INDIAN FERTILIZER SECTOR

Neutral outlook for the urea sector; challenging times ahead for the P&K sector
INDUSTRY NOTE AUGUST 2012



ICRA RESEARCH SERVICES




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Summary Highlights

Despite partial decontrol of non-urea fertilizers in the past, the Indian fertilizer sector remains one of the most regulated sectors in the country. Amongst
these, the urea sector (which accounts for around 50% of the fertilizer consumption) is completely regulated where retail price is fixed and subsidy is
variable in order to ensure cost plus return (12% post tax RoE). On the other hand, the non-urea sector (viz DAP and NPK fertilizers) functions under a
fixed subsidy variable retail price framework, with considerable pricing freedom being granted since April 2011.

The core long term demand drivers for the fertilizer industry remain steady with improving farm economics and rising thrust on irrigation. However, price
driven factors are increasingly impacting consumption pattern among fertilizers. Partial price deregulation (fixed urea price and variable non urea fertiliser
prices), lower subsidies (under NBS) and weak rupee have significantly widened the retail price differential between urea and non-urea fertilisers, thus
further skewing the consumption in favour of urea. In the near term, poor monsoon indications and inventory overhang of non-urea fertilisers, should
however negatively impact demand in the P&K sector.

While, the overall demand growth for fertilizers industry has remained steady at around 5% over the period 2005-12, production has remained largely
stagnant during the said period. The latter is a result of lack of capacity creation due to various policy related hurdles and limited availability of raw
materials to some extent. As a result, Indias dependence on fertilizer imports has increased at a rapid pace, and currently imports constitutes around 27%
of urea consumption and 68% of DAP consumption. Additionally, given that India is deficient in primary sources of fertilizer inputs (such as natural gas,
rock phosphate, potash); it has sizeable import dependence for the intermediates like phosphoric acid and ammonia.

In 2011, GoI appointed a committee to suggest improvements in the old urea investment policy as the latter failed to encourage investments due to lack
of transparent gas price pass through mechanism. While, an Empowered group of ministers (EGoM) approved the new urea investment policy in Feb
2012, the industry has been awaiting final approval by the Cabinet Committee on Economic Affairs (CCEA). The new investment policy provides for implicit
pass through of gas prices upto US$14/mmbtu and designs floor and cap urea prices at each level of gas price to ensure minimum of 12% and maximum of
20% post tax RoE respectively. Due to requests by the industry to increase cut off gas prices beyond US$ 14/mmbtu, the finalization of the policy has been
held up. While some clarity on the final investment decisions by various companies is awaited, ICRA expects that brownfield and Greenfield expansion of
four to five urea plants should take off provided the concerns on the gas front are addressed.

On the phosphatic fertilizers front, the stagnancy in domestic production can be largely attributed to constraints in availability of raw materials (viz
phosphoric acid and rock phosphate). Further, post the departure from assured return framework (and later price decontrol), exposure to commodity
price fluctuations and demand elasticity have emerged as concerns for companies planning capacity additions in DAP and NPK space. As a result,
moderate capex has been planned in these products. In comparison to muted capex outlook for DAP and NPK, there has been a new found interest in
Single Super Phosphate (SSP), a low cost alternative to DAP/NPK. While, the production of SSP is primarily concentrated in the unorganized sector, the sub
segment is witnessing a spate of entry by large fertilizer players. ICRA views expansions in the SSP sector with caution as the industry is prone to
overcapacity, even though demand from substituting DAPs and NPK remain.

Overall, ICRA expects the participants in the urea sector to continue to report steady returns in the near term with policy expectations increasingly
pointing towards modified NPS-III (New Pricing Scheme-III) (primarily comprising of increase in fixed cost subsidy by Rs 350/tonne). NBS (Nutrient based

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subsidy) and decontrol in urea are unlikely to be adopted in the medium term following evidence of demand destruction in P&K fertilisers (due to sharp
increase in farm gate prices) as well as heterogeneous composition of the industry as it stands today. Even in an unlikely scenario of adoption of NBS, the
same is likely to be a continuation of the existing grouping system with convergence towards two groups over the next 4 years. Either way, ICRA expects
the regulated framework of urea to continue at least over the next 5 years, which should provide the opportunity for energy intensive units (primarily
naphtha and FO based units) to not only convert into gas, but also improve their post conversion energy efficiency. However, growth opportunities &
capacity expansions in the urea sector are contingent on the final approval of the new urea investment policy by GoI.

Notwithstanding the pricing freedom, the performance of P&K sector is relatively more vulnerable to regulatory (subsidy levels) as well as economic
variables (such as commodity prices and currency movements). Low subsidy levels and weak rupee have required increase in farm gate prices of P&K
fertilisers, which has affected demand. In order to contain overall fertilizer subsidies, GoI is likely to continue to reduce NBS rates for P&K in FY14 and
beyond, which may necessitate further increase in MRPs. This in absence of any major decontrol of urea prices, indicates challenging times ahead for P&K
fertilisers.
























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Contents

Industry Section
Industry Overview .........................................................................................................................................................................................5
Key Trends in Urea sector: ..............................................................................................................................................................................6
Key Trends In Phosphatic & Potassic Fertilisers ...............................................................................................................................................9
Key trends in GoIs subsidy requirements ..................................................................................................................................................... 13

Company Section
COROMANDEL INTERNATIONAL LIMITED ...................................................................................................................................................... 14
CHAMBAL FERTILISERS & CHEMICALS LIMITED .............................................................................................................................................. 19
DEEPAK FERTILISERS & PETROCHEMICALS CORPORATION LIMITED ............................................................................................................... 25
GUJARAT NARMADA VALLEY FERTILIZERS COMPANY LIMITED (GNFC): .......................................................................................................... 31
GUJARAT STATE FERTILISERS & CHEMICALS LIMITED ..................................................................................................................................... 37
MANGALORE CHEMICALS & FERTILIZERS LIMITED ......................................................................................................................................... 42
NATIONAL FERTILIZERS LIMITED (NFL): ......................................................................................................................................................... 45
NAGARJUNA FERTILIZERS & CHEMICALS LIMITED (NFCL): .............................................................................................................................. 48
RASHTRIYA CHEMICALS AND FERTLIZERS LIMITED ........................................................................................................................................ 53
TATA CHEMICALS LIMITED ........................................................................................................................................................................... 59
ZUARI HOLDINGS LIMITED ............................................................................................................................................................................ 64




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