRepo

rtAnalysi

Emkay Global Financial Services Ltd. 3

Fertilizer Secto

Affected by sharp rise in working capital

September 25, 2013

Chambal Fertilizers CMP: Rs35

Coromandel International CMP: Rs222

Deepak Fertilizers CMP: Rs107

GNFC CMP: Rs60

GSFC CMP: Rs50

Mangalore Chemicals CMP: Rs51

NFL CMP: Rs20

RCF CMP: Rs31

Performance of Indias fertiliser companies was not encouraging in FY13,

due to severe pressure the industry faced. Hence, we have analyzed some

key fertiliser firms and their balance sheets, and prepared the following

comparative analysis for the period FY11-13.

n After benefiting from Nutrient Base Scheme (NBS) in

complex fertiliser since 2010, industry players witnessed

pressure on profitability due to high inventory and rising

fertilizer prices in FY13

n Complex fertiliser volumes declined by 23% to 23mn mt in

FY13 after growing at a CAGR of 16% in FY08-12

n Delays in fertiliser subsidy payments from the government

and a sharp rise in receivables (increased 3.8x over FY11)

has spurred the working capital requirement

n The increase in working capital has been one of the biggest

challenges faced by the companies in FY13. It is also evident

from the rise in the working capital cycle from 45 days in

FY11 to 121 days in FY13

n Burdened by the spiraling working capital requirement, the

companies debt almost doubled from Rs202bn in FY11 to

Rs360bn by FY13 those covered in our analysis. D/E also

increased to 1.5x FY13 from 1x in FY11

n Higher debt also spurred the interest cost, as the companies

paid interest of Rs19.6bn in FY13 vs. Rs12.5bn in FY11. As a

result, 27% of EBIDTA went in interest payment in FY13 as

against 16% in FY11. The firms like NFL and Zuari Agro have

been affected the most due to the rise in interest cost

n Pressure on EBIDTA and higher interest cost, along with

increase in working capital, affected ROCE of the industry

sharply, which declined to 9.9% in FY13 from 18.7% in FY11

n Trading of complex fertiliser has been key a driving factor

for pushing the inventory in the system. However, it has

declined significantly in FY13, as it accounted for 16.2% of

total sales as against 24.4% in FY12 and 19.3% in FY11

n Favourable monsoon and the subsequent pick-up in demand

for fertiliser has been the only revival hope for the industry.

The industry is also optimistic about reduction in imports

and trading, which will help domestic manufacturers


4/41



A study of Management Discussion and Analysis (MDA) of variousfertilizer companies has highlighted the following points:

Enthusiasm about NBS is cooling off now

After the introduction of the Nutrient-Based Scheme (NBS) in FY10, where the government

partially decontrolled the complex fertilizer sector by introducing a fixed subsidy regime on

all complex fertilizers, the excitement in the industry is slowly receding now. Though NBSwas a step in the right direction, as it helped the industry in improving its efficiency, raw

material contracting and product innovations, longer-than-expected delays in covering urea

under NBS has taken some sheen of the policy.

Imbalanced use of fertilizer as price difference continues to widen between

urea and complex

On the one hand, complex fertilizer prices have been shooting up post the introduction of

NBS, as the same has increased from Rs 9350/mt in FY10 to Rs 24,000/mt by FY13 for

DAP, on the other, urea prices still being controlled by the government have not witnessed

any revision. This has resulted in imbalanced use of urea and complex fertilizer. As sales of

urea increased by 7% FY13/FY11, complex fertilizer sales dropped by 21% over the same

period.

Reduction in subsidies in line with the drop in global fertilizer prices

The financial year 2012-13 was the third year since the implementation of the NBS for P&K

fertilizers. The government has announced NBS rates for P&K fertilizers for 2013- 14.

Subsidy on DAP has been reduced by 14% to 12,350pmt (14,350pmt in the previous year),

while MoP by 22% to 11,300pmt (14,400pmt in the previous year). These rates have been

reduced by the government in line with the decline in global prices of DAP and potash. The

subsidy rates for complex fertilizers have been reduced based on the nutrients. Subsidy on

N is revised from 24.0/kg to 20.9/kg, P is reduced from 21.8/kg to 18.7/kg, and on K

from 24.0/kg to 18.8/kg.

Poor monsoon impacted demand; currency depreciation affected costs

Poor monsoons since the second half of FY12 and the whole of FY13 led to a drop indemand of complex fertilizers. Currency depreciation resulted in a sharp rise in prices of

both end-products and input costs, particularly natural gas, ammonia, phosphoric acid and

rock phosphate. The spike in international prices in FY12 worsened the situation further.

Management positive about monsoon; however, subsidy payment remains a

key concern

A favorable monsoon has buoyed the hope of most fertilizer companies in FY13, which

may help revive the flagging industry. The increase in MSP and the higher rural income are

likely to support the demand, thereby addressing the supply glut situation to a large extent.

Delays in government subsidy payments and mounting receivables have been the key

concerns of most companies in the current year. Volatili ty in currency also remains a major

concern for the industry.

Enthusiasm about NBS wades

as lop sided policy leads to

imbalance fertilizer use

Monsoon and rupee

depreciation impact growth andprofitability

Early monsoon arrival with wide

distribution positive for the

sector though timely receipt of

subsidy remains a concern


5/41



Our analysis of key financials

Deterioration in working capital cycle

Receivable days increase d to 113 from 34 days as industry faces inventory

and subsidy issues

Working capital requirement of the industry has been affected significantly, mainly due to asharp increase in receivables. Higher inventories in the system, largely with distributors,

have affected collections . As a result, trade receivables for the companies in our analysis

increased 3.8x in FY13/FY11, resulting in increase in receivable days to 113 days in FY13

from 34 days in FY11. Delays in government subsidies also affected receivables of the

industry. However a large share of subsidies pending has been received in H1FY14 which

is likely to improve companies balance sheet going forward.

Exhibit 1: Aggregate Receivable Days

34

75

113

0

20

40

60

80

100

120

FY11 FY12 FY13

Numberofda

ys

Source: Company, Emkay Research

Exhibit 2: Receivable Days by company

Company Name FY11 FY12 FY13

RCF 55 109 135

Chambal Fertilizers 44 106 158

GSFC 65 96 166

Deepak Fertilizers 57 84 87

Coromandel International 10 35 73

GNFC 53 73 100

Mangalore Chemicals & Fertilizers 6 33 24

NFL 100 121 170

Zuari Agro 51 164 198

IFFCO 3 32 56Source: Company, Emkay Research

Inventory and Payables days increased marginally

Inventory days increased marginally from 36 days in FY11 to 44 days in FY13. Inventory

days have not witnessed significant changes, as companies have passed on the burden of

higher inventory to distributors.

Payable days of the industry rose from 26 days to 36 days. While other players have the

benefit a credit period of 20-40 days, Coromandel International has been able to enjoy

higher credit days of 96 days, which has helped the company to keep its working capital

cycle under control.

Exhibit 3: Aggregate Inventory Days

36

42

44

32

34

36

38

40

42

44

46

FY11 FY12 FY13

Numberofda

ys


Exhibit 4: Inventory Days by company


RCF 35 65 63


GSFC 42 43 39



GNFC 57 56 54


NFL 23 26 23

Zuari Agro 51 47 43



6/41



Exhibit 5: Aggregate Payable Days

26

34 36

0

5

10

15

20

25

30

35

40

FY11 FY12 FY13

Numberofdays


Exhibit 6: Payable Days by company


RCF 33 70 39


GSFC 23 33 31

Deepak Fertilizers 15 32 28Coromandel International 72 77 96

GNFC 34 44 19


NFL 27 22 18

Zuari Agro 27 46 25


Working capital goes up to 121 days from 45 days

The working capital cycle of almost all the players analyzed by us deteriorated significantly.

The working capital days for the peer set analyzed by us deteriorated from 45 days in FY11

to 121 days in FY13, mainly due to a rise in receivable days.

Though there has been deterioration in working capital of almost all companies, Zuari Agro,

Chambal Fertiliser, RCF and GSFC have witnessed the maximum increase in working

capital.

Exhibit 7: Aggregate Working Capital Cycle

45

84

121

0

20

40

60

80

100

120

140

FY11 FY12 FY13

Numberofdays


Exhibit 8: Working Capital Cycle by company


RCF 57 105 159


GSFC 84 106 175



GNFC 76 85 135


NFL 96 125 174

Zuari Agro 74 165 216



7/41



Significant increase in leveraging

As fertiliser companies have witnessed a s ignificant increase in working capital, this has

adversely affected their balance sheets. Debt on the companies balance sheet has almost

doubled to Rs360bn by FY13 from Rs202bn in FY11. As a result, D/E of the companies in

our analysis increased from 1x in FY11 to 1.5x by FY13.

Deterioration in net debt/equity has even been sharper since it increased from 0.7x to 1.4x.A drop in cash and equivalents from Rs64bn in FY11 to Rs23bn by FY13 has affected

companies balance sheets further, as surplus cash has been used in funding working

capital requirement.

The companies like National Fertiliser and Zuari Agro have seen sharp deterioration in their

balance sheets.

Exhibit 9: Aggregate D/E

1.0

1.4 1.5

0.0

0.2

0.4

0.6

0.81.0

1.2

1.4

1.6

FY11 FY12 FY13

D/Ex


Exhibit 10: D/E by company


RCF 0.2 0.6 0.7

Chambal Fertilizers 1.5 2.0 2.7

GSFC 0.1 0.2 0.4

Deepak Fertilizers 0.7 0.6 0.8

Coromandel International 0.8 1.2 1.3

GNFC 0.4 0.5 1.0

Mangalore Chemicals & Fertilizers 0.4 2.4 2.1

NFL 0.4 1.7 3.0

Zuari Agro 1.0 3.5 4.1

IFFCO 2.5 2.3 1.7Source: Company, Emkay Research

Exhibit 11: Aggregate Net Debt to Equity

0.7

1.1

1.4

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

FY11 FY12 FY13 Source: Company, Emkay Research

Exhibit 12: Net Debt to Equity by company


RCF 0.0 0.3 0.7

Chambal Fertilizers 1.1 1.8 2.5

GSFC -0.1 -0.1 0.3

Deepak Fertilizers 0.4 0.5 0.5

Coromandel International 0.3 0.8 1.1

GNFC 0.3 0.4 1.0

Mangalore Chemicals & Fertilizers 0.3 2.2 2.1

NFL 0.3 1.7 3.0

Zuari Agro 0.6 3.1 3.9

IFFCO 1.9 2.1 1.7Source: Company, Emkay Research


8/41



Profitability under pressure

Sharp jump in interest cost has eroded a large share of profitability

Increase in debt has adversely affected the interest cost of the industry, as the interest

outgo of the companies covered in our analysis increased by 57%. The interest coverage

ratios deteriorated significantly for the analyzed peer set from 6.2x in FY11 to 3.7x in FY13.

The industry has paid 27% of its EBIDTA in interest payment in FY13 as against 16% inFY11. Here, too, due to hugely leveraged balance sheet, the companies like NFL and Zuari

Agrochem have witnessed complete erosion in profitability due to payment of interest.

Exhibit 13: Interest as a percentage of EBITDA

0%

15%

30%

45%

60%

75%

RCF

Chambal

Fert

ilizers

GSFC

De

epak

Fert

ilizers

Corom

andel

Interna

tional

GNFC

Mang

alore

Chemi

cals&

Fertilizers

ZuariAgro

IFFCO

NFL

Industry

FY11 FY12 FY13


EBITDA margin contraction due to higher sales, though absolute EBIDTA

down marginally

EBITDA margins of the peer group, which we have compared, have shrunk from 12% in

FY11 to 9.4% in FY13. However, the aggregate EBIDTA of the companies covered

dropped marginally by 6% in absolute terms. The increase in fertilizer prices boosted the

top line without a proportionate increase in per mt EBIDTA, contributing to a drop in

EBIDTA margins.

Exhibit 14: Aggregate EBITDA Margins (%)

12%

10%

9%

8%

9%

9%

10%

10%

11%

11%

12%

12%


Exhibit 15: EBITDA Margins by company


RCF 8% 9% 9%

Chambal Fertilizers 14% 12% 9%

GSFC 26% 24% 15%

Deepak Fertilizers 24% 26% 14%

Coromandel International 15% 11% 9%

GNFC 17% 15% 15%

Mangalore Chemicals & Fertilizers 6% 6% 7%

NFL 5% 5% 1%Zuari Agro 7% 5% 5%

IFFCO 11% 9% 11%



9/41



Higher Interest cost and lower margins affected companies bottom line

adversely

An increase in interest cost, coupled with a drop in margins, has led to contraction in net

profit margins across the board. At the industry level, the PAT margin contracted to half

from 6% in FY11 to 3% in FY13. In absolute terms, the net profit was lower by 33%

between FY11and FY13. The contraction in margin has been steeper for the companies

with large contributions from chemical and complex fertilizers compared to urea players. Onthe other hand, tax expenses have remained steady at 32% in FY13 compared with 33%

and 29% in FY12 and FY11, respectively.

Exhibit 16: Aggregate PAT Margin

6%

4%

3%

0%

1%2%

3%

4%

5%

6%

7%


Exhibit 17: PAT Margin by company


RCF 4% 4% 4%


GSFC 15% 14% 8%



GNFC 9% 7% 6%Mangalore Chemicals & Fertilizers 3% 2% 2%

NFL 2% 2% -3%

Zuari Agro 3% 2% 1%

IFFCO 4% 3% 3%Source: Company, Emkay Research

Trading activity declined due to huge inventory in the system

Trading activity increased sharply during FY11-12, as companies wanted to benefit from

the NBS, besides non-complex fertilizer manufacturers, too, entered in market to reap the

benefit of their distribution system. However, a sharp jump in inventories, delays in subsidy

payments from the government and mounting receivables have discouraged trading activity

in FY13, mainly in H2FY13. As a result, trading as % of sales dropped to 16% in FY13 asagainst 24% in FY12 and 20% in FY11.

While players like Chambal Fertiliser and Zuari Agro increased their trading significantly, a

few new significant players such as GSFC also emerged.

Exhibit 18: Aggregate Purchase of traded goods as a percentage of sales

20%

24%

16%

0%

5%

10%

15%

20%

25%

30%

FY11 FY12 FY13

Percentage


Exhibit 19: Purchase of traded goods as a percentage of sales


RCF 23% 29% 13%


GSFC 0% 0% 16%


Coromandel International 11% 19% 17%GNFC 2% 4% 2%


NFL 2% 0% 0%

Zuari Agro 37% 46% 38%

IFFCO 27% 29% 8%Source: Company, Emkay Research


10/41



Return ratios deteriorated as working capital goes up

ROCE down from 18% to 10%

The confluence of events highlighted above led to a sharp contraction in RoCE of the

analyzed peer set. The RoCEs for the peer sets dropped from 18.7% in FY11 to 9.9% in

FY13. The drop was largely on account of higher capital employed due to a sharp increase

in working capital.

Exhibit 20: Aggregate RoCE (%)

19%

14%

10%

0%

5%

10%

15%

20%


Exhibit 21: RoCE (%) by company


RCF 15% 15% 12%


GSFC 43% 36% 15%



GNFC 13% 13% 9%


NFL 9% 5% -1%Zuari Agro 19% 9% 7%

IFFCO 13% 11% 12%



11/41



Other qualitative analysis from annual reports

Raw material availability and cost impacted profitability: The availability of rawmaterials impacted sales and profitability of companies to a large extent. Inadequate

availability of phosphatic inputs , due to supply-side issues and higher international

prices, impacted the timely availability of the same. Further, volatility on input prices,

particularly in global markets impacted the performance. As far as complex fertilizerplayers are concerned, volatility in prices and availability of phos acid impacted growth.

Further, the companies in the chemical space such as GSFC and Deepak Fertilizers

were impacted by adverse spreads in raw material and output prices. As far as urea

players are concerned, they were impacted by a lack of availability of natural gas in

domestic markets . As a result, companies had to resort to imports.

Sharp increase in traded goods portfolio in end-FY12 added to supply glut: Asharp increase in the traded goods portfolio of most of these companies in FY12

accentuated the supply glut witnessed in FY13. Most companies tried to benefit from

the NBS and rising prices of complex fertilizer in global markets. Most of these imports

came into the country in the second half of FY12. The rising complex fertilizer prices,

along with adverse weather conditions in FY13, led to the inventory pile up with

dealers and distributors. Monsoons to help revive growth:The early onset of the monsoons in FY14, coupled

with healthy distribution of the same, has led to an increase in acreage in the current

year. As a result, the industry participants expect the inventory situation to improve in

the current year. Our analysis of the annual reports of the peer set points towards the

fact that after witnessing a tough couple of years, industry participants are hopeful that

supply-side issues would be addressed this year, primarily due to good monsoons.

Receivable materialization to help reduce strain:On the balance sheet front, thecompanies expect the strain to reduce, particularly on the receivables side, primarily

due to release of pending subsidies. This will help ease some amount of pressure as

far as the financial performance is concerned. Further, with the government releasing a

large part of last years subsidy, the strains may ease a bit; however, with the swift

depreciation in the rupee, the governments subsidy budget is expected to overshooteven in the current year, which may lead to delayed payments for this year.

Rupee depreciation may weigh on positive effects of a good monsoon:Rupeedepreciation poses a key worry, as it may weigh negatively on input costs of these

companies , while at the same time make imported fertilizers costlier. Further, as some

of these companies have foreign currency loans, the translation effect will impact their

financial performance. Currency depreciation may also lower the benefit of softening

input prices like ammonia, phosphoric acid, urea and DAP, which will help cushion

some impact of the swift rupee depreciation.

Thus, the revival in the monsoons though may provide a silver lining to the industry, the

receivable situation and the impact of rupee depreciation will weigh negatively on the

sector. The ability of the government to release subsidies in a timely manner needs to be

watched closely. On the positive side, the increase in the MSP and the higher rural income

will help revive demand, thereby addressing the supply glut situation to a large extent.


12/41



Exhibit 22: Key take away

Company Name Positives Negatives

RCF Early onset of monsoons leading to better sowing Rupee depreciation likely to impact raw material costs

High volatility in input prices and increased competition inthe chemical segment leading to volatility in profitability

Chambal Fertilizers Early onset of monsoons to help revive demand

Drop in international prices of raw material to provide somecushion from the swift depreciation of currency

Significant increase in landed price of natural gas

Expect tough conditions in shipping business to continue

GSFC Early onset of monsoons to help revive demand High inventory in the system which will take sometime to

correct

Deepak Fertilizers Ltd. Revival in monsoons to provide some fillip High cost of ammonia impacting profitability

Sluggish demand from the mining sector impacting TANbusiness

Coromandel International Focus on international markets of Brazil, South Africa and

South East Asia for its Agrochemical business

Revival in monsoons to help address the glut in the market

Rupee depreciation to impact raw material costs

NBS based fertilizer subsidy for complex fertilizer players

may be reduced to contain the subsidy billMangalore Chemicals

& Fertilizers

Conversion from naphtha to gas to be c ompleted by mid 2014 Sharp increase in furnace oil cost to impact performance

NFL Revival in monsoons to provide some fillip High amount of receivables of subsidy both on account of

sales and capital expenditure

GNFC Revival in monsoons to provide some fillip

New TDI plant commissioning to aid in growth of chemical

segment

Lower raw material and fertilizer prices in the internationalmarkets to provide some cushion from depreciating currency

ANP fertilizer sales may be impacted due to supply slut,

low er international prices and government indication on

selling prices

Currency depreciation and increasing fuel cost could impact

margins

Source: Emkay Research, Company


13/41


Emkay

13

AnnualRepo

rtAnalysi


Chambal Fertilisers

Challenges in all the segments

September 25, 2013

Rating

Accumulate

Previous Reco

Buy

CMP

Rs35

Target Price

Rs63

EPS Chg FY14E/FY15E (%) NA/NA

Target Price change (%) -36

Nifty 5,874

Sensex 19,856

Price Performance

(%) 1M 3M 6M 12M

Absolute 4 -1 -32 -52

Rel. to Nifty -2 -6 -36 -55

Source: Bloomberg

Relative price chart

30

40

50

60

70

80

Sep-12 Nov-12 Jan -13 Mar-13 May-13 Ju l-13 Sep-13

Rs

-60

-48

-36

-24

-12

0%

Chambal Fertilisers (LHS) Rel to Nifty (RHS)

Source: Bloomberg

Stock DetailsSector Agri Input & Chemicals

Bloomberg CHMB IB

Equity Capital (Rs mn) 4,162

Face Value(Rs) 10

No of shares o/s (mn) 416

52 Week H/L 77/ 31

Market Cap (Rs bn/USD mn) 14/ 230

Daily Avg Volume (No of sh) 1,671,516

Daily Avg Turnover (US$mn) 0.9

Shareholding Pattern (%)

Mar'13 Dec'12 Sep'12

Promoters 55.7 55.1 55.1

FII/NRI 7.5 8.3 9.6

Institutions 9.9 9.9 9.2

Private Corp 6.1 6.3 6.1

Public 20.9 20.4 19.9

Source: Bloomberg

n Chambal Fertilisers focus remains on urea and trading of

complex fertilizer, it is leveraging its distribution strength.

Trading of non-urea fertilizer products like specialty and

water soluble fertilizer contribute higher profit margins

n Trading revenues doubled from Rs14.5bn in FY11 to Rs31bn

by FY13, and its contribution to profit also increased from

17% to 36% in FY13/FY11. However, trading is likely to

soften in current year due to huge inventory in the system

n Higher uses of spot RLNG, due to lower availability of natural

gas, pushed production cost of urea and has affected

profitability

n Worldwide shipping business continues to remain sluggish,

with pressure on freight rates. This has adversely impacted

the performance of the business and the outlook for shippingindustry continues to remain weak

n Performance of the textile business at the beginning of FY13

was under pressure. However, it has picked up momentum

from second quarter onwards

n Working capital deteriorates on account of increase in

receivables and inventory days and, more importantly,

delays in government subsidies

n The recent swift depreciation in the rupee is likely to add to

pressures on profitability, particularly on account of the

higher cost of landed natural gas prices

n Further, the company has witnessed an increase in short-

term foreign currency loans in FY13 to finance the working

capital need. Hence, the rupee depreciation would have a

negative impact on the same

n Sharp jump in working capital days from 46 days in FY11 to

185 days by FY13 has increased the companys debt as D/E

goes up to 2.7x from 1.5x


14/41

Chambal Fertilisers Annual Report Analysis


High cost pressure and supply glut impact profitability

The lack of availability of domestic natural gas , coupled with the supply glut in the

phosphatic and complex fertilizer space, led to increased pressure on profitability of the

company in FY13. The natural gas cost continued to inch higher in FY13, primarily due to a

lack of availability of indigenous gas supply. As a result, the company had to resort to

import of high cost natural gas. The average cost of gas increased 35% in FY13 yoy, which

led to a significant increase in cost pressure for the manufactured fertilizer segment. Thesegment level EBIT margin slipped to 13.2% in FY13 as against 16.7% in FY12.

The supply glut created in the second half of FY12 intensified in FY13, primarily due to poor

monsoons in FY13. The phosphatic segment witnessed a significant deterioration in the

profitability margins in FY13, due to the supply glut created in the market since H2FY12.

Exhibit 1: Sales and EBITDA Margin

-

20

40

60

80

100

FY11 FY12 FY13

RsBn

0%

2%

4%6%

8%

10%

12%

14%

16%

P

ercentage

Sales EBITDA Margin


Shipping business continues to face pressures

The global shipping industry continues to remain under pressure, mainly on account of the

large demand-supply mismatch that has been created in the recent past. The shipping

division of the company continued to remain under pressure in FY13. The company

expects the shipping division to remain under pressure in the near term, as the supply glut,though has abated a tad, continues to remain the key overhang.

Textile division witnesses some improvement

The textile division witnessed some improvement in FY13 on the back of increase in

capacity utilization from 86.4% in FY12 to 93.2% in FY13. With some improvement in

demand, the company expects the performance of its textile division to remain stable to

negative, as the positive impact of falling input prices is expected to be offset by increasing

labour, power and fuel costs.

Software division continued to remain under pressure

The software business continued to remain under pressure even as the company

undertook various initiatives to turn around the performance of the software division. The

drop in revenue was attributed to a loss of a big client in CY12. The recent initiatives bothon rejig of top management and the cost rationalization exercise will help turn around the

performance of the division.

Exhibit 2: Segment Margins

15% 17% 13%

0%

14%

0%

6% 6% 7%

16%

-6% -7%

11%

-4%

5%0%

-17% -19%

-30%

-20%

-10%

0%

10%

20%

FY11 FY12 FY13

Own manufactured urea P2O5

Trading Shipping

Textile Software & Others Source: Company, Emkay Research

Exhibit 3: Segment Margin Contribution

-50%

0%

50%

100%

150%

FY11 FY12 FY13

Own manufactured urea P2O5

Trading Shipping

Textile Software & Others



15/41

Chambal Fertilisers Annual Report Analysis


Working capital deteriorates on account of increase in receivables and

inventory days:

The working capital of the company continued to deteriorate in FY13, led byincreased pressure on receivables , including subsidy receivables from the

government. The number of debtor days increased significantly from 44 days in

FY11 to 159 days in FY13.

The gross debt to equity ratio deteriorated from 1.63x in FY11 to 2.7x in FY13.The days on inventory inched higher to 55.8 days in FY13 from 27.3 days in FY11.The increase is largely attributed to a significant increase in inventory of traded

goods, which rose from Rs1597.7mn in FY12 to Rs6708.1mn in FY13.

Exhibit 4: Working Capital Cycle

22 28

5544

106

158

19 23 28

46

111

185

0

50

100

150

200

FY11 FY12 FY13

Inventory Days Receivable Days

Payable Days Working Capital Cycle Source: Company, Emkay Research

Exhibit 5: Purchase of Traded Goods

-

5

10

15

20

25

30

35

FY11 FY12 FY13

R

sbn

0%

10%

20%

30%

40%

Aspercen

tageofsales


Exhibit 6: Net Debt to Equity and Interest Coverage

0

1

1

2

2

3

3

FY11 FY12 FY13

NetDebtto

Equity

0

1

2

3

4

5

6

7

8

InterestCover

ageRatio

Net Debt to Equity Interest Coverage Source: Company, Emkay Research

Exhibit 7: RoCE

14%

13%

8%

6%

7%

8%

9%

10%

11%12%

13%

14%

15%

FY11 FY12 FY13

Percentag

e


Rupee depreciation to further add to pressures

The recent swift depreciation in the rupee is likely to add to pressures on profitability,

particularly on account of a higher cost of landed natural gas prices. Further, the companyhas witnessed an increase in short-term foreign currency loans in FY13 to finance the

working capital requirement. Hence, the rupee depreciation would have a negative impact

on the same.

Sharp fall in receivables, repayment of working capital loans and revival in

demand to act as key catalyst

Going forward, a sharp fall in receivables , particularly in the form of receipt of outstanding

subsidy, coupled with the paring down of short-term debt, is likely to lead to easing of

pressure on the balance sheet. Further, the benefits of a drop in international prices of

urea, ammonia and DAP may not be available completely, largely due to the swift

depreciation of the rupee.


16/41


Emkay

16

AnnualRepo

rtAnalysi


Coromandel International

Demand revival could counter rupee impact

September 25, 2013

Rating

Hold

Previous Reco

Buy

CMP

Rs222

Target Price

Rs286



Nifty 5,874

Sensex 19,856

Price Performance

(%) 1M 3M 6M 12M

Absolute 17 28 14 -22

Rel. to Nifty 10 21 8 -26

Source: Bloomberg


150

180

210

240

270

300

Sep-12 Nov-12 Jan -13 Mar -13 May-13 Jul -13 Sep-13

Rs

-50

-38

-26

-14

-2

10%

Coromandel International (LHS) Rel to Nifty (RHS)

Source: Bloomberg


Bloomberg CRIN IB

Equity Capital (Rs mn) 283

Face Value(Rs) 1


52 Week H/L 304/ 162

Market Cap (Rs bn/USD mn) 63/ 1,004

Daily Avg Volume (No of sh) 132,885




Promoters 63.8 63.8 63.8

FII/NRI 6.5 7.3 7.3



Public 17.1 17.2 17.3

Source: Bloomberg

n Adverse weather conditions in the second half of FY12 and

whole of FY13 impacted volume growth in the key markets

of the company

n The company has slowed down production during the year to

align with the market requirement and also to avoid excess

inventory buildup

n The timely purchase of raw materials and proactive foreign

exchange management have helped the company to improve

its overall performance

n The crop protection unit of the company registered a 11%

growth on the top line, despite adverse weather conditions,

primarily due to the complete integration of the Sabero

acquisition with the company

n With its increased range of captive technicals, strategic

partnerships to source new products, strong pipeline of off-

patent products and a presence in growing geographies and

segments, the crop protection segment to grow stronger

n Coromandel completed the capacity expansion at Kakinada,

and commissioned the new third granulation train (C-Train),

as well as associated support facilities in 2012-13

n During the year, the company acquired a 53.62% stake in

Liberty Phosphate Ltd., leading manufacturers of Single

Super Phosphate (SSP),with a presence North India, to

strengthen its presence in SSP

n With acquisition of Liberty, Coromandel has achieved a tal

capacity of around5mn mt. Urea trading completes its

product basket of fertilizer

n Efficient management of working capital has helped the

company in managing its debt. Its working capital days at 36

in FY13 is the lowest in the peer set

n Though companys D/E increased to 1.3x from 0.8x, mainly

due to delays in subsidy and capex, it still remain lower than

the industry average


17/41

Coromandel International Annual Report Analysis


Adverse weather conditions and rupee depreciation impacts growth:

The adverse weather conditions in the second half of FY12 and whole of FY13 impacted

volume growth in the key markets of the company. In absolute terms, the overall market for

complex fertilizers contracted by 25-30% in FY13. Further, the rupee depreciation in FY13

led to an increase in prices of P&K fertilizers without a corresponding increase in urea. As a

result of this lop sided policy, the demand for P&K fertilizers contracted in FY13. The farmer

earning capability was also impacted in FY13, due to the poor monsoon. As a result, theofftake was lower. The supply glut created in the system further added to these existing

pressures.

On the positive side, the formulation business witnessed a growth of 16% in FY13.


60

70

80

90

100

110

FY11 FY12 FY13

Rsbn

0%

2%4%

6%

8%

10%

12%

14%

16%

EB

ITDAMargi

Sales EBITDA Margin


Crop protection unit performs well, despite adverse weather conditions

The crop protection unit of the company registered a 11% growth on the topline, despite

adverse weather conditions , primarily due to the complete integration of the Sabero

acquisition with the company. The integration helped Sabero to reach newer geographies.

As a result, the company was able to register topline growth. Going forward, the company

management is upbeat about the prospects of this business unit. With the onset of early

monsoons and given the wide distribution of rainfal l, the management expects this

business unit to clock in higher growth, led by leveraging Coromadels presence in the

Brazilian markets, one of the largest agro-chemicals market, and its vast retail presence.

Further, Sabero currently has a robust pipeline of products, which will be able to help

achieve better growth going forward.

Specialty nutrient business unit: Focus on crops to drive growth

The specialty nutrient business unit witnessed weak performance, primarily on the back of

adverse weather conditions and high level of sulphur product stocks in the pipeline.

However, the water soluble fertilizer business and micro-nutrients performed well,

registering a growth of 14% and 16%, respectively. The management remains focused on

developing this particular business unit, due to its vast growth potential. As a result, thecompany has put in place a team to adopt a crop-based approach to identify high potential

crops and drive growth.


18/41

Coromandel International Annual Report Analysis


Prompt inventory management helps control working capital, though

receivable inch higher

Days of trade receivables continued to inch higher in FY13, moving up to 73.5 days

compared with 9.8 days in FY11. The receivable days started inching higher from FY12

onwards , and the same continued in FY13. However, despite the glut in the system , the

company was able to manage its inventory well. As a result, the inventory days improved in

FY13 to 59.7 days as against 70.8 days in FY12. Further, this was evidenced by theincrease in market share of the company, despite a difficult environment in FY13.


72 7059

10

35

7372 77

96

9

28 36

0

20

40

60

80

100

120

FY11 FY12 FY13

Days


Payable Days Working Capital Days Source: Company, Emkay Research

Exhibit 3: Purchase of traded goods

5

7

9

11

13

15

17

19

21

FY11 FY12 FY13

Rsbn

0%

5%

10%

15%

20%

25%

A

sapercentageofsales

Purchase of traded goods As a percentage of sales


The net debt-to-equity ratio, though inched higher to 1.1x in FY13 vs. 0.3x in FY11,the

same is attributable to a couple of acquisitions made by the company n these 3 years,

along with a capacity expansion project at its Kakinada plant.

Exhibit 4: Net Debt to Equity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

FY11 FY12 FY13

NetDebttoEquity

0

2

4

6

8

10

12

14

InterestCoverage

Net Debt to equity Interest Coverage Source: Company, Emkay Research

Exhibit 5: RoCE (%)

43%

25%

17%

0%

10%

20%

30%

40%

50%

FY11 FY12 FY13


Monsoons to help revive demand, though rupee depreciation to impactperformance

The early onset of the monsoon, coupled with adequate pan-India coverage, is likely to

help increase sales in FY14. Further, with the Liberty Phosphate acquisition, the company

will be able to increase its presence in north Indian markets.

The rupee depreciation may impact the performance negatively, since the company imports

a large part of its raw materials.


19/41


Emkay

19

AnnualRepo

rtAnalysi


Deepak Fertilisers

Input cost pressures visible

September 25, 2013

Rating

Buy

Previous Reco

Buy

CMP

Rs107

Target Price

Rs115

EPS Chg FY14E/FY15E (%) NA


Nifty 5,874

Sensex 19,856

Price Performance

(%) 1M 3M 6M 12M

Absolute 25 14 15 -21

Rel. to Nifty 17 7 9 -25

Source: Bloomberg


80

94

108

122

136

150

Sep-12 Nov-12 Jan -13 Mar -13 May-13 Jul -13 Sep-13

Rs

-40

-30

-20

-10

0

10%

Deepak Fertilisers (LHS) Rel to Nifty (RHS)

Source: Bloomberg


Bloomberg DFPC IB


Face Value(Rs) 10


52 Week H/L 144/ 81






Promoters 43.3 43.3 43.3

FII/NRI 13.1 13.2 13.2



Public 28.1 28.0 27.9

Source: Bloomberg

n Management is expecting a recovery in its agri-business

based on a favorable monsoon after 2 years of drought

n

Weak currency and significant delays in subsidy paymentshave adversely affected the companys profitability in the

current year

n Global supply-side constraints in key raw materials like

Natural Gas, Ammonia, Phosphoric Acid and Propylene

continued to pose problems in FY13

n Rising cost of inputs like ammonia affected margins in the

chemicals segment. Globally, ammonia shortages, driven by

lower gas output in Trinidad and the delayed commissioning

of new capacities in the Middle East, pushed ammonia prices

n The company expects shale gas finds in the US to provide

succor, and the medium to long-term outlook for ammonia to

turn positive

n The company has gained a market share in few chemicals

like Iso Propyl Alcohol (IPA) and Technical Ammonium

Nitrate (TAN), and has retained a market share in Nitric Acid

n In TAN, the company is targeting 70% of the domestic

market share. Expectations of a pick-up in the domestic

mining sector, except for iron ore, is expected to drive its

TAN business

n Agri-business continues to remain the focus area for the

company, as it is augmenting the fertilizer capacity for a

new 6,00,000mt NPK plant at Taloja and a new 30,000mt

Bentonite Sulphur plant in the North

n Despite the weak fertilizer sector environment domestically,

the companys fertilizer sales volumes declined only by 9%

n Working capital deterioration visible in FY13, as working

capital days increased from 78 in FY11 to 92 in FY13

n Currency depreciation poses a risk, while the monsoons to

provide some fillip


20/41

Deepak Fertilisers Annual Report Analysis


Adverse weather conditions and high input prices impacted performance

Averse weather conditions in FY13 largely impacted growth of the agri-business. High

prices of ammonia in international markets impacted profitability of the company in FY13.

The proportion of traded goods to segment sales for the chemicals segment inched higher

in FY13, while that for the agri-business continued to remain elevated. The EBIT margin of

the chemicals segment dropped considerably to 14.7% in FY13 vs . 22.8% in FY12. The

drop was largely on account of an increase in proportion of sales of traded goods and lowermethanol production and sales on account of unviable margins for the product in FY13.


-

5

10

15

20

25

30

FY11 FY12 FY13

Rsbn

0%

5%

10%

15%

20%

25%

30%

Percentage

Sales EBITDA Margin


Chemicals segment margins come under pressure

The chemicals business segment managed to register a topline growth of 18% yoy in

FY13, despite a tough regulatory environment for the mining sector. The growth was largely

led by higher production and sales of TAN, which helped achieve growth along with IPA.

However, the growth was negatively impacted by a significant drop in methanol sales ,

primarily due to lower margins available for methanol throughout the year. The margins

came under pressure on the back of increasing input costs . As a result, segment margins

dropped from 22.8% in FY12 to 14.8% in FY13. In the short term, the company expects the

input cost pressures to continue, primarily on the back of the depreciating rupee and the

lack of availability of domestically sourced natural gas.


30%

23%

15%

6%

12% 11%

0%5%

10%

15%

20%

25%

30%

35%

FY11 FY12 FY13

Chemicals Fertilizers Source: Company, Emkay Research

Exhibit 3: Segment Revenue Contribution

66% 59% 63%

33% 40% 37%

1% 0% 0%

0%

20%

40%

60%

80%

100%

FY11 FY12 FY13

Chemicals Fertilizers Realty



21/41

Deepak Fertilisers Annual Report Analysis


Working capital deterioration visible in FY13

The working capital of the company deteriorated in FY13 marginally to 92 days from 78

days in FY11.

The percentage of traded goods sales to total sales steadily inched higher to 24.9% in

FY13 from 16.5% in FY11, which further led to lower margins.

However, the companys balance sheet remained relatively stable, as the D/E ratioincreased marginally FY13 to 0.8x from 0.72x in FY11.

Exhibit 4: Working Capital Cycles

35 32 33

57

84 87

15

32 28

78 84 92

0

20

40

60

80

100

FY11 FY12 FY13

Days




-1

2

3

4

5

6

7

FY11 FY12 FY13

Rsbn

0%

5%

10%

15%

20%

25%

Asapercentageofsales

Purchase of traded goods As a percentage of sales


Exhibit 6: Net Debt and Interest Coverage

0.0

0.1

0.2

0.3

0.4

0.5

0.6

FY11 FY12 FY13

NetDebttoEquit

0

2

4

6

8

10

InterestCo

verage


Exhibit 7: RoCE

21%

31%

14%

0%

5%

10%

15%

20%

25%

30%

35%

FY11 FY12 FY13


Currency depreciation poses a risk, while monsoons to provide some fillip

An early and sufficient monsoon is likely to help provide some a fillip to the company in

FY14, as the supply glut situation adjusts itself in the current financial year. However, the

swift depreciation of the currency may have a negative impact, primarily due to ECBexposure in the form of debt to the tune of Rs2058.1mn as at the end of FY13. Further, as

the company imports around 25% of its raw material requirements, margins may be

impacted, though correction in international prices of inputs may help in absorbing some of

the rupee depreciation.


22/41


Emkay

22

AnnualRepo

rtAnalysi


GNFC

Chemicals business suffer from weak environment

September 25, 2013

Rating

Buy

Previous Reco

Buy

CMP

Rs60

Target Price

Rs105



Nifty 5,874

Sensex 19,856

Price Performance

(%) 1M 3M 6M 12M

Absolute -8 -20 -16 -28

Rel. to Nifty -13 -25 -21 -32

Source: Bloomberg


50

58

66

74

82

90


Rs

-40

-30

-20

-10

0

10%

GNFC (LHS) Rel to Nif ty (RHS)

Source: Bloomberg


Bloomberg GNFC IB

Equity Capital (Rs mn) 1,554

Face Value(Rs) 10


52 Week H/L 91/ 59






Promoters 41.2 41.2 41.2

FII/NRI 8.9 8.9 8.9



Public 27.6 27.3 27.6

Source: Bloomberg

n Top line growth of 10.3% on the back of growth in both

fertilizer and chemicals segment. Despite poor monsoons in

FY13, the company was able to deliver 6% yoy growth in

FY13 in the fertilizer business and 6% in chemicals

n Production across all categories remained encouraging, as

most plants operated at over 100% utilization. The Ammonia

plant with utilization of 133%, while Urea plant at 111%

n However, production of Methanol, Concentrated Nitric Acid

(CNA) and Calcium Ammonium Nitrate (CAN) was affected

due to weak demand

n Ammonium Nitrate rules, 2012 were notified in July 2012,

and will become finally effective from Jan14. Ammonium

Nitrate (AN) Melt and CAN fertilizer manufactured by GNFC

are under the purview of these Rules, and it has alreadyinitiated the actions for obtaining the necessary licences to

continue to market these products

n The EBITDA margins for FY13 stood at 14.8% vs. 14.9% in

FY12 on the back of stable margins in both segments. The

fertilizer segments EBIT margin remained stable at 5.6% in

FY13 vs. 5.4% in FY12, while the chemical segments EBIT

margin stood at 18.1% in FY13 vs. 19.6% in FY12

n Net debt to equity for the company deteriorated from 0.3x in

FY11 to 1x in FY13. The interest coverage ratio as a result

fell from 25.8 in FY11 to 10.1 in FY13n Increase in debt is primarily led by various capex taken by

the company along with increase in working capital

requirements

n GNFC has completed various capex-related projects. It has

further plans for a few projects like brownfield ammonia urea

project, JV project with Jordan Phosphate Mines Company

Ltd. (JPMC)


23/41

GNFC Annual Report Analysis


Topline growth aided by both fertilizer and chemicals segments

GNFC registered a topline growth of 10.3% on the back of growth in both fertilizer and

chemicals segments. Despite poor monsoons in FY13, the company was able to deliver a

6% yoy growth in FY13 in the fertilizer business due to an increase in sale of urea. The

company also registered a growth of 33.9% in ANP fertilizers. The chemicals segment, on

the other hand, registered a growth of 16% yoy in FY13, helped by improved sales of

concentrated nitric acid, anline, TDI and EA.


10

15

20

25

30

35

40

45

FY11 FY12 FY13

Rsbn

13%

14%

15%

16%

17%

18%

EBITDAMargi

Sales EBITDA Margins


EBITDA margins remain stable on the back of stable margins in both

segments

EBITDA margins for FY13 stood at 14.8% vs. 14.9% in FY12 on the back of stable margins

in both segments. The fertilizer segments EBIT margin remained stable at 5.6% in FY13

vs. 5.4% in FY12, while the chemical segments EBIT margin stood at 18.1% in FY13 vs .

19.6% in FY12. The margins in the chemicals segment were impacted due to an increase

cost of materials consumed and rupee depreciation. The purchase of traded goods was

lower in FY13, primarily due to no import of MOP and lower import of SSP, as the

environment remained difficult on the back of the supply glut created in the system.

Exhibit 2: Segment EBIT Margin

3%5% 6%

27%

20%18%

0%

5%

10%

15%

20%

25%

30%

FY11 FY12 FY13

EBITMargi

Fertilizer Chemicals Source: Company, Emkay Research

Exhibit 3: Segment EBIT Contribution

10%29% 30%

90%71% 70%

0%

20%

40%

60%

80%

100%

FY11 FY12 FY13

Percentage

Fertilizer Chemicals



24/41



Working capital days deteriorate due to increase in receivables

Given the difficult environment, the working capital days increased from 76 days in FY11 to

135 days in FY13. The increase was primarily led by rise in receivable days from 53 in

FY11 to 100 in FY13, while the days payable fell from 34 days in FY11 to 19 days in FY13.

As a result, capital employed in the working cycle increased from Rs6.2bn in FY11 to

Rs15.9bn in FY13.


57 56 5453

73

100

3444

19

76 85

135

0

20

40

60

80

100

120

140

160

FY11 FY12 FY13

Days

Inventory Days Receivable Days Payable Days Working Capital Days


Increase in net debt led by increased working capital requirement and

capital expenditure

Net debt to equity for the company deteriorated from 0.32x in FY11 to 0.96x in FY13. The

interest coverage ratio as a result fell from 25.8 in FY11 to 10.1 in FY13. The increase in

debt can be attributed to increase in capital employed on the back of higher working capital

days , while at the same time, the ongoing capital expenditure also led to increase in both

long-term and short-term debt. The total gross debt in absolute terms increased from

Rs9.2bn in FY11 to Rs28.3bn in FY13. On the capital expenditure front, the company

expects to commission the TDI capacity of 50,000mtpa by September 2013. The project

has been delayed slightly. However, the management hopes to commission the same bythe end of September.

Exhibit 5: Net Debt to Equity and Interest Coverage Ratio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

FY11 FY12 FY13

NetDebttoEquity

0

5

10

15

20

25

30

InterestCoverage

Net Debt to Equity Interest Coverage Ratio



25/41



Return ratio falls due to increase in capital employed

RoCE of the company has fallen from 13% in FY12 to 9.1% in FY13. The drop in RoCE is

largely attributed to increase in net debt on the back of a rise in both working capital

employed and capex. Some improvement in RoCE can be expected if the TDI capacity is

commissioned in a timely manner, leading to increased contribution both to the topline and

the bottom line. Further, the improvement in days receivables would also act as a keycatalyst as far as reducing debt is concerned.

Exhibit 6: RoCE

13% 13%

9%

6%

7%

8%

9%

10%

11%

12%

13%

14%

FY11 FY12 FY13


Growth to be driven by both chemical and fertilizer segments

The management expects growth to continue in both fertilizer and chemicals segments, led

by a good monsoon and commissioning of plants. In the fertilizer business, the

management expects the environment for ANP, MOP and DAP to remain challenging in the

near term due to the supply glut situation created in the industry. However, with the onset

of early monsoons and given their sufficient distribution, the company expects sales to

improve in the second half. Further, it aims at increasing the quantum of traded goods

sales to 2mn tons in FY14 to drive growth.

On the chemicals business, the company expects growth to continue with the

commissioning of new TDI capacity, along with the underlying organic growth.

Rupee depreciation to take sheen from drop in raw material prices

Recently, international raw material and fertilizer prices have corrected, which is likely to

benefit the company in terms of raw materials, particularly rock phosphate and import of

fertilizers. However, with the swift depreciation in the rupee, some of these gains may not

materialize. Further, the com pany also has foreign currency debt, which could be impacted

with the swift depreciation in the currency.

Further, on the margins front, with the glut in non-urea fertilizer business persisting

throughout the first quarter of FY14, the management expects sales of ANP to be

impacted. The impact may be further accentuated due to both drop in international prices offertilizers and the governments recent indication of holding selling prices for fertilizers,

which are already under the NBS.

Capex plans

Brown field Ammonia-Urea Project - The company is considering to set up a gas -based brown field Ammonia-Urea Project (BAUP) at Bharuch, using some of its

existing facilities/utilities. It has expressed its interest to the Department of

Fertilizers, the Government of India, for setting up of BAUP at Bharuch.

Ghana-India Fertilizer Project The Government of India and the Government ofGhana have agreed to set up a joint venture, a natural gas-based ammonia-urea

project in Ghana. Rashtriya Chemicals & Fertilizers Ltd., (RCF) is acting as a nodal

agency of the Government of India for implementation of the said project. Thecompany has submitted an Expression of Interest (EoI) to RCF for participating in

the equity of Indian joint venture to be formed for the proposed project in consortium


26/41



with Gujarat State Fertilizers & Chemicals Ltd. (GSFC) and Gujarat Alkalies &

Chemicals Ltd. (GACL).

Joint Venture project with Jordan Phosphate Mines Company Ltd (JPMC) -JPMC are supplying rock phosphate for t he companys existing nitrophosphate

complex. It has a long-term business relationship with them. The company is

considering setting up a phosphoric acid project in joint venture with JPMC and has

signed a MoU for setting up the said project. Actions have been initiated for carryingout the pre-feasibility studies of this project.

Poly Aluminium Chloride and Di-Calcium Phosphate Project - TDI Project atDahej, when commissioned, will generate hydrochloric acid (HCl) as a by-product.

Poly aluminium chloride and di-calcium phosphate project based on the HCl are

under active consideration of the company.


27/41


Emkay

27

AnnualReportAnalysi


GSFC

Affected by adverse spread in chemicals

September 25, 2013

Rating

Accumulate

Previous Reco

Buy

CMP

Rs50

Target Price

Rs70



Nifty 5,874

Sensex 19,856

Price Performance

(%) 1M 3M 6M 12M

Absolute 4 -17 -16 -36

Rel. to Nifty -2 -22 -20 -39

Source: Bloomberg


40

50

60

70

80

90


Rs

-50

-38

-26

-14

-2

10%

GSF C (LHS) Rel to N if ty (RHS)

Source: Bloomberg


Bloomberg GSFC IB


Face Value(Rs) 2


52 Week H/L 82/ 44






Promoters 37.8 37.8 37.8

FII/NRI 12.4 11.6 11.9



Public 14.6 14.5 13.9

Source: Bloomberg

n Despite a significant drop in demand of DAP in the

companys key regions like Gujarat ( -39%), Maharashtra

(-43%), AP (-36%) and Karnataka (-55%), GSFC has been able

to report a 15% increase in DAP sales

n Fertilizer inputs like Phosphoric Acid witnessed a drop of

15% to USD 861/mt, while DAP prices in the global market

dropped 12% to $ 573/mt

n Caprolactam prices fell from its all-time high of USD3570pmt

in April11 to USD2211pmt in December 12. This with all

time-high feedstock price of Benzene has affected the

spread, which dropped to USD800 from USD2400

n Working capital strains visible due to the increase in debtor

days

n Fertilizer segment margins have dropped from 19% in FY11

to 10%, as the company faces input cost pressure

n Chemical segment margins have also dropped sharply from

33% in FY11 to 15% by FY13. Pressure on caprolactam

Benzene spread affected margins

n Expansion plans focused on backward-integration and

capacity expansion, which includes expansion of Nylon-6

and water soluble fertilizers at Vadodara unit. The company

also has expansion plans for a DAP/NPK at Sikka unit


28/41

GSFC Annual Report Analysis


Poor monsoons and supply glut impact demand and profitability

The lack of monsoons in FY13 led to a sharp contraction in demand for DAP and other

complex fertilizers. On an all India basis, DAP sales declined by 15% to 9.13mn mt, while

complex fertilizer sales fell by 32% to 7.73mn mt. DAP sales of the industry, as a whole in

the state of Gujarat, dropped by 39%, while in Maharshtra, it fell by 43%, AP 36% and

Karnataka by 55%.

Performance of the company was impacted largely due to the sluggish performance of the

fertilizer division, along with a fall in profitability of the industrial products division. Further,

the traded goods segment has witness a significant increase in FY13, particularly due to

higher sale of traded DAP, which while leading to a higher topline has impacted profitability

due to lower margins in the traded goods business.

The supply glut created in the second half of FY12 could not be addressed due to poor

weather conditions in FY13. As a result, competitive pressure within the sector increased,

thereby impacting profitability.

Exhibit 1: Sales and EBITDA Margins

30

35

40

45

50

55

6065

70

FY11 FY12 FY13

Rsbn

0%

5%

10%

15%

20%

25%

30%

EBITDAMargi

Sales EBITDA Margins


Falling benzene caprolactum spread impacts profitability

The industrial products segments profitability has been impacted significantly in FY13,

primarily due to falling spreads between benezene and caprolactum prices. The overall

profitability was further impacted due to a slowdown witnessed in the domestic growth

environment, which put additional pressure on margins. The industrial product segment

margins fell from 32.9% in FY11 to 15.4% in FY13.


19%

15%

10%

33% 30%

15%

0%

5%

10%

15%20%

25%

30%

35%

FY11 FY12 FY13

Fertilizer Products Industrial Products



29/41



Working capital strains visible due to increase in debtor days

The working capital strain on account of increasing receivables days was clearly visible in

FY13. The debtor days increased from 65 days in FY11 to 166 days in FY13.

Consequently, the gross debt-to-equity ratio deteriorated from 0.14x in FY11 to 0.38x in

FY13.


42 43 39

65

96

166

23 33 31

84106

175

0

50

100

150

200

FY11 FY12 FY13

Days




-

2,000

4,000

6,000

8,000

10,000

12,000

FY11 FY12 FY13

Rsmn

0%

5%

10%

15%

20%

Asapercentageof

sales

Purchase of traded goods As a percentage of salesSource: Company, Emkay Research

Exhibit 5: RoCE

43%

36%

15%

0%

10%

20%

30%

40%

50%

FY11 FY12 FY13


Expansion plans focused on backward-integration and capacity expansion

The company continues to focus on capital expenditure both for backward-integration and

for capacity expansions.

Capacity expansion projects:

Expansion of Nylon-6 capacity by additional 15,000mtpa at Vadodara unit

Expansion into water soluble fertilizers to the tune of 20,000mtpa at Vadodara unitExpansion of 500,000mtpa for DAP/NPK at Sikka unit

Backward integration:

Strategic investment of 19.98% in equity share capital of M/s. Karnalyte ResourcesInc., Canada, totaling Rs 2380mn. This will give assured supply of 350,000mt of

Potash in Phase I, and further 250,000mt in Phase II from Wynyard Potash Project

of the said Company.

Setting up a sulphuric acid and phosphoric acid plant at Sikka unit for assuredsupply of raw material


30/41



Outlook

The management highlighted that FY13 was a difficult year. However, going forward, with

the early arrival of the monsoons, the company expects demand to pick up in FY14,

thereby helping to improve the overall supply situation within the industry. Further, with the

drop in international prices of key inputs, the company may be able to absorb some of the

negative impact of the recent rupee depreciation.


31/41


Emkay

31

AnnualRepo

rtAnalysi


Mangalore Chemicals and Fertilizers

Leveraging its distribution strength

September 25, 2013

CMP

Rs51EPS Chg FY14E/FY15E (%) NA/NA

Target Price change (%) NA

Nifty 19,856

Sensex 5,874

Price Performance

(%) 1M 3M 6M 12M

Absolute 1 (16) 25 14

Rel. to Nifty (6) (14) 25 11

Source: Bloomberg


20

32

44

56

68

80


Rs

-50

-32

-14

4

22

40%

Mangalore Fertlizers (LHS) Rel to Nifty (RHS)

Source: Bloomberg


Bloomberg MCF.BOEquity Capital (Rs mn) 1185.5

Face Value(Rs) 10

No of shares o/s (mn) 118.5

52 Week H/L 27/73


Daily Avg Volume (No of sh) 328707


Shareholding Pattern (%)Mar13 Dec12 Sep12

Promoters 22.0 30.4 30.4

FII/NRI 1.6 0.4 0.4



Public 51.0 43.2 42.9

Source: Bloomberg

n Poor monsoons and high costs impact performance. Severe

weather conditions in the key market of Karnataka in FY13

significantly impacted the topline, as volumes from traded

goods were lower in FY13

n MCFL continues to thrust on import of fertilizes to complete

its product basket, though trading came down sharply in

FY13, due to a weak demand scenario

n MCFL has also finalized supply arrangements with certain

local manufacturers of fertilizers to augment total fertilizer

availability in its marketing territory to leverage its

distribution strength

n MCFL will continue to focus on its plant protection business,

which was started in 2010-11. Given the enormous potential

for growth in this segment and the companys ability toleverage its strong distribution, this will remain the

companys thrust area

n MCFL has efficiently managed its working capital, as despite

the increase in receivable days from 6 days in FY11 to 24

days by FY13, its working capital days remained stable at 14

days

n Despite an insignificant increase in working capital, MCFLs

debt has increased sharply to Rs12bn from Rs2bn in FY11.

This was mainly on account of delays in subsidy from the

government


32/41

Mangalore Chemicals Annual Report Analysis


Poor monsoons and high costs impact performance

Severe weather conditions in the key market of Karnataka in FY13 significantly impacted

the topline, as volumes from traded goods were lower in FY13. Further, increase in MRP

due to the rupee depreciation and higher costs impacted demand for phosphatic fertilizers

in FY13.


15

20

25

30

35

40

FY11 FY12 FY13

Rsbn

5%

6%

6%

7%

7%

EBITDAMargi

Sales EBITDA Margin


Higher interest costs impacts bottomline

Interest costs impacted profitability negatively in FY12 and FY13. The interest coverage

ratio deteriorated sharply from 8.6x in FY11 to 2.1x in FY13. The increased borrowings

were largely on account of outstanding concessions receivable from the Government of

India, which have significantly shot up between FY11 and FY13.

Further, borrowings also increased on account of capital expenditure for plant and

machinery, and Rs 2,000mn for investment in preference shares of Bangalore Beverages

Ltd., with a coupon of 0.001% and repayment of 20 years.


2521

32

6

33

24

17

30

44

14

24

13

0

10

20

30

40

50

FY11 FY12 FY13

Days




-

2

4

6

8

10

12

14

16

FY11 FY12 FY13

Rsbn

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Asapercentageofsales



0

1

1

2

2

3

FY11 FY12 FY13

NetDebttoEquity

0

2

4

6

8

10

InterestCoverage

Net Debt to Equity Interest Coverage ratio Source: Company, Emkay Research

Exhibit 5: RoCE

20%

10%9%

0%

5%

10%

15%

20%

25%

FY11 FY12 FY13



33/41

Mangalore Chemicals Annual Report Analysis


Monsoon to help revive demand, though rupee depreciation may impact

negatively

The early onset of monsoons and wide distribution are likely to lead to a revival in demand,

thereby helping to reduce the supply slut in the system. However, the company has guided

that it plans to increase imports to meet the increased demand, which may impact the

performance negatively due to the swift depreciation in the rupee. Further, the company

depends on imports of certain key raw materials , which may also impact profitability.

To focus on plant nutrition and plant protection products to drive growth

The company has been a late entrant in the plant protection business, as it ventured into

the same only in FY11. However, it continues to focus on this business, and with regards to

the same, it has launched three products of reputed pesticide companies under the

Mangala brand name. On the plant nutrition front, the company will continue focusing on

the water soluble fertilizer segment and micro-nutrients to drive growth. It plans to launch

three new products in FY14 in the plant protection segment, besides aiming to achieve

faster growth on the back of better-than-anticipated monsoons.


34/41


Emkay

34

AnnualRepo

rtAnalysi


National Fertilizer

Capex is over, Benefits yet to come

September 25, 2013

CMP

Rs20EPS Chg FY14E/FY15E (%) NA/NA

Target Price change (%) NA

Nifty 5,874

Sensex 19,856

Price Performance

(%) 1M 3M 6M 12M

Absolute -2 -45 -57 -77

Rel. to Nifty -8 -48 -59 -78

Source: Bloomberg


10

26

42

58

74

90


Rs

-80

-64

-48

-32

-16

0%

National Fertilizers (LHS) Rel to Nifty (RHS)

Source: Bloomberg


Bloomberg NFL IBEquity Capital (Rs mn) 4,906

Face Value(Rs) 10


52 Week H/L 88/ 18




Shareholding Pattern (%)Mar'13 Dec'12 Sep'12

Promoters 97.6 97.6 97.6

FII/NRI N/A N/A N/A



Public 1.0 0.8 0.8

Source: Bloomberg

n NFL is the largest producer of urea in the country, with a

share of 14% of total urea production

n

Government of India has allotted NFL and Engineers IndiaLtd (EIL) for a revival of closed unit of Fertilizer Corporation

of India Ltd (FCIL) at Ramagundam. This venture will provide

the company an opportunity to establish itself as a market

leader in urea

n Completion of capacity augmentation of urea projects at

Vijaipur-I & II has enabled the company to consolidate its

position in urea production at a competitive cost

n Switchover of feedstock from fuel oil to natural gas at

Bathinda, Panipat and Nangal will improve energy efficiency

and reduce the production cost in the coming years

n NFL produced 32LMT of Urea (92% of revised installed

capacity of 34.9 LMT) against 34. LMT (105%) in CPLY. FY13

production was lower than the CPLY, primarily due to a

shutdown taken at Nangal, Panipat and Bathinda units

n NFL is developing a technique for coating of normal prilled

urea with neem oil on a large scale. Wider acceptability of

neem-coated urea in the market offers an opportunity to

augment production of neem-coated urea

n Availability and pricing of gas have been a major constraint.

Firm allocation of domestic gas is still awaited for Panipat,

Bathinda and Nangal units

n The average vintage of production units of the company,

except Vijaipur II unit, is above 25 years and requires regular

expenditure on renewals and replacements

n There has been significant additions in fixed assets from

Rs32bn to Rs48.5bn, mainly due to capitalization of energy

saving and urea capacity enhancement, along with a

changeover of feedstock from fuel oil to natural Gas

n NFL has witnessed a sharp run-up in its debt to Rs48bn from

Rs6bn in FY13 due to capitalization

n With a sharp increase in the interest burden and lower

profitability due to various plant shutdowns, NFL has

witnessed significant losses in FY13


35/41

National Fertilizer Annual Report Analysis


High cost, delay in subsidy payments and stretched balance sheet impact

performance

FY13 was a rather difficult year for the company, both in terms of topline and bottomline.

On the topline front, urea volumes were lower, largely on account of wagon-related issues

at Vijaipur unit. Further, the increase in costs of both power and fuel led to a larger cost

impact. As a result, EBITDA margins contracted from 5.2% in FY11 to 1.1% in FY13. The

subsidy outstanding, too, increased by 96% in absolute terms between FY11 and FY13.


40

45

50

55

60

65

70

75

80

FY11 FY12 FY13

Rsbn

0%

1%

2%

3%

4%

5%

6%

EBITDAMargi


As a result of the delay in payment of subsidies and increase in debt due to the on-going

capex programme of switching of feedstock, interest expenses inched higher to Rs1,297mn

in FY13 vs . Rs92mn in FY11. Hence, the interest coverage ratio deteriorated to 0.6x in

FY13 vs. 33x in FY11.


23 26 23

100121

170

27 22 18

96

125

174

0

50

100

150

200

FY11 FY12 FY13

Days



Exhibit 3: Subsidy Receivable

2

2

3

0

0.5

1

1.5

2

2.5

3

3.5

FY11 FY12 FY13

Rsbn

Subsidy outstanding



0

1

1

2

2

3

3

4

FY11 FY12 FY13

NetDebttoEquity

0

5

10

15

20

25

30

35

InterestCoverage

Ratio

Net Debt to Equity Interest Coverage Ratio Source: Company, Emkay Research

Exhibit 5: RoCE

9%

5%

-1%-2%

0%

2%

4%

6%

8%

10%

FY11 FY12 FY13



36/41

National Fertilizer Annual Report Analysis


Subsidy repayment to help reduce debt burden

Given that a large sum of money is still receivable in the form of subsidies, the receipt of

the same would help reduce the debt burden of the company. This will also help reduce the

interest burden.

Aggressive capex plans

Revamp of fuel oil-based plants at Panipat, Bathinda and Nangal completed

The company has undertaken capital schemes for a changeover of feedstock from fuel oil

to natural gas at Panipat, Bathinda and Nangal, involving a total investment of Rs40bn. All

of these plans have achieved their completion in calendar FY13.

Capacity augmentation and energy saving project (ESP) at Vijaipur

The company has successfully commissioned capacity augmentation and energy savings

projects of ammonia and urea plants at Vijaipur-I amd II units, including installation of

carbon dioxide recovery (CDR) plant during 2012-13 at an investment of around Rs6.5bn.

The total urea capacity of Vijaipur units, after commissionin

indian fertilizer sector annual report analysis

Documents