Beruflich Dokumente
Kultur Dokumente
NEGATIVE
THEMATIC March 01, 2018
though our channel checks suggest pilferage has continued even after these Beneficiary Uni vers al Uni veral Defi ned Defi ned Defi ned
initiatives. Shift in recognition of sale from receipt at the district level to point of Quantum of
Not Not Not
subsi dy per Capped Not Capped
sale will increase inventory days for urea players by 90-100 days and will take uni t
Capped Capped Capped
Quantity of Not Not
away most of the gains from reduced receivables. subsi dy Capped Capped
Capped Capped Capped
sajid.merchant@ambit.co, ssmerchant@gmail.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Fertilisers
Lost opportunity
Subsidies are an integral part of the Indian public welfare system. They
account for ~2% of India’s GDP across 3Fs, namely food, fertiliser and fuel.
Fertilisers alone account for a staggering US$11bn in subsidies. What was
Fertiliser is an integral part of
initiated as a way to boost India’s food production has now become a key
bottleneck in improving agricultural productivity. In many regions, excessive Government subsidy mechanism.
With more than 1.25bn people
urea consumption has led to a decline in yields.
(~17% of world population) to
Fertilisers played an important part in the Green revolution feed with less than ~4% of global
resources (like agricultural area
Post-independence, India brought a substantial amount of land under agriculture,
which improved production over the 1950s. However, as addition of arable land and water resources), there is
came to a halt, India struggled to meet the food requirements of its ever growing tremendous pressure on India’s
natural resources which is expected
population.
to increase going forward. We
An interesting paper from Harvard University student summaries it aptly: have to think not only to raise
productivity per unit of land but
A book by William and Paul Paddock released around this time, with a name more
also per unit of water. Well, this
suited for reality television, “Famine 1975 – America’s Decision: Who Will Survive?”
would have been easy with
classified countries into three categories: ‘walking wounded’, ‘should receive food’, and
advanced agricultural R&D and
‘can’t be saved’. The brothers believed that the US was the “sole hope of the hungry
better farming practices but given
nations” and India fell squarely in ‘can’t be saved’ category; giving it food was
the current not so advanced farm
equivalent to “throw(ing) sand in the ocean”.
technologies, fertilisers play an
However, focused efforts from the Government on Green Revolution led by important to feed future India.
development of high yielding varieties of wheat/rice led to a sharp 45% increase in
grain production over 1967-1977. Most of these varieties were quite responsive to
fertilisers and hence the Government encouraged indigenous manufacturing of
fertilisers.
Exhibit 1: Fertiliser scenario after Independence but before major reforms!
No Profit No Loss Uniform Price Regime Retention Price Scheme Some Poor Decisions
1. Due to increased production of
1. RPS was introduced to attract
fertilisers, subsidy amount ballooned
1. Fertiliser was declared as essential 1. Uniform price of fertilisers was fixed investment in this sector and thus
resulting in high fiscal deficits. To deal
commodity under Essential Commodities based on the pooled cost of both increase fertiliser production in the
with this situation Government
Act, 1955. domestic and imported fertilisers. country to make India self-sufficient in
increased prices of DAP & MOP by
staple food grains and fertilisers.
~40%.
2. Retention Price equals cost of 2. Urea prices were also increased by
2. Fertiliser Control Order was passed to
2. Increase in prices was passed on to production of a particular plant as ~30% but due to political unrest in the
regulate sale, price and quality of
the farmers assessed by Government + 12% Post country it was immediately reduced by
fertilisers.
Tax RONW ~10% previous levels.
3. Further, there was shortage and thus 3. Action of reducing urea prices to
3. Price was determined based on
Fertiliser Movement Control Order was counter political unrest sent Indian
pooled cost of fertiliser plants. There 3. RPS was also expanded to Phosphatic
passed to bring distribution and inter- political mindset in a loop from which
was no profit incentive for companies and other complex NPK fertilisers.
state movement under Government we have not been able to come out
operating in this space.
control. even after 25 years.
4. Firms use to profit from producing at
cost lower than that set by Government
for calculating subsidy. Some players
4. This resulted in increase in urea
use to show higher capacities to get
demand relative to other fertilisers.
more subsidy. However, it increased
working capital burden on firms due to
subsidy payment delays.
5. This also resulted in increasing
subsidy burden on Government budget
as higher cost resulted in higher subsidy
amounts.
1955-66 1967-77 1978-91 1992-96
Source: fert.nic.in, Ambit Capital
sajid.merchant@ambit.co, ssmerchant@gmail.com
Foundation for Decontrol of New Pricing Scheme & Nutrient Based Subsidy Urea subsidy politically
fertilizers Missed opportunities (NBS) Scheme & DBT sensitive; government
Rollout unlikley to go whole hog
1. Govt. started indicating all- 1. NPS was introduced for
India uniform MRP for Urea replacing the RPS in 1. NBS was introduced. Govt. 1. DBT is the primary focus of
fertilizers like DAP, MOP, 2003. Thereafter newer fixed the subsidy on nutrient govt. Though its initial rollout
complex NPK, etc. These MRPs versions with some content (per kg.) of fertilizers. was unsuccessful, govt. is
were revised in Feb 2002 amendments were This scheme covered 22 working on building holistic
which continued up to Mar introduced in 2004 and grades of P&K fertilizers but and robust system
2010 in case of DAP & MOP. 2006 respectively. excluded Urea. It was accommodating all aspects.
mandated for fertilizer While DBT is in its initial
2. Purohit committee was 2. All the reforms suggested companies to write MRP and stages, energy efficiency
constituted to reassess the by ERC like energy efficiency subsidy on fertilizer bad itself. norms are proposed to be
capacities of plants operating norms, , change in revised further as per initial
at high capacities. Based on production for subsidy 2. This action of govt. made recommendations of ERC
their recommendation, govt. calculation were slowly and urea darling of farmers. Urea committee.
reduced retention price of 11 gradually introoduced during was used more as compared
urea manufacturing units. This this phase thourgh revision to other fertilizers and this 2. Govt. played it safe on
hit profit of these 11 firms. in NPS. resulted in deterioration of Budget Day on 1 Feb. 2018
Indian soil. as there were no significant
3. Expenditure Reforms 3. However, one of best announcements for fertilizer
committee (ERC) was formed recommendation of ERC of 3. NPS was modified further sector. Subsidy allocation
whose recommendation of increasing urea prices by 7% to revise fixed cost subsidy was kept similar to prior
phased decontrol of fertilizer every year in real terms provisions which were kept years allocations. It didn't
subsidy is being followed today (during 2001 to 2006), which unchanged since 2003. provision for pending subsidy
also with some modifications. would have resolved majority arrears which was widely
Reforms like decontrolling the of fertilizer subsidy issues, 4. At start of NBS, farmers anticipated to be cleared
distribution system, energy was never implemented. used to bear 25%-40% of cost before beginning of DBT.
efficiency norms and changes of P&K fertilizers which
in fixed cost subsidy are all increased to 60%-68% in span 3. DBT is expected to be now
recommendations of this of 4 years. rolled out from 1st April
committee. 2018. The date has been
5. Govt. also rolled out new already shifted multiple
investment schemes to times.
promote investments,
amended energy efficiency
norms and NPS scheme
among other things
sajid.merchant@ambit.co, ssmerchant@gmail.com
8
6.7
7
6
5 4.7
4
3 2.2 2.4
2
1.0 1.0
1
0
FY10 FY17
Lack of political willpower led to deterioration of soil health To resolve the imbalance of
nutrients, no amount of education
The imbalanced use of fertilisers has caused many problems such as widespread
to the farmers, and even having
deficiency of secondary and micronutrients, spread of salinity and alkalinity etc., all of
soil health cards, will work
which have adversely affected productivity. Excessive use of N (urea) encourages
efficiently and effectively if the
climate change (when lost through de-nitrification) and groundwater pollution (when
prices of NPK remain highly
lost through leaching). Increase in the nitrate content of groundwater in some
skewed in favor of N, as is the case
intensively-cropped areas has been reported, which is obviously due to leaching of
today. It is worth remembering that
nitrates beyond crop root zone. Increase in nitrate content of groundwater is
in a free market system, pricing is a
potentially harmful as it is used for drinking in most rural areas.
great teacher leading to efficient
Also, India is short on micro nutrients in the soil. On a country-wide basis, nutrient use of a product, which ultimately
deficiency of zinc has been found to 48%, sulfur 41%, boron 33%, iron 12% and promotes efficiency and growth of
manganese 5% vs. scientific required levels of these nutrients. that market
sajid.merchant@ambit.co, ssmerchant@gmail.com
500.0 4.0%
400.0 3.0%
279.2
300.0 2.0%
211.8
200.0 165.1 175.2 1.0%
126.6 134.4
100.0 60.6 0.0%
- -1.0%
South Africa Pakistan Brazil Bangladesh
Urea 7,791 8,522 10,986 12,793 17,721 26,385 33,940 24,580 24,337 37,760 40,016 41,824 54,400 54,500 55,000
Salience 70.7% 71.9% 68.1% 66.0% 63.2% 60.9% 34.1% 38.4% 37.0% 50.6% 56.7% 58.7% 72.5% 71.2% 74.3%
-Indigenous
7,790 8,521 10,243 10,653 12,650 16,450 20,969 17,580 15,081 20,285 20,000 26,500 38,200 38,200 40,000
Urea
-% of Total
100.0% 100.0% 93.2% 83.3% 71.4% 62.3% 61.8% 71.5% 62.0% 53.7% 50.0% 63.4% 70.2% 70.1% 72.7%
Urea Subsidy
-Imported
1 1 742 2,141 5,071 9,935 12,971 7,000 9,256 17,475 20,016 15,324 16,200 16,300 15,000
Urea
-% of Total
0.0% 0.0% 6.8% 16.7% 28.6% 37.7% 38.2% 28.5% 38.0% 46.3% 50.0% 36.6% 29.8% 29.9% 27.3%
Urea Subsidy
P&K 3,225 3,326 5,142 6,596 10,298 16,934 65,555 39,452 41,500 36,809 30,576 29,427 20,667 22,000 19,000
Salience 29.3% 28.1% 31.9% 34.0% 36.8% 39.1% 65.9% 61.6% 63.0% 49.4% 43.3% 41.3% 27.5% 28.8% 25.7%
-Indigenous
2,488 2,606 3,977 4,499 6,648 10,334 32,957 16,000 20,650 20,237 16,000 15,500 12,000 NA NA
P&K
-% of Total
77.2% 78.4% 77.3% 68.2% 64.6% 61.0% 50.3% 40.6% 49.8% 55.0% 52.3% 52.7% 58.1% NA NA
P&K Subsidy
-Imported
737 720 1,165 2,097 3,650 6,600 32,598 23,452 20,850 16,572 14,576 13,927 8,667 NA NA
P&K
-% of Total
22.8% 21.6% 22.7% 31.8% 35.4% 39.0% 49.7% 59.4% 50.2% 45.0% 47.7% 47.3% 41.9% NA NA
P&K Subsidy
Total (in Rs 10
11,016 11,848 16,128 19,390 28,020 43,319 99,495 64,032 65,837 74,570 70,592 71,251 75,067 76,500 74,000
Mns)
Source: Company, Ambit Capital
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 6: Salience of P&K in fertiliser subsidies has reduced over a period of time
indicating the preferential treatment of Urea
65.9%
61.6% 63.0%
49.4%
43.3% 41.3%
27.5% 28.8%
25.7%
Source: GoI
Under NBS, the fixed rate of subsidy was announced (on Rs/kg basis) on Nitrogen,
Phosphate, Potash and Sulphur on an annual basis. The exhibit below illustrates the
fixed subsidy amount from FY11 to FY15. It can be inferred from the exhibit above
that the fixed subsidy amount per kg has reduced over the years. It is directly
correlated to the strategy of the Government of reducing its subsidy burden over the
years. Thus, we expect these rates to reduce further.
Exhibit 7: NBS rates for nutrients NPKS for the FY11 to FY18 (Rs/kg)
Nutrients 9MFY11 4QFY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
‘N’ (Nitrogen) 23.2 23.2 27.2 24.0 20.9 20.9 20.9 15.9 19.0
‘P’ (Phosphate) 26.3 25.6 32.3 21.8 18.7 18.7 18.7 13.2 12.0
‘K’ (Potash) 24.5 24.0 26.8 24.0 18.8 15.5 15.5 15.5 12.4
‘S’ (Sulphur) 1.8 1.8 1.7 1.7 1.7 1.7 1.7 2.0 2.2
Source: fert.nic.in, Ambit Capital
sajid.merchant@ambit.co, ssmerchant@gmail.com
40
15%
30
10%
20
5%
10
- 0%
CY15 CY16 CY17 CY18 CY19 CY20
40
10%
30
9%
20
9%
10
- 8%
CY15 CY16 CY17 CY18 CY19 CY20
Some of recent deals include one with Uralkali (Russian fertiliser producer), which has
agreed to enter a new contract with India for supplying Potash (Potassium Chloride)
through June 2018 at $240/mt (up $13/mt from last year).
sajid.merchant@ambit.co, ssmerchant@gmail.com
Quantum of subsidy per unit Not Capped Capped Not Capped Not Capped Not Capped
1600 70
1400 60
1200
50
1000
40
800
30
600
400 20
200 10
0 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: GoI
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Maharashtra, Kerala and Assam tend to have higher rates of leakage. This could be
because leakages to the industry may be greater than leakages across borders.
Exhibit 12: Urea leakages by state
Source: Note ‘Redesigning India’s Urea Policy’, Ambit Capital. Black area shows no leakages/unavailability of
data.
25,000 50
45
20,000 40
35
15,000 30
10,000 25
20
5,000 15
10
- 5
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
However, fertiliser prices are subsidised in India, resulting in a sharp deviation from
global trends. Volatility in global prices can be correlated to subsidy payments by the
sajid.merchant@ambit.co, ssmerchant@gmail.com
Government. India could have avoided being an outlier had it followed ERC’s
recommendation of increasing urea prices at ~7% per annum in real terms.
Exhibit 14: International prices during 1967-2017 (USD/MT)
800.0
Global
crash
600.0 First oil India, China
crisis exports
400.0 surge....then
stop
200.0
-
FY67
FY69
FY71
FY73
FY75
FY77
FY79
FY81
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
Urea DAP MOP
Exhibit 15: While Indian urea prices have remained Exhibit 16: DAP prices (Rs/MT) have moved towards global
stagnant, global prices range at ~3s the domestic fixed prices after introduction of NBS
MRP; ratio should decline a bit in light of global excess
supply (International prices/MT: Domestic prices/MT – the
gap is subsidies)
4.50 45,000
4.11
4.00 3.61 35,000
3.50 3.57
25,000
3.00
2.67
2.50 15,000
2.04 2.58
2.00
5,000
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
1.50
1.00
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Exhibit 17: Ammonia (NH3) global supplies are expected to be in excess until 2020,
resulting in a decrease in urea prices globally (Mn tonnes)
sajid.merchant@ambit.co, ssmerchant@gmail.com
18,000
16,000
14,000
Missed Opportunity
12,000
10,000
8,000
6,000
4,000
2,000
-
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
MSP of Wheat MSP of Paddy (Common) Urea
Fertiliser movement is controlled but the urea black market prevents it from
reaching marginal farmers
FMS and mFMS systems track fertiliser to the retailer level but the final sale to the
farmer is not captured. Retailers often have monopoly power in the village and
artificially reduce availability in order to redirect farmers to the black market.
Excerpt from ‘Redesigning India’s Urea Policy’ explains the formation of the black
market:
“Bags of urea arrive through the cooperatives at the local Panchayat twice a year,
usually before harvest. In many villages, these are sold out within a day or so.
Entrepreneurial farmers and local shops buy large quantities, as they know they will be
in high demand and can be resold for a profit. Most farmers are also not aware when
urea will arrive. Therefore only those well connected and living close to the Panchayat
is able to secure urea.”
This black market hurts small farmers as large farmers procure the majority of
subsidised urea due to their connections in the market. Marginal farmers end up
paying higher prices in the black market.
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
the energy consumption norms downwards under NPS-II, NPS-III, NUP-2015 and did
not take into cognizance the capital investment made for achieving higher energy
efficiency during the last 14 years.
Unlike RPS, there is no pricing period envisaged beyond 2018-19 for which drastic
energy reduction norms will remain valid.
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
Lost to In-efficient
Firms
9%
Acrrues to small
farmers
33%
Lost to Leakage
36%
Lost to Rich
Farmers
22%
Exhibit 23: Key features of the new system under DBT vs. the old systems
New System
Old System
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Exhibit 24: DBT – A lot of promises but too few are delivered
Reason for not being
Proposed Benefits Current
implemented
Direct subsidy payment Subsidy payment should be
Helps in identifying the right Payment is being done to Not all Aadhar cards are linked
to beneficiary’s done to farmer directly into his
buyers companies to bank accounts
account account
Targeted subsidies to marginal
farmers over a period of time.
Identification of Aadhar based identification Most of the states don’t have
No land record linkage
beneficiary seeded with land records digitised land records
Reduced leakages to other
industries
Targeted subsidies basis soil No defined benefits. Any
Identification of Seeding of Aadhar with Soil Soil health card seeding is
type. Improves nutrient Aadhar card holder can take
benefits Health Cards not done yet
balances. any number of Urea bags
Source: Ambit Capital
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 27: Average subsidy receivable days for fertiliser players at 130-140
days
500,000 120.0
93.1
100.0
400,000
80.0
300,000 46.5 46.4 60.0
39.6 37.4
200,000 40.0
100,000 20.0
- -
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 28: Urea players are significantly leveraged to subsidy receivable burden (in
Rs mn)
GNFC FY15 FY16 FY17
Subsidy Receivable 11,313 11,621 6,353
Interest Foregone @ 8% 905 930 508
Tax Rate 0% 35% 27%
Current PAT (4,521) 1,727 5,213
Profit Scalability% to Current PAT 20% 35% 7%
Chambal FY15 FY16 FY17
Subsidy Receivable 26,726 30,935 26,432
Interest Foregone @ 8% 2,138 2,475 2,115
Tax Rate 39.1% 48.0% 34.2%
Current PAT 2,795 1,061 3,562
Profit Scalability% to Current PAT 47% 121% 39%
GSFC FY15 FY16 FY17
Subsidy Receivable 14,250 23,819 19,259
Interest @ 8% 1,140 1,906 1,541
Tax Rate 30% 31% -12%
Current PAT 4,005 4,093 4,195
Profit Scalability% to Current PAT 20% 32% 41%
RCF FY15 FY16 FY17
Subsidy Receivable 30176 39461.6 31869.9
Interest @ 8% 2,414 3,157 2,550
Tax Rate 37% 35% 28%
Current PAT 3,221 1,726 1,793
Profit Scalability% to Current PAT 47% 119% 103%
NFL
Subsidy Receivable 49,535 46,043 40,449
Interest @ 8% 3,963 3,683 3,236
Tax Rate 41% 31% 36%
Current PAT 262 1,986 2,082
Profit Scalability% to Current PAT 886% 128% 100%
Source: Company, Ambit Capital
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
100
80
60
40 41 43 44
34 36 36 37 36
25 27 29 29
20
12 14 12 15
10
-
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Production (%) Import (%)
sajid.merchant@ambit.co, ssmerchant@gmail.com
Further, Matix Fertilisers and Chemicals had started production in October 2017 in its
fertiliser plant located in Panagarh, West Bengal. This is a coal-bed methane urea
plant (first if its kind in the country) and will be key to fertiliser security of north-
eastern states. The company has invested around Rs7,000cr towards the plant. Our
channel checks suggest it will be really challenging for Matix to generate positive IRR
from this project. Total capacity of the plant is 1.3 mn tons and is expected to run at
100% capacity utilisation by the end of FY18. Coal-bed methane will be sourced from
Essar Oil’s Raniganj block (30km dedicated pipeline has already been set up).
What are the other new investments in this sector? One key thing to note here is that
private players are at benefit as
We could witness some new investments by refiners. But that raises concerns as to
compared to PSUs since approvals
why refiners will turn to this sector which has to travel a long bumpy road to become
are faster for investment. Since
value-accretive.
public players need to follow
There are two motivations for doing so: certain prescribed rules and
complete other formalities like
Increased traction towards DAP.
appointing valuer among others
Prospective ban on petcoke. they lag behind when time comes
for grabbing newly discovered
All refineries are surplus in sulphur and petcoke, so they go for investments which
opportunity that comes to the
can use these. They will use petcoke for generating steam by using them in boilers.
shore.
And for sulphur, they are planning to convert it to sulphuric acid and then react with
phosphate (rock) to obtain phosphoric acid and gypsum (which consumes the whole
sulphur). Reacting phosphoric acid with ammonia gets DAP. Gypsum will be sold as
input to cement.
Gypsum is required to soften cement. So, instead of selling petcoke (on the verge of
being banned) to cement plants they will send gypsum to cement plants (~5% of
cement content is gypsum). Further, gypsum finds its applications in other industries
like Plaster of Paris among others. The only concern is that gypsum should be of good
quality.
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 31: Revenue growth has been subdued across the industry in the past 3 years;
Coromandel and Chambal gained market share and also improved EBITDA margin
Revenue CAGR Rs mn EBITDA CAGR Rs mn
Particulars
FY08-14 FY14-17 FY08-17 FY17 FY08-14 FY14-17 FY08-17 FY17
Coromandel 17.8% 0.5% 11.7% 101,951 11.8% 6.9% 10.1% 9,827
GNFC 5.9% -1.8% 3.3% 45,888 -0.7% 2.0% 0.2% 6,524
Chambal 18.6% -5.4% 10.0% 75,534 4.9% 3.5% 4.4% 7,483
GSFC 7.2% -0.9% 4.5% 52,645 3.1% -4.7% 0.4% 4,866
RCF 4.2% 2.5% 3.7% 70,982 12.2% -11.9% 3.5% 3,730
NFL 11.6% -1.7% 7.0% 76,199 -7.0% 62.6% 12.1% 5,570
Source: Companies, Ambit Capital
Exhibit 32: EBITDA margin reached a trough as capacity utilisation came down by
FY15 due to gas availability issues at some plants; but gas pooling improved
profitability for most fertiliser players; players that conformed better on energy
efficiency norms too did better
Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Coromandel 11% 9% 11% 14% 11% 9% 8% 8% 7% 10%
GNFC 19% 15% 11% 13% 14% 14% 13% 7% 12% 14%
Chambal 16% 12% 16% 12% 11% 8% 8% 8% 8% 10%
GSFC 13% 15% 11% 25% 21% 13% 10% 11% 11% 9%
RCF 5% 5% 3% 6% 6% 8% 8% 10% 5% 5%
NFL 5% 4% 6% 4% 4% 1% 2% 4% 7% 7%
Source: Companies, Ambit Capital
Exhibit 33: High receivables burden (translating into heavy debt) drives lower PAT
margins
Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Coromandel 6% 6% 7% 9% 7% 5% 4% 4% 3% 5%
GNFC 11% 8% 5% 9% 7% 6% 6% -10% 4% 11%
Chambal 7% 4% 5% 4% 2% 3% 3% 3% 1% 5%
GSFC 7% 8% 6% 16% 14% 8% 6% 8% 7% 8%
RCF 3% 2% 4% 4% 4% 4% 3% 4% 2% 3%
NFL 3% 2% 3% 2% 2% -3% -1% 0% 3% 3%
Source: Companies, Ambit Capital
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Exhibit 34: ROCEs declined due to decline in margins as an Exhibit 35: A similar trend was seen in ROE….
outcome of Government push for taking away efficiency
gains
35% 60%
30% 50%
25% 40%
20%
30%
15%
20%
10%
10%
5%
0%
0%
FY08FY09 FY10FY11FY12FY13 FY14FY15FY16FY17
-5% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 -10%
-20%
Coromandel GNFC Chambal GSFC RCF NFL
Coromandel GNFC Chambal GSFC RCF NFL
Source: Companies, Ambit Capital research Source: Companies, Ambit Capital research
Exhibit 36: Only Coromandel out of the top 6 has been able to maintain its working capital days since it is not affected by
urea subsidy
Debtor Days Inventory Days Creditor Days Net Working Capital Days
Particulars
FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17
Coromandel 60 47 48 58 59 65 72 73 93 94 99 110 26 18 22 21
GNFC 99 110 114 103 55 62 58 54 19 23 22 24 135 149 150 134
Chambal 146 126 142 167 40 27 33 42 19 12 16 17 167 140 159 191
GSFC 165 134 156 209 46 45 36 45 38 32 27 40 174 148 165 213
RCF 148 144 172 205 56 42 48 50 34 26 27 32 170 160 193 223
NFL 177 207 231 217 19 15 18 25 16 12 11 17 180 210 238 226
Source: Companies, Ambit Capital Research
7 3.5
6 3.0
5 2.5
4 2.0
3 1.5
2 1.0
1 0.5
0 -
Apr-14 Dec-14 Aug-15 Apr-16 Dec-16 Aug-17 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 39: Coromandel too has seen sharp improvement in Exhibit 40: GNFC’s re-rating is also linked to increase in
valuations driven by improved profitability and prices for its specialty chemicals portfolio
anticipation of better P&K sales from use of soil health
cards
7 3
6
2
5
4 2
3 1
2
1
1
0 0
Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
Exhibit 41: Chambal too has seen meaningful Exhibit 42: GSFC, RCF and NFL haven’t seen much re-
re-rating given anticipation of fertiliser reforms and rating given weaker ROEs
improved visibility on return ratios of new Gadepan facility
5 3
4
4 2
3
2
3
2
1
2
1 1
1
0 0
Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17
sajid.merchant@ambit.co, ssmerchant@gmail.com
Relative valuations
We don’t see many reasons to own fertiliser stocks except Coromandel and Chambal
even if we ignore valuations given weaker return ratios. While we like the ability to
maintain good return metrics for Coromandel and Chambal in the difficult space, on
a structural basis valuations based on P/B and ROE seem expensive. At 19x FY19E
EPS, Coromandel is expensive to other agri-input players while growth is unlikely to
exceed that of private agrochemical players. Chambal at a P/B valuation of 2.2x
FY19E P/B for ROE of 19% appears expensive. P/E ratios of 12x FY19E EPS for
Chambal appear to be much more expensive than OMCs at 9-10x for ROEs of 22-
25%.
Exhibit 43: Coromandel & Chambal have traded as premium to its peers
ADVT -
Mcap EV/EBITDA (x) P/E (x) CAGR (FY14-17) ROCE P/B (x) RoE
Companies 6m
US$ mn US$ mn FY15 FY16 FY17 FY15 FY16 FY17 Sales EBITDA EPS FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17
COROMANDE
2,506 2.1 13.6 10.4 11.4 40.5 45.5 34.2 12% 7% 10% 10.4% 8.7% 12.0% 7.4 6.2 5.6 18% 15% 17%
L
GNFC 1,034 15.0 13.0 7.8 9.8 NA 39.0 12.9 -2% 0% 21% -4.2% 5.7% 11.0% 2.7 2.1 1.8 -17% 6% 15%
CHAMBAL 1,078 1.9 8.1 7.5 8.3 23.8 31.8 19.4 -5% 1% 14% 5.9% 3.4% 6.8% 3.1 3.8 3.3 14% 11% 18%
GSFC 783 7.2 5.7 5.1 10.8 12.8 12.5 12.2 -1% -6% 7% 8.1% 7.2% 6.6% 1.1 0.9 0.8 9% 8% 7%
RCF 700 8.0 6.2 10.8 14.0 14.2 26.4 25.4 -21% -14% -10% 8.4% 4.4% 4.7% 1.7 1.6 1.6 12% 6% 6%
NFL 459 1.6 20.3 12.0 12.7 115.1 15.1 14.4 -2% 20% 49% 2.5% 4.6% 5.4% 2.0 1.8 1.6 2% 13% 12%
GNFC 1,034 15.0 5.3 4.6 NA 10.2 8.5 NA NA NA NA -4.2% 5.7% 11.0% 1.5 1.3 NA 15% 16% NA
CHAMBAL 1,078 1.9 12.7 12.3 6.3 13.8 13.0 8.3 14% 42% 29% 5.9% 3.4% 6.8% 2.8 2.4 1.9 19% 18% 23%
GSFC 783 7.2 10.6 8.2 7.8 14.1 10.6 10.0 9% 17% 19% 8.1% 7.2% 6.6% 0.8 0.7 0.7 6% 7% 7%
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 45: Large part goes towards funding subsidy Exhibit 46: …..Most of the subsidy receivables are funded
receivables (working capital) despite not growing much on from debt
revenues
Increase in
Loans
Equity Cash Profit
39%
Dividend from
4% Loans operations
Share
Repayment 59%
Corp.dividen Capital Issue
26%
d Tax Increase in Interim 0% Sale of
1% Investments Dividend Investments
5% 1% 2%
Source: Companies, Ambit Capital Source: Companies, Ambit Capital
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
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