Zuari Agro - Initiating Coverage - SKP

October 3, 2018
Zuari Agro Chemicals Ltd.

Integrated solution provider for farmers…
CMP INR 243 Target: INR 400 Initiating Coverage: Buy
Key Share Data Company Background

Zuari Agro Chemicals Ltd. (Zuari), a part of Adventz Group of Mr Saroj Poddar (originally
Face Value (INR) 10.0 promoted by Late K.K. Birla in 1967), is amongst India‘s largest pure-play fertilizer companies
Equity Capital (INR Mn) 420.6 on a consolidated basis, manufacturing Urea, DAP, NPK and other complex fertilizers. Its eight
Market Cap (INR mn) 10220.1 plants are located in Goa, Maharashtra, Karnataka (MCFL) and Odhisa (PPL) with an installed
capacity of ~3.5 mtpa, sold under ‗Jai Kisaan‘ brand, with pan India presence. It also sells
52 Week High/Low (INR) 689/220 externally sourced products like DAP, SSP, MOP, specialty fertilizers, and other agri inputs like
Avg. Daily Volume (BSE) 28,973 pesticides, seeds and micro-nutrients, through its extensive retail distribution network. It
BSE Code 534742 acquired Mangalore Chemicals & Fertilisers Ltd. (MCFL) in 2015. It also owns 40% in its
associate Paradeep Phosphates Ltd (PPL), Odhisa.
NSE Code ZUARI
Investment Rationale
Reuters Code ZUAR.NS India’s largest private player in complex fertilizers with strong brand recall and robust
Bloomberg Code ZUAC:IN distribution network
Shareholding Pattern (Jun 30, 2018)  Zuari Group (Zuari, MCFL, PPL) is the largest private complex fertilizer manufacturer in
India. It is the largest Water Soluble Fertiliser (WSF) maker with 24% market share and
fourth largest private DAP manufacturer with 16% market share. Its robust distribution
network comprising of ~8,000 dealers and ~75,000 sub-dealers nationwide with access to
~23 mn farmers, helped Zuari Group retain its industry leadership.
24%
 Zuari enjoys strong brand recall and healthy relationship with farmers with multiple initiatives
like training, soil testing labs, farm demonstration, creating customised products, providing
Promoters
agriculture equipment, arranging micro finance, crop insurance/loan, etc.
DII
1%  Zuari is strategically changing its business model from a B2G to B2C player, a
FII
potentially game changing value creating move. It has introduced its own multi-brand
9% Public & Others agri inputs retail chain of hubs under ‗Jai Kisaan Junction‘ brand, as a one stop agri shop for
66% farmers‘ needs and convenience, helping them to grow high quality products. Over 300
such stores are already operational in Karnataka and Maharashtra of which most are
EBITDA positive. Zuari has plans to have 1,000 stores in next 2-3 years. These initiatives
have played an important role in fortifying the foundation of the company across various
markets, helping it to gain a critical edge over competition.
Key Financials (INR m n)  A business process rejig has helped improve operational efficiencies like reduction in
Particulars FY17 FY18 FY19E FY20E inventory, unlocking valuable working capital in this working capital intensive industry.
Strategically located manufacturing facilities with long-term raw material tie-ups
Net Sales 63,854.2 72,647.8 87,192.8 98,116.9
Growth (%) -16.1% 13.8% 20.0% 12.5%
 All Zuari group manufacturing facilities are strategically located near ports and in proximity
to inland domestic market, which makes it easier for the company to import raw materials
EBIDTA 4,656.6 5,351.3 5,077.5 6,204.2 for its production, complex fertilizers and other agri products for selling to the end
PAT (438.7) 1,289.9 887.1 1,682.5 consumers, saving in logistics and other costs.
Growth (%) -64.3% -394.0% -31.2% 89.7%  As a major competitive advantage, Zuari has long standing tie-ups with its suppliers for
EPS (INR) -10.4 30.7 21.1 40.0 sourcing key raw materials viz. Rock Phosphate, Phosphoric Acid, Ammonia, Potash etc.,
ensuring timely availability. Procurement price of LNG from GAIL has reduced from USD
BVPS (INR) 397.3 351.0 372.1 412.1 16/MMBTU in 2016 to USD 9/MMBTU, post gas price pooling mechanism.
Key Financials Ratios Strategic change in product mix and well-timed capex to increase capacity and meet
Particulars FY17 FY18 FY19E FY20E tightened energy saving norms
P/E (x) (23.3) 7.9 11.5 6.1  Zuari has made a strategic change in its diverse product mix with a higher focus on complex
fertilisers like NPK compared to Urea, for higher pricing flexibility and better margins. With
P/BVPS (x) 0.6 0.7 0.7 0.6
complex fertilizer CU of MCFL over 90%, for further long term growth, it is setting up a new
Mcap/Sales (x) 0.2 0.1 0.1 0.1 NPK plant with capacity of 800,000 MTPA at Panambur at an estimated capex of Rs. 6 bn
EV/EBITDA (x) 10.9 9.7 11.4 10.5 to be met through a 70:30 mix of debt and equity, expected to be commissioned by FY22E.
ROCE (%) 6.7% 7.8% 6.5% 7.3%  To meet the tightened energy saving norms, Zuari is revamping its Urea unit with an
ROE (%) -2.6% 8.7% 5.7% 9.7% investment of Rs 13 bn at Goa, making it more energy efficient and increasing production.
Consequently, Urea capacity will increase ~50% from 1,210 MTPD to 1,800 MTPD and
EBIDTA Mar (%) 7.3% 7.4% 5.8% 6.3%
energy consumption per tonne of Urea will reduce from 6.6 G Cal to 5.39 G Cal by April
PAT Mar (%) -0.7% 1.8% 1.0% 1.7% 2020, making Zuari amongst the most energy-efficient plants in India.
Debt - Equity (x) 2.5 2.9 3.1 3.2  MCFL is revamping its Urea unit at an estimated cost Rs. 3.5 bn to be met through internal
Source: Company, SKP Research accruals and debt. This will reduce energy consumption from 6.65-6.70 G Cal to 5.25 G cal
Price Performance Zuari vs BSE Small Cap by April 2020, though capacity will remain unchanged at 1,150 MTPD.
50%
 Zuari plans to raise funds by making a Rights Issue of Compulsory Convertible Debentures,
Zuari BSE SMALLCAP
40%
not exceeding Rs 5 bn and a Foreign Currency Convertible Bonds issue or other similar
30%
securities upto Euro 32 mn, on private placement basis.
20% Valuation
10% Amongst India‘s largest pure play fertilizer manufacturers, Zuari has a strong brand recall,
0% robust distribution network and has planned a well-timed capex to expand capacity, improve
03-Oct-17
-10% 03-Jan-18 03-Apr-18 03-Jul-18 efficiency, productivity and energy saving. Strategic creation of a large retail network to provide
-20% integrated solutions to farmers needs at one place, can be a game changing value enhancer. It
-30% is well-placed to reap benefits of reforms like DBT of fertilizer subsidy, etc. Although the long
-40% term big picture is more attractive, uncertainties have been created in the near term by the
-50% recent devaluation of INR. Zuari has significant imports. Rising prices may have a bearing on
-60% demand of its products amongst farmers; response by GoI, fertilizer industry and the company
Analysts: Vineet Agrawal needs to be seen. In view of this, we have currently valued the stock at a P/E of 10x of FY20E
Tel No: +91-22-49226006; Mobile: +91-9819510575 EPS of Rs 40 and recommend buy on the stock with a target price of Rs 400 (~65% upside) in
E-mail: vineet.agrawal@skpsecurities.com 15 months, subject to future re-rating as clarity emerges.
SKP Securities Ltd www.skpsecurities.com Page 1 of 36

Fertilizer Industry –An Overview

 Fertilizer is defined as any organic or inorganic substance, natural or artificial in nature,
supplying one or more of the chemical elements/nutrients required for plant growth.
 Categories of nutrients: Sixteen plant nutrients are necessary for plant development. These
are classified into three categories viz. primary (macro) nutrients, secondary nutrients and
micro-nutrients. Application of essential plant nutrients in right proportion, with the use of
correct method and time of application helps in increasing crop production.
Category Nutrients Comments
Nitrogen (N) These are basic nutrients

Primary nutrients
Phosphorus (P) needed in large quantity
Potassium (K)
Calcium (Ca2+)
Secondary nutrients Magnesium (Mg2+) Needed in small quantity
Sulfur
Iron, Cobalt, Chromium, Lack of micronutrients may

Micronutrients
Copper, Iodine, Manganese, hamper plant growth
Selenium, Zinc, etc.
Source: SKP Research
 Primary nutrients: Primary nutrients are Nitrogen (N), Phosphorus (P), Potassium (K),
Ammonium (NH4+), Dihydrogen Phosphate etc. NPK are frequently required in a crop
fertilization programme and are needed in larger quantity by plants. Indian Fertilizer Industry
majorly focuses on primary nutrients.
 Secondary nutrients: Calcium (Ca2+), Magnesium (Mg2+) and Sulfur are secondary
nutrients for plants, but are as important as other essential plant nutrients.
 Micronutrients: Micronutrients which includes Iron, Cobalt, Chromium, Copper, Iodine,

Manganese, Selenium, Zinc and Molybdenum, are nutrients required by plants throughout
their life in small quantities to orchestrate a range of physiological functions.
Although required in smaller quantity, micronutrients are as important to plant nutrition as

primary and secondary macronutrients. A lack of any one of the micronutrients in the soil can
limit growth, even when all other nutrients are present in adequate amounts.

Industry and Trends
 Currently, there are 144 large fertilizer plants in India producing various nitrogenous,
phosphatic and complex fertilizers. Of these, 31 plants (29 in operation) produce Urea and 33
plants produce DAP and complex fertilizers. In addition, there are about 80 small & medium
scale plants in operation manufacturing Single Super Phosphate (SSP).
Exhibit:Total installed capacity of fertilizers in India
Total Installed Capacity

Product No. of Units
(mn MT per annum)
Urea *31 21
DAP 12 7
Complexes 21 5
SSP 80 8
Total 144 41
Source: Departm ent of fertilizers, SKP Research

*At present operational capacity is 200.30 LMT since FACT-Cochin and DIL Kanpur are under
shut down. In the absence of domestic natural resources, complete requirement of potash is
imported
 Urea: Urea is the most popular source of major plant nutrient viz. Nitrogen, which plays a vital
role in ensuring food security in the country and is produced by public, co-operative and
private sector entities. With an increase in area under irrigation and introduction of high
yielding varieties of crops, demand of Urea has been gradually increasing over the years.
 No new Urea capacity added in 17 years: Despite increase in demand, no new Urea
capacities have been added in 17 years, except revamping of few existing plants. This has
widened the gap between demand and domestic supply thereby increasing imports. Key
reasons for stagnant Urea capacities are as follows:
 Setting-up a fertilizer plant in India is a long process which generally takes three to
four years from time of issue of Letter of Intent to start of production. There was an
absence of a clear policy for setting up fertilizer plants in the country.
 Government policy towards private sector players in fertilizers has not been clear.
Business environment for fertilizer companies has been hostile due to Urea subsidy
and erratic supply of natural gas, which is the key feedstock for manufacturing Urea.
 India could not attract foreign companies to produce fertilizers because they earn
huge profits in exports to India. Since local production is low, India is dependent on
fertilizer imports.
Demand and supply trends of Urea in the past nine years are given below:
Figures in mn MT FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Production 19.9 21.1 21.8 21.9 22.5 22.7 22.6 24.5 24.2 24.0
Imports 5.7 5.2 6.6 7.8 8.0 7.1 8.8 8.5 5.5 6.0
Total Demand 25.6 26.3 28.4 29.7 30.5 29.8 31.3 32.9 29.7 30.0
Source: The Company & SKP Research
Imports have more or less remained stagnated during FY16 & FY17 on account of 100%
neem coating and record imports in 2015, along with poor monsoons that lowered farm-level
consumption, allowing significant inventories to build up throughout the supply chain. 2 mtpa
of Urea is imported from Oman under ‗Urea Off-take Agreement‘. Rest is imported from China
and Iran.
 Canalization of Urea: Urea is imported on Government account, through canalizing
agencies viz. Metal and Minerals Trading Corporation of India (MMTC), State Trading

Corporation (STC) and Indian Potash Ltd (IPL), to meet the gap between demand and
indigenous availability.
Deliveries are monitored through an inter-ministerial committee under chairmanship of a Joint
Secretary. Imported Urea is distributed through nominated handling agencies through open
tender. Supply from plants and ports are arranged by the Department of Fertilizers (GoI) as
per allocation given to companies and States by DAC under Essential Commodities Act.
To ensure availability on time, monthly movement order to each Company is issued and
monitoring is done on weekly/fortnightly basis through active interface with DAC - Ministry of
Railways, State Governments, Fertilizer manufacturers and handling agents at ports.
Optimum production coupled with timely imports has resulted in adequate availability of Urea
in the market place. There was a downward trend in the price of imported Urea which was in
the range of USD 185-270 per MT during FY17.
 Urea, the only controlled fertilizer in India is sold at a statutory notified, uniform sale price
of Rs. 5,360/ton which is lower than production cost of Rs.18,000-20,000/ton. The difference
is reimbursed by the Central Government as subsidy. Thus, the Government subsidises
about 70% of cost compared with 30% or so on P&K fertilisers, prices of which were partially
decontrolled under a nutrient-based subsidy scheme in 2010.
Till 2003, the subsidy on Urea was under the provisions of Retention Price Scheme (RPS).
Under RPS, the difference between Retention Price (cost of production as assessed by the
Government plus 12% post tax return on networth) and the statutorily notified sale price was
paid as subsidy to each Urea unit. Later, the RPS regime was replaced by a Concession
Scheme for Urea units based on prices of feedstock used and vintage of plants, which was
called New Pricing Scheme (NPS).
Phosphatic and potassic fertilizes are in a decontrolled regime and are sold at indicative
maximum retail price. Once decontrolled, there was a steep hike in P&K fertilizers. This
resulted in decline in demand of P&K fertilizers, causing a nutrient imbalance in the soil.
 100% neem coated Urea: In 2015, GoI made it mandatory for fertilizer manufacturers to
produce 100% neem coated Urea. When farmers use conventional Urea, about half the
applied nitrogen is not assimilated by the plant and leaches into the soil, causing extensive
groundwater contamination. Spraying Urea with neem oil slows the release of nitrogen, by
about 10-15%, concomitantly reducing consumption of the fertiliser. According to recent
research, the "sustained release" nature of neem-coated Urea has seen rice yields jump by
9.6% and wheat by 6.9%.
Neem-coating also ended an old malpractice of Urea being diverted for use in chemical
industry and, most harmfully in states like Punjab and Haryana, as an additive in milk to
whiten it. GoI has also allowed manufacturers to charge a small 5% premium on neem-
coated Urea.
 Urea self-sufficiency by 2022 under ‘Make in India’ programme: In view of the continuous
losses, units of Fertiliser Corporation of India Ltd (FCIL) at Talcher (Odhisa), Ramagundam
(Telangana), Gorakhpur (UP), Sindri, and Korba (Chhattisgarh), were shut in 2002, during the
previous NDA rule. Similarly, Hindustan Fertiliser Corp Ltd's (HFCL) Barauni (Bihar) and
Durgapur and Haldia units (West Bengal) were also shut.
To revive these closed fertilizer units, to connect them with new gas pipelines and to make
India self-sufficient in Urea by 2022, GoI and cash-rich coal, power and oil PSUs have
planned to jointly invest over Rs. 500 bn. This move will also help in reducing imports.

While revival of Korba unit is to be taken up later, FCIL's Sindri & Gorakhpur, and HFCL's
Barauni plants will be connected to the 2,650-km pipeline, which GAIL is laying from
Jagdishpur in Uttar Pradesh to Haldia in West Bengal to supply feedstock Natural Gas.
When all the closed fertiliser units start full-fledged operations, India's annual
domestic Urea production would rise by about 7.3 mn tonnes, and help meet the
annual demand of 31-32 mn tonnes.
Besides investing in rebuilding the shut Urea plants, about Rs.130 bn is being invested in
laying a gas pipeline to connect the Eastern Region with rest of the country. Another Rs. 60-
80 bn is being invested in setting up a terminal to import Liquefied Natural Gas (LNG) at
Dhamra in Odisha, taking total investment to Rs 500 bn.
Fertiliser plants are being revived with the help of state-run power producer NTPC Ltd, miner
Coal India Ltd, oil refiner Indian Oil Corporation (IOC) and gas utility GAIL India Ltd who has
taken equity stake in the plants.
Revival of fertiliser units will boost the productivity of agriculture, which accounts for about
th
15% of India's USD 2.7 tn economy and employs 3/5 of its 1.3 bn people.
The upcoming Urea units between 2018-21 under ‗Make in India‘ campaign at a glance:
Revival of Government Units (Under ‘Make in India’ Campaign)
Capacity Investment
Location Consortium Commissioning
(mn mtpa) (Rs bn)
Talcher, Odhisha FCIL-GAIL, CIL and RCF 1.27 77.0 2020
Gorakhpur, UP FCIL-IOCL, NTPC 1.30 79.8 2020-21
Sindri, Jharkhand FCIL-SAIL, NFL 1.30 58.2 2020-21
Ramagandam, Telangana FCIL-EIL, NFL 1.12 50.0 2018
Korba, Chhattisgarh FCIL-Through bidding route 1.20 90.0 2020-21
Barauni, West Bengal HFCL-IOCL, NTPC 1.27 65.0 2020-21
Total capacity revival in Urea units under ‘Make in India’ 7.46 420.0
Apart from the above mentioned units some more Urea units (new and revamp) are coming in
the near future which are given below:
Capacity Investment
New Units Players Commissioning
(mn mtpa) (Rs bn)
Thal, Maharashtra RCF 1.27 55.0
Chabahar, Iran RCF-GSPL, Falat– JV 1.27 USD 903 mn
Gadepan, Rajasthan Chambal 1.27 60.0 2019
Total New Units 3.81
Capacity Investment
Revamp Units Players Commissioning
(mn mtpa) (Rs bn)
Goa Zuari Agro 0.20 13.0 2021
Mangaluru, Karnataka MCFL 0.00 3.5 2020
Total Upcoming Urea Units 0.20
 Di-ammonium Phosphate (DAP): DAP is one of a series of water-soluble Ammonium

Phosphate salts that can be produced when Ammonia reacts with Phosphoric Acid. When
applied as plant food, it temporarily increases the soil pH. Roughly one-third of the complex
fertilizers sold in India is DAP. There are large players in the Indian market who manufacture
as well as import DAP.
Half of the demand of DAP in the country is met through imports and balance half through
domestic production. Demand and supply trends in the past nine years is given below:

Figures in mn MT FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Production 3.0 4.2 3.5 4.0 3.6 3.6 3.7 4.2 4.4 4.7
Imports 6.2 5.8 7.4 6.9 5.6 3.3 3.8 5.6 4.4 4.2
Total Demand 9.2 10.0 10.9 10.9 9.3 6.9 7.5 9.8 8.8 8.9
 Single Super Phosphate (SSP): SSP was the first commercial mineral fertilizer, and it led to
the development of the modern plant nutrient industry. SSP is an excellent source of three
plant nutrients viz. Phosphorus, Calcium and Sulphur. The ‗P‘ component reacts in soil
similarly to other soluble fertilizers. SSP is considered to be superior to other P fertilizers, as it
has Sulphur and Calcium.
SSP market is very fragmented with many small players. Currently, the industry has been
grappling with various challenges like price pressure, excess capacity, quality issues; etc.
The industry produced 4.28 mn mt of SSP during FY17.
 Muriate of Potash (MOP): MOP is applied Imports of MOP
4.74
wherever soil Potassium reserves are 5
4.20
inadequate for targeted crop or pasture 4 3.74
3.24
production. MOP is the most common 3.18
3
mn MT
potassium source used in agriculture,
accounting for about 95% of all potash 2
fertilisers used worldwide. Its composition 1

is 50% Potassium and 46% Chloride. The
0
demand of MOP is entirely met through FY14 FY15 FY16 FY17 FY18
imports.
Demand drivers for fertilizers
1. Scarcity of nutrients creates demand for fertilizers: Deficiency of nutrients that are
essential for plant growth can lead to lower plant yield. More than 50% of districts in India are
deficient in essential plant nutrients, as shown below:
Source: Investor Roadshow Presentation – May 2017 – Coromandel Fertilizers
As per the estimates of ‗Indian Institute of Soil Science‘, about 90 mn hectare land is affected
by various soil related deficiencies and around 41% of the Indian soil is deficit in Sulphur
content leading to stunted plant growth and subsequent lower yields. This creates demand for
fertilizers and opportunities for players like Zuari.
2. Unbalanced nutrient applications: Though India ranks amongst the largest agriculture
economies globally, its crop yields remain marginal. Nutrient application, a major determinant
to crop productivity, has been grossly inadequate and unbalanced, affecting soil health and

output quality. Against the ideal NPK nutrient application ratio of 4:2:1, fertiliser usage is
divergent towards N, recording nutrient ratio of 7.8:3.2:1 in 2015-16.
The main reason behind this imbalance is availability of Urea at subsidised price (Rs.
5,360/ton), making farmers to use Urea in unbalanced way. This has also led to illegal export
of Urea to neighbouring countries. Potash and Phosphate fertilizers are available at ~Rs.
24,000/ton and are currently under a decontrolled regime (sold at indicative maximum
retail prices). Once decontrolled, there was a steep hike in P&K fertilizer prices resulting in
decline in their demand, causing nutrient imbalance in the soil.
Exhibit:Urea remains the preferred choice as part of the nutrient mix for more than two decades
Share of major fertilizers to nutrient consumption
DAP & AS, CAN &
AS, CAN & Others, 16 ACl, 1%
ACl, 30% %
DAP &
Others, 17 Urea, 80%
%
Urea, 83%
Year - FY1991-92 Year- FY2014-15
Source: Fertiliser Association of India (FAI),SKP Research
This imbalanced use of fertilizers leads to consistent low yield of all crops across India vis-a-
vis global yield. A comparative overview of various crop yields in India vis-a-vis the China,
Brazil and USA is given below:
Yield (KG) Per Hectre Paddy Wheat Maize
India 3622 3030 2752
China 6749 5048 5998
Brazil 5201 2209 5176
USA 8487 2944 10733
Source: Zuari's Invester Presentation - Dec 2017
3. Increasing use of micro-irrigation provides opportunities for water soluble fertilizers:
Micro-irrigation is frequent application of small quantities of water directly above and below
the soil surface; usually as discrete 54% of India faces high to extreme high water stress
drops, continuous drops or tiny streams
through emitters placed along a water
delivery line.
As the agriculture sector consumes
80% of freshwater in India, micro-
irrigation is often promoted by Central
and State Governments to tackle the
growing water crisis, as the drip and
sprinkler irrigation delivers water to
farms in far less quantities than
conventional gravity flow irrigation. Source: Investor Roadshow Presentation – May 2017 – Coromandel fertilizers
Due to recurring droughts in years 2012, 2015 and 2016, micro-irrigation has become a policy
priority in India. The new catch-phrase in one of the Central Government‘s schemes (Pradhan
Mantri Krishi Sinchai Yojana), is ―Per Drop More Crop‖. Apparently, the shift towards micro-
irrigation is thought to ―save‖ water and boost crop yields.

The global water-soluble fertilizers market is estimated to be valued at USD 12.24 bn in 2016
and projected to reach USD 17.06 bn by 2022, at a CAGR of 5.69% from 2016.
Just 7.7 mn hectare of land is under Micro Irrigation Potential in India 69 mn
9 Hectares
drip irrigation out of a potential of 69 7.7
8
mn hectares. With an increase in 7
6.1
demand for food security for the 6
mn Hectares
4.9
5
growing population, along with
4
3.1
limited agricultural land available in 3
the world, and rise in crop loss due 2

1
to nutrient deficiency, usage of
0
water-soluble fertilizers is expected 2005 2010 2012 2015
to increase with higher penetration Source: Investor Roadshow Presentation – May 2017 – Coromandel fertilizers
of micro-irrigation in India.
4. Government of India (GoI) aims to double farmers’ income by 2022 – expected to boost
fertilizer demand: The GoI is aiming to double farmer‘s income by 2022 to improve their
standard of living and tackle suicides among them. Agrarian distress manifested from large
number of farmers living below poverty line and unfortunate incidents of suicides can be
addressed by enabling farmers to increase their income. To achieve this, Department of
Agriculture, cooperation and farmers' welfare has constituted an inter-ministerial committee to
examine various dimensions of farmers' income and to recommend an appropriate strategy.
 Government schemes to increase agri income: GoI is implementing and
promoting schemes to reduce cost of cultivation in order to realise net positive returns
for farmers. In order to increase production, it is implementing schemes such as
National Food Security Mission (NFSM), National Mission for Oilseed and Oil Palm
(NMOOP), Mission of Integrated Development for Horticulture (MIDH), National
Mission on Agricultural Extension and Technology (NMAET), Rashtriya Krishi Vikas
Yojana (RKVY) and others.
 Pradhan Mantri Fasal Bima Yojana, introduced in 2016 at very low premium which
aims to address agricultural risks and shortcomings in earlier schemes. In order to
ensure all eligible farmers are provided with hassle free and timely credit for
agricultural operations, Government has introduced Kisaan Credit Card scheme
which enables them to purchase agricultural inputs like seeds, fertilisers, pesticides
etc. and draw cash to fulfil their consumption needs.
Further, the Reserve Bank of India (RBI) has allowed banks to take a lenient view on
rescheduling of loans if a farmer loses 33% or more of his crops. The banks have
been advised to allow maximum period of repayment of up to two years (including
moratorium period of one year) if the crop loss is between 33% and 50%. If the crop
loss is 50% or more, then restructured period for repayment is extended to five years.
In order to provide much-needed price support and de-risk farming, GoI has been
enhancing Minimum Support Prices (MSP) for various crops based on
recommendations of Commission of Agricultural Costs and Prices.
 Review of National Policy for Farmers (NPF), 2007: GoI is also reviewing NPF
under the program. A plan of action was prepared by an inter-ministerial committee
set up by the GoI for operationalisation of NPF, 2007. After carefully analysing the
differential between the action points as contained in the NPF and action already
taken by the Government, the committee prepared a plan of action and identified 201
action points, where action was to be taken. Till date, out of 201 action points only
nine action points remain pending.

 Price discovery for farmers -eNAM: Most of the states have Agricultural Produce
Market Committees (APMCs) as first sale points for farmers for their agricultural
produce since early 1960s. In these markets there is asymmetry in market
information and power with more information concentrated with commission agents
and traders than with farmers. This asymmetry in information is leading to exploitation
of farmers by middlemen. In recent years, GoI is laying more emphasis on market
reforms with the introduction of Model APMC Act, 2003.
Many states are in the process of implementing the model APMC Act with provisions
like private markets, direct marketing, contract farming, consumers markets, farmers
markets, single levy, single licence and provision of e-auction to increase competition
and for better functioning of agricultural markets. Latest is electronic-National
Agricultural Markets (eNAM). Under eNAM, in the first stage physical trade will be
replaced by electronic trade in 585 mandis, later on all stand-alone e-mandis will be
electronically linked.
eNAM improves transparency in price discovery, reduces possibility of formation of
cartels among traders as bidders from outside the jurisdiction of APMC markets can
participate in the e-bidding. For example, a cotton miller in Mumbai can bid for the
cotton put up for sale in the e-market of Warangal district of Telangana. It also
facilitates direct bidding by big food retail chains, exporters and agro-processing
industry for agricultural commodities.
This will increase the price received by the farmers in local e-markets. A study by
National Agricultural Marketing Institute on e-markets in Karnataka, where e-markets
are implemented since 2012, clearly shows that there is increased price realisation by
farmers and increased market arrivals in e-markets when compared to non-e-
markets. Preliminary evidence shows that farmers‘ share in consumer Rupee has
increased in e-markets in Karnataka, where currently, 5-15% of the bids are coming
from outside the mandis, which increases competition among traders.
eNAM will be rolled out on demand in states which have fulfilled the following reforms
in their APMC Act, viz.:
 Single licence to be valid across the state;
 Single point levy of market fee; and
 Provision for electronic auction as a mode for price discovery.
Currently, only 17 states have fully or partially amended APMC Acts to join eNAM,
but only 10 states are implementing eNAM as of now All states should participate in
eNAM to facilitate integration of markets across the states for efficient price discovery
at National level. States like Bihar and Kerala are without any APMC Acts and they
are yet to frame regulations.
Visible results from implementation of eNAM will take about five years or more.
But long term policy is essential for benefit of farmers. If eNAM is implemented
successfully in these 585 mandis to convert them into a network of e-markets,
they integrate these local markets into one national market and help in efficient
price discovery.
 Need for Digitisation: Agriculture sector accounts for nearly 15% of India‘s GDP and
constitutes 10% of overall exports. Over 58% of rural households depend on the
sector as their principal means of livelihood. Most importantly, it feeds more than 1.2
billion people.
Driven by a growing population, in particular an expanding middle class with higher
incomes, the sector has seen a sustained increase in demand, especially over the
past decade. India, however, continues to face significant bottlenecks in feeding

nutritious food to a large chunk of the population, leading to issues around chronic
undernourishment and malnutrition as well as lifestyle diseases.
To feed the currently undernourished population, India would require a 3-4% increase
in food supply. With the population expected to grow even further, the strain on the
sector is likely to grow more in the coming years.
 Establishing digital platform - the game changer: The solution to the concerns
stated above is establishment of a digital platform. Technologies such as automation,
decision support system and agriculture robots are being widely adopted in the
sector, globally. Farmers are using the Internet of Things and smart sensors to get
access to valuable information like soil moisture, nutrient levels, temperature of
produce in storage and status of farming equipment. The sector is also ripe for the
use of big data analytics and artificial intelligence, deployed successfully in various
sectors across the globe.
However, the digitization and use of technology in agriculture has, thus far, been
taking place in confined application fields. The logical step for the sector, especially in
India, would be to build an all-inclusive digital platform. An inclusive platform will be
able to provide end-to-end services for farmers—from selecting crops, optimising
plantation timings, seeding and fertilization rates based on plants‘ actual needs and
regulatory requirements and limits. All the data collected during a crop‘s cycle can be
compared with other farmers who grow the same crop in similar conditions. Lessons
learnt from one field can be applied automatically to another to maximize output.
Such an approach can help to improve the yield of major broad-acre crops by
between 20-30%.
 Boons of Digitisation: Establishing such a digital platform will not only help improve
yields and meet the growing demand, it will also be a game changer for the sector.
Firstly, it will help to track produce from farm to the table. In the process, it will reduce
wastage in the value chain—a huge issue in India currently—and improve food
safety. Technology can help detect pathogens and allergens before they reach
consumers.
It can also help address the price discovery issue. The current wholesale market
format suffers from a transparency challenge. With no data on volumes, prevailing
prices or inventory levels, there is little information for buyers or sellers to make
informed decisions. This information gap is a barrier to the entry of new players and,
hence, increased competition and better price discovery.
It can trigger an ―uberization‖ of the sector by bringing farmers in touch with profitable
customers and help build sustainable partnerships to improve farming productivity.
GoI has also taken various measures to improve rural infrastructure by building
roads, electrifying all villages, developing irrigation and providing regular dwellings.
Conclusion: These efforts of GoI, amongst others, to improve farmers‘ income, are
expected to garner positive results for Indian agriculture, thus boosting demand for
fertilizers in India.
 Dynamics of fertilizer business – Government regulated industry: Fertilizer business is

highly regulated by GoI. It introduces various schemes, from time to time, beneficiary of which
are end farmers and fertilizer manufacturers.
 Subsidy on Urea – Retention Pricing Scheme (RPS): GoI introduced RPS in 1977 with the
goal of providing Urea to farmers at reasonable rate without affecting the profitability of

manufacturers. Under this scheme, GoI pays the difference between administered price and
retention price as subsidy to the industry.
 When RPS became burden on exchequer: With steep rise in outstanding subsidy (from Rs.
2,660 mn in 1977-78 to Rs 94.8 bn in 2000-01) and fall in international prices of Urea, the
Government had no option but to re-examine RPS.
Increase in subsidy was due to:
 Rapid increase in capacity of Urea on the back of favourable environment provided
by RPS. Thus, ramping up capacity with high capacity utilization (upto 120%)
resulted in oversupply of Urea in the market
 Government‘s inability to increase farm-gate prices in comparison to rising
production cost; and
 Pass through of the burden of overcapitalization to the GoI, through higher capacity
utilization
International price of Urea is dependent upon imports by China and India. With both the
countries attaining self-sufficiency in 1990s, international Urea price softened – a tad lower
than production cost of domestic players.
Conditions became worse with the steep price increase of crude resulting in higher outgo of
subsidy for naphtha and fuel oil based Urea plants. With the above factors in play, the
Government was forced to shelve RPS in 2003.
 Other Subsidy schemes: The Government has come up with other schemes such as
 New Pricing Scheme (in three phases – NPS I (2003-04), NPS II (2004-06) and NPS
III (2006 onwards)
 Modified NPS in 2014,
 New Investment Policy in 2012, and
 New Urea Policy in 2015
 Shortcoming of NPS schemes: Problem with NPS was that fertilizer companies started
bleeding due to fixed Urea prices and rising cost of inputs such as Natural Gas and Naphtha
(80% of India‘s production of Urea is gas-based). GoI hiked Urea price by Rs. 50/ton in 2012,
which was the last price hike taken for Urea. With this increase, Urea now costs Rs. 5360/ton,
still cheaper than potash and phosphate fertilizers, which cost Rs. 24,000/ton.
Thus, because of lower Urea prices, farmers not only started using Urea in an unbalanced
way but also illegally exported it to neighbouring countries. Hence, modification was required
in NPS III so that manufacturers are allowed to hike Urea prices and there can be a check on
the imbalanced use of soil nutrients resulting in reducing Government subsidy burden.
The Government formed a GoM, in January 2013, to look into the Modified NPS III for Urea
as well as consider earlier proposals for de-regulating the sector. The constitution of the GoM
comes in the backdrop of stiff resistance by Fertiliser Ministry in raising Urea prices and
bringing the sector under the Nutrient Based Subsidy (NBS) policy like P&K fertilisers. But
nothing happened, as politicians could not take bold steps. Thus, Urea is still under price
control regime.
Currently, Urea subsidy is governed by NPS III, Modified NPS III, New Investment Policy, and
New Urea policy.
 Subsidy on other fertilizers - NBS: Government has implemented NBS scheme for other
fertilizers w.e.f. April 1, 2010. Given below is the salient features of the scheme:
 This scheme is for 22 grades of decontrolled fertilizers namely DAP, MAP, TSP,
DAP Lite, MOP, SSP, Ammonium Sulphate and 15 grades of complex fertilizers

 These fertilizers are provided to the farmers at subsidized rates based on the
nutrients (N, P, K & S) contained in these fertilizers
 Additional subsidy is also provided on the fertilizers fortified with secondary and
micronutrients as per the Fertilizer Control Order such as Boron and Zinc
 Subsidy given to companies is fixed annually on the basis of its nutrient content (i.e.
N, P, K & S)
 Under this scheme, Maximum Retail Price (MRP) of fertilizers has been left open
and manufacturers/marketers are allowed to fix the MRP at reasonable level
 Mandatory compliances for fertilizer players: In order to check the prices fixed by P&K
companies, in 2011, GoI directed fertilizer companies to fix prices of P&K fertilizers at a
reasonable level under the NBS regime. In order to ensure reasonableness of prices fixed by
fertilizer companies, while announcing the NBS Policy and rates the following clauses have
been incorporated in NBS Policy applicable:
 It is mandatory for all fertilizer companies to submit, along with their claims of
subsidy, certified cost data in the prescribed format.
 In cases, where after scrutiny, unreasonableness of MRP is established or where
there is no correlation between the cost of production or acquisition and the MRP
printed on the bags, the subsidy may be restricted or denied even if the product is
otherwise eligible for subsidy under NBS.
 Fertiliser companies have to continue to submit the certified cost data as per the
requirement and direction of DOF from time to time. They also have to report MRPs
of P&K fertilizers regularly to DOF.
 P&K companies have to print the same MRP on the bags as applicable for each
state in FMS. In other words, there should not be any difference in MRP printed on
the fertilizer bags and that reported in the FMS for a particular state.
 Is NBS reasonable? Under NBS policy companies are allowed to fix the MRP on their own.
The intention behind introduction of NBS was to increase competition among the fertilizer
companies to facilitate availability of diversified products in the market at reasonable prices.
However, the prices of P&K fertilizers have gone up substantially (which increased on an
average from Rs. 10,000/mt before introduction of NBS to Rs. 25,000/mt in 2013) and doubts
have been raised about reasonableness of the prices fixed by the companies. Prices have
gone up substantially on account of:
 Increase in prices of raw materials/finished fertilizers in international market,
 Depreciation of Indian Rupee versus US Dollar and
 Larger profit margins by the companies
This has led to lot of hue and cry from various quarters and has also led to imbalance in use
of fertilizers, as Urea was available a tad cheaper.
Furthermore, the NBS, which sought to deregulate subsidy on non-Urea fertilizers, was
expected to reduce the subsidy burden substantially. Total fertilizer subsidy, which was
Rs.612 bn in 2008-09, immediately before the introduction of NBS, has increased
substantially to Rs. 730 bn in 2015-16. NBS did not lead to any decline in subsidy on fertilizer,
though it lead to worsening of soil nutrient quality, along with shortages and price increases in
all three types of fertilizers, namely nitrogenous, phosphoric and potassic (NPK).
Issues of Fertilizer Industry
 Coal based units: There are seven units which are using coal for fuel and power. Per unit
cost of energy through coal is significantly lower than that of gas. But, the energy efficiency of
coal is low and hence coal using units need higher energy consumption in terms of Gcal/ton
of Urea. Yet, these units are saving subsidy for the Government because total energy cost is
lower due to use of coal instead of 100% gas.

GoI has been encouraging use of coal. But, while fixing the energy norms under National
Urea Policy 2015 (NUP 2015), this aspect has not been taken into account. The NUP 2015
with reduced energy norms particularly from the fourth year i.e. 2018-19 onwards is expected
to severely impact the viability of these units.
 Naphtha based units: Three remaining naphtha based units namely MCFL (Mangalore),
SPIC (Tuticorin) and MFL (Manali) have already converted to gas by investing large amounts.
But these plants are not able to get gas due to lack of pipeline connectivity and have been
allowed to operate on naphtha till they get gas supply. These units have been discriminated
in fixing their energy norms under NUP 2015. They have also been denied state taxes on
feedstock and special allowance of Rs.150 per ton of Urea allowed to more than 30 years old
gas based units.
 Non-payment of additional fixed cost of Urea: GoI continued to defer implementation of
the policy notified on 2nd April, 2014 known as Modified NPS-III. The industry continues to
suffer under recovery of ~Rs. 9.4 bn per annum on account of fixed cost since 2014-15.
This is one of the reasons for poor viability of Urea units, in spite of high capacity utilization.
 Reduction in energy consumption norms under NUP 2015: Major change in NUP 2015 in
comparison to NPS-III is reduction in energy norms. This has been done without providing
any window for recovery of capital expenditure required for such energy improvement.
Government has effectively mopped up the energy efficiency achieved in last several years
while fixing energy consumption norms for 2015-16 to 2017-18. Further drastic reduction in
energy norms have been proposed for 2018-19 onwards with only 3 energy groups of 5.5
Gcal per ton, 6.2 Gcal per ton and 6.5 Gcal per ton of Urea. For achieving these norms, major
capital replacements are required. In view of scarce availability of resources under present
policy environment and short lead time, many Urea units may not be able to achieve these
norms by 2018-19.
 Huge dependency on imports: One of the constraints for fertilizer industry in India is raw
material availability. The feedstock for nitrogenous (NG, naphtha, & fuel oil/LSHS) phosphoric
(Rock Phosphate & Sulphur) and Potash based fertilizers are largely import dependent.
Currently, about 5 mn tons of Rock Phosphate and 1.2 mn tons of Sulphur is imported every
year.
Outlook:
 World fertilizer demand is seen as expanding moderately in 2017. In last few years about 100
new production units and expansion projects came on stream, adding ~19 mnmt nutrients in
incremental capacity for primary products (Ammonia, Phosphoric Acid and Potash). As per
World Bank estimates, prices are generally expected to increase moderately over the
medium term due to expected growth in demand and higher energy costs.
 On the domestic front also, fertiliser availability is likely to improve over the next two years
with new capacities getting added in Urea and phosphatic fertilizers space. Industry channel
inventory has been brought down moderately during 2016-17 and with agrarian and GST
reforms taking shape, market is expected to grow 5%-10% going forward.
Company Profile
 Introduction: Zuari Agro Chemicals Ltd. (Zuari), of Adventz Group of Mr Saroj Poddar
(originally promoted by Late K.K. Birla in 1967), is amongst India‘s largest pure-play fertilizer
companies on a consolidated basis, manufacturing Urea, DAP, NPK and other complex
fertilizers. It also retails externally sourced products like DAP, SSP, MOP, specialty fertilizers,
and other agri inputs such as pesticides, seeds & micro-nutrients. Leading Urea and Complex
fertilizer manufacturer Mangalore Chemicals & Fertilisers Ltd. (MCFL), Karnataka became its

subsidiary in 2015. Zuari also owns 40% of Paradeep Phosphates Ltd (PPL), Odisha, its
associate company.
 State of the art infrastructure with diverse portfolio: The Company has state-of-the-art
manufacturing facility in Goa. The plant was started in technical & financial collaboration with
US Steel Corporation, International Finance Corporation and Bank of America. The designing
and construction of the plant was carried out by Toyo Engineering, Japan.
Zuari has an annual installed (standalone) capacity of 1,483,300 tons of fertilizers (including
amalgamated capacities). The entire manufacturing facility at Goa comprises of four separate
plants namely Ammonia, Urea, NPK ‗A‘ and NPK ‗B‘. The plants employ latest in pipe –
reactor technology and are based on the slurry granulation process. Breakup of (standalone)
fertilizer capacities (including amalgamated capacities) are as follows:
Installed Capacity
Product Category Location (MTPA)
Urea Goa 399,300
NPK‗A‘ Goa 430,000
NPK ‗B‘ Goa 430,000
SSP* Mahad 200,000
Water Soluble Fertilizers* Baramati 24,000
Total 1,483,300
Source: The Company; * after amalgamation of ZFCL and ZSFL with Zuari, w.e.f. November 13, 2017
 Urea Unit: Zuari has an installed capacity of 1,210 mtpd, commissioned in 1973. Initially, it
was Naphtha based feedstock unit which has been converted to gas based unit. Rationale
behind conversion is given below:
 Under NBS-III, pre 1992 Naphtha based plant was not allowed for production beyond
100% capacity utilization. Capacity and Production (MT)
500000 140%
 Conversion has led to 450000 117% 118%
107% 120%
improvement in plant 400000 97% 100% 103%
92% 94% 91% 100%
efficiency and increase in 350000
300000
80%
production and margins. 250000 Capacity (MT)
Production (MT)
(Earlier, with Naphtha 200000 60%
CU (%)
based feedstock cost of 150000 40%
production for 100000 20%

50000
manufacturing of Urea was
0 0%
~Rs 36,000-37,000 per FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
ton, which has improved to Source: The Company & SKP Research
Rs16,000-18,000 per ton after conversion).
Zuari is revamping its Urea capacity by 590 MTPD at an estimated capex of Rs. 13 bn. The
revamp will take the total capacity of Urea to 1,800 MTPD.
 Production of DAP and other complex fertilizers: The Company also produces DAP, NPK,
SSP and other complex fertilizers. Zuari group is the fourth largest manufacturer of DAP
having market share of ~16% after IFFCO (~25%), Coromandel International (~20%) and IPL
(~20%).

250000
200000
150000
Production (MT)
100000 Sales (MT)
50000
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18
 Largest SSP production capacity in Maharashtra: Zuari has the largest SSP production
capacity in Maharashtra having market share of ~3.1% (in Q1FY19).The Company markets
SSP through its own regional sales channel and through sales channel of Paradeep
Phosphate Ltd. (PPL), its joint venture associate. Zuari‘s SSP is suitable for sugarcane,
onion, banana etc. As mentioned earlier, SSP market is very small and fragmented.
 Distributing externally sourced agri-inputs: Zuari also sells agri-inputs through its well
established distribution network. It imports and supplies DAP, MOP, SSP and other complex
fertilizers. There are large players in the market who manufacture and/or import DAP. As
mentioned earlier, ~50% consumption of DAP is met through imports.
It sources other agri-inputs like, micro-nutrients, crop protection, chemicals (insecticides,
herbicides and fungicides), seeds, etc. from reputed manufacturers and is known for quality
products in the market.
The insecticides market is dominated by multi-national companies (MNC‘s) and products are
either manufactured by them or they supply the basic ingredients to domestic manufactures
for production of finished products. The seeds and micro-nutrients market is fragmented with
many small manufacturers. Zuari‘s diverse portfolio at a glance:
Categories Products Manufactures/Trades
Nutrients Urea, DAP, MOP, complex fertilizers and SSP Manufactures as well as trades
Crop Protection Insecticides, pesticides and fungicides Trade
Seeds Cotton, maize, paddy and mustard Trade
Specialty Fertilizers SOP and Water Soluble Fertilizers (WSF) Manufactures as well as trades
Micro Nutrients Zinc Sulphate, mustard and boron Trade

Source: The Company
 Joint Ventures and subsidiaries: Zuari has an integrated Phosphatic fertilizer facility as
Paradeep Phosphates Limited (PPL) by way of a 50:50 strategic JV with Office
Chérifien des Phosphates (OCP) Group, Morocco, through a SPV Zuari Maroc
Phosphates (P) Ltd. OCP has access to largest global rock phosphate reserves. GoI
holds 19.55% stake in PPL and the rest is held by Zuari Maroc Phosphates Pvt. Ltd.
PPL manufactures and markets complex Phosphatic fertilisers and intermediary products
like Phosphoric Acid and Sulphuric Acid, crucial in the manufacture of Phosphatic
fertilisers. All the products are marketed under the popular ‗Jai Kisaan-Navratna‘ brand.
PPL‘s range caters to almost all agricultural applications.

Major raw materials like Phosphoric Acid, Ammonia, Rock Phosphates, Sulphur and MOP
are imported from Morocco, Tunisia, Indonesia, Jordan, Saudi Arabia and CIS countries.
PPL‘s plant was commissioned in 1986, located in the port town of Paradeep, Odissa.
Today, it has an installed capacity of 1,300,000 MTPA of DAP/NPK, 660,000 MTPA of
Sulphuric Acid and 225,000 MTPA of Phosphoric Acid (designed to meet 50% of total
requirement).
The manufacturing facility of PPL is situated near Paradeep port with 3.4 km closed
conveyor from the port to the plant along with a railway siding, raw material storage yard
and a 3.1 km long pipe rack. PPL also have dedicated 2,000 acres of land berth in the
port which provides safe and secure mooring which facilitates unloading of cargo (various
imported raw materials) from vessels. It has a capacity of 40,000 MTPA of ammonia,
though the total requirement is just 10,000 MTPA. The manufacturing facility is connected
with pipelines from the port. PPL also have two captive power units of 16 MW each,
designed to run on excess steam generated by Sulfuric Acid plant.
PPL is ramping up its fertilizers capacity (4 trains) through de-bottlenecking with an
estimated investment of Rs. 4-5 bn funded through internal accruals. It is expected to be
completed in three years. One train at a time will be taken. With this revamp, PPL will
be ready to double its capacity in next 4-5 years of completion of revamp.
 Zuari Maroc Phosphates Private Limited (ZMPPL), a 50:50 joint venture with Office
Cherifien Des Phosphates (OCP) SA, was established as a Special Purpose Vehicle
(SPV) for acquisition of stake in Paradeep Phosphates Limited (PPL). At present, ZMPPL
is holding 80.45% of equity in PPL.
 Stake in MCA Phosphate PTE: Zuari also has stake in MCA Phosphate Pte, with
Mitsubishi Corp, Japan, registered in Singapore. The JV holds 30% stake (with an
investment of USD 46.12 mn) in FOSPAC. Mitsubishi Corporation (MC) owns 70%. The
JV will purchase the entire production of rock for exports for minimum 20 years.
Formed in December 2011, MCA Phosphates Pte was setup for investments in rock
phosphate assets. In 2012, MCA and Zuari have acquired a stake in Fasfatos Del Pacifico
S.A. (FOSPAC) from a major Peruvian cement manufacturer, Cementos Pacasmayo
S.A.A. (Pacasmayo). FOSPAC is a subsidiary Company of Pacasmayo dedicated to
explorations and the production of rock phosphate in Bayovar, Piura Province, Peru.
 Subsidiary - Mangalore Chemicals and Fertilizers Ltd (MCFL): MCFL is the subsidiary
of ZFCL w.e.f. May 18, 2015. ZFCL holds 53.03% equity stake in MCFL.
MCFL – an introduction: Like Zuari, MCFL is also a pure-play fertilizer Company. It
manufactures both Nitrogenous and Phosphatic fertilizers and is the only fertilizer
manufacturer in Karnataka.
MCFL has an installed capacity of 1,150 mtpd of Urea with the energy consumption of
6.65 G cal. MCFL is revamping its capacity to take advantage of GoI‘s tightened energy
consumption norms which will improve the energy consumption to 5.25 G Cal. Currently,
MCFL‘s plant runs on Naphtha (instead of Natural gas/LNG) because of unavailability of
core infrastructure (gas pipeline) for gas supply.
MCFL also manufactures complex fertilizers and has an installed manufacturing capacity
of 255,500 mtpa of DAP/NPK, and 21,000 mtpa of Sulfonated Napthlene Formaldehyde
(SNF), 12,000 mtpa of WSF and 18,000 mtpa of ABC. Since, its capacities are running at
optimum utilization levels; MCFL has planned a capex of Rs.6 bn to increase its complex
fertilizer capacity by 800,000 mtpa.
Strategic reason for the acquisition: Zuari had dominating presence in Maharashtra. To
consolidate its market share it acquired MCFL to pave its way in Southern India. About

60% of the Company‘s products are sold in the state of Karnataka, which meets about
20% of the needs of the farmers in the State. MCFL maintains a good share of the market
in Kerala and a modest share in the neighbouring states of Tamil Nadu, Andhra Pradesh
and Maharashtra. The subsidiary contributed Rs 26,929.03 mn in FY18.
Furthermore, MCFL is strategically located near Mangalore port, making it easier for the
company to import necessary raw materials, cutting its transportation cost. Also, MCFL
has a huge land bank on which incremental 2 mn ton capacity can be added.
A brief review of the subsidiaries (after amalgamation) and joint ventures of the Company
is given below.
Entities Business Ownership Region Stake
Mangalore Fertilizers and Chemicals Ltd Urea DAP and other complex fertilizers Subsidiary India 53%
Paradeep Phosphates Ltd DAP Sulfuric Acid and Phosphoric Acid Joint Venture India 40%
Zuari Maroc Phosphates Pvt Ltd SPV for acquiring stake in PPL Joint Venture 50%
MCA Phosphates PTE Ltd Investment in rock phosphatw assets Joint Venture Singapore 30%
 Gas scenario in Mangaluru: Petronet LNG Limited is South India‘s first LNG-receiving,
regasification and re-loading terminal. Located in Kochi, it has a capacity of 5 MMTPA.
Constructed at a cost of Rs. 4,500 crore, the Kochi LNG terminal was meant to ensure
natural gas supply for domestic and industrial use in South India.
To facilitate this, GAIL envisaged a pipeline from Kochi to Mangaluru and Bengaluru.
Conceived in 2007, the Kerala project had two phases. In the first phase, a 44 km-long
pipeline was laid in Kochi, linking the terminal with local industrial users, including Bharat
Petroleum Corporation Limited. To take the natural gas to domestic consumers, Indian Oil
Corporation (IOC) entered into a pact with Adani Gas Limited.
The second phase of the pipeline was to go through seven districts of Kerala, covering
503 km in that state, besides 312 km in Tamil Nadu and 22 km in Karnataka. GAIL
required 1,250 acres of land to lay pipeline from Kochi to Mangaluru and Bangaluru. Gas
requirement in Mangaluru, alone, is 4 mnscm per day (of which MCFL‘s requirement is 0.9
mnscm per day).
The delay: The project was to be completed in 2013, however, the project faced stiff
resistance from farmers and landowners in Kerala, apparently with backing of politicians.
Protesters demanded that pipeline be relocated from populated areas and taken through
the sea route. They also demanded rehabilitation of dwellers along the pipeline route if the
latter has less than 10 cents of land (100 cents constitute an acre), which was rejected by
GAIL on the grounds that unlike other infrastructure projects, GAIL‘s pipeline work does
not involves evictions. GAIL acquires the RoU (Right of Use) from land owners and/or
farmers. Owners are paid compensation as per the Petroleum and Mineral Pipelines
(Acquisition of Right of User in Land) Act, 1962. Consequently, GAIL had to terminate the
contracts it entered into with construction firms to lay the pipeline.
Furthermore, the state Government affected a steep hike in compensation — increasing
to 10 times the fair value from the existing five times, for land acquired under the RoU at a
distance of 10 metres. This would have retrospective effect, and GAIL would have to pay
at the revised rate.
Thus, the project has been delayed considerably as a result of resistance to acquisition of
land under RoU agreement. The project which would have been completed in 2013, now
has a revised deadline of February 2019.
 Amalgamation of wholly owned subsidiaries: Zuari recently amalgamated its
subsidiaries Zuari Fertilizers and Chemicals Ltd (ZFCL), Zuari Agri Sciences Ltd (ZASL)

and Zuari Specialty Fertilizers Ltd (ZSFL) with itself. The Honourable National Company
Law Tribunal bench, in Mumbai, has sanctioned the Scheme of Amalgamation w.e.f.
November 13, 2017. These subsidiaries were dissolved without winding up and shares
held by the Company in transferor companies will be cancelled and extinguished without
any act or deed. A brief about the amalgamated subsidiaries are given below:
ZFCL: ZFCL, a wholly owned subsidiary of Zuari, was incorporated for the manufacture of
organic and inorganic fertilisers. ZFCL has set up a 600 MTPD unit at Mahad, in
Maharashtra, for the manufacture of powdered and Granulated Single Super Phosphate
(GSSP).The subsidiary contributed Rs. 453.3 mn during FY17.
ZSFL: Zuari Rotem Speciality Fertilizers Limited (ZRSFL) which was a JV of Zuari has
become a wholly owned subsidiary w.e.f. December 11, 2015. Subsequent to this, the
name of the Company has been changed from ZRSFL to Zuari Speciality Fertilisers
Limited (ZSFL). The Company is engaged in manufacturing of Water Soluble Fertilisers
(WSF‘s) with its manufacturing facility at Baramati, Maharashtra. ZSFL has a capacity of
24,000 MTPA, in two shift basis for production of different NPK blends. The plant is
working on one shift basis and producing 30 mt per day on an average. The subsidiary
contributed Rs. 338.6 mn in FY17.
ZASL (erstwhile Zuari Seeds Limited) is a wholly owned subsidiary of Zuari which is
engaged in the production and trading of hybrid seeds. The subsidiary contributed Rs.
1,320.4 mn in FY17.
The Objective: The objective of the amalgamation was to simplify group structure and to
achieve synergies in operations, economies of scale, reduction in operational costs,
overheads, administrative and other expenditure. The merger would create a single entity,
which would lead to business activities being carried out with greater focus and
specialisation. The Company structure after amalgamation is given below:

Evolution of Zuari at a glance:
Source: Corporate Presentation 2017
 Decrease in share of subsidy: Complex fertilizers are decontrolled by GoI, the share of
subsidy in realisations had declined over the last five years in NPK/DAP in Zuari, which
has further lead to reduction in working capital requirements.
 Well accepted brand and

robust dealer network:
Zuari has a pan-India
presence through its three
marquee brands –Jai Kisaan,
Jai Kisaan-Navratna & Jai
Kisaan-Mangala. Navratna is
the brand of PPL, its JV.
Zuari has a vast marketing
network comprising, ~8,000
dealers and ~75,000 sub-
dealers nationwide with
access to ~23 mn farmers.
These dealers have played
an important role in fortifying
the sales foundation of the
Company across various
markets, helping it to gain a
critical edge over
Source: Investor Presentation - Dec 2017
competition.

 Volatility in RM prices: Natural Gas/LNG, Ammonia, Phosphoric Acid etc. is the main
feedstock for producing fertilizers. Zuari‘s Urea plant in Goa operates entirely on imported
LNG.
LNG prices are propelling high with strong Chinese and Indian demand as Asia accounts
for ~70% of global LNG consumption. China is replacing coal with gas to reduce air
pollution, whereas India is struggling with unavailability of coal. Prices are also rising due
to troubled supply from European facilities. The average price of spot LNG was USD 10.2
per mmbtu in Dec. 2017 which increased to USD 11.6 per mmbtu in August 2018.
Post the gas price pooling mechanism, Zuaris‘ gas cost has fallen to USD 9 per mmbtu
from USD21 per mmbtu in FY16, which has led to lower working capital requirement.
USD per MMBTU
25
20
15
10
0
19-10-2012 19-10-2013 19-10-2014 19-10-2015 19-10-2016 19-10-2017
Source: Bloomberg
Ammonia: Ammonia is used for manufacturing Urea as well as complex fertilizers like
DAP. Prices of Ammonia are volatile in nature and were under pressure till Q2FY18
when it reached USD 230 per MT. It started rising again since October 2017 and touched
USD 345 per MT in December 2017 and again went down to USD 255 per MT in May
2018. Ammonia has started rising again and currently priced at USD 310 per MT.
Ammonia Price trend at a glance:
1000
900
800
700
600
500
400
300
200
100
0
03-12-2007 03-12-2008 03-12-2009 03-12-2010 03-12-2011 03-12-2012 03-12-2013 03-12-2014 03-12-2015 03-12-2016 03-12-2017
Source: Bloomberg
Phosphoric Acid: Phosphoric acid is another key raw material in manufacturing

fertilizers such as triple superphosphate, DAP and Mono-ammonium Phosphate (MAP).
About 90% of Phosphatic Acid produced is used for manufacturing fertilizers. Zuari has a
tie-up with Office Cherifien Des Phosphates (OCP) SA, its PPL partner, for the supply of
Phosphoric Acid. Prices are reviewed twice a year, under the contract. Price of
Phosphoric Acid is also quite volatile. It went down from USD 590 per MT in Q1FY18 to
USD 567 per MT in Q2FY18. Prices have started rising again and is currently at USD
758 per MT (July 2018). Zuari has fixed the price of Phosphoric Acid at USD 758 per MT
with its vendors for Q2FY19. Further negotiations are expected in September 2018.
2500
2000
1500
1000
500
0
03-12-2007 03-12-2008 03-12-2009 03-12-2010 03-12-2011 03-12-2012 03-12-2013 03-12-2014 03-12-2015 03-12-2016 03-12-2017
Source: Bloomberg
Weakness in raw material prices have reduced the prices of fertilizers internationally and
the Indian fertilizer producers also had to reduce their realisation under the pressure of
GoI, resulting in lower revenues in FY17. Input prices have started rising again coupled
with depreciating Indian Rupee (INR), which has dented Zuari‘s margins in Q4FY18 and
Q1FY19, as the Company has not been able to pass it on to the end users. INR has
depreciated even further in Q2/FY19.

Investment Rationale:
1. India’s largest private manufacturer of complex fertilizers with strong brand recall, robust
distribution network:
 One of the most integrated fertilizer manufacturer: Zuari has a diversified product
portfolio which includes Urea, DAP/NPK, plant nutrients, Zypmite (PPL) and other products. It
focuses on DAP/NPK and other complex fertilizers compared to Urea because of higher
pricing flexibility as these are decontrolled fertilizers. The Company also supplements its
production by trading (seeds, pesticides, micro nutrients, and specialty fertilizers) which
contributes to ~34% of total standalone sales and imports key fertilizers and farm nutrients.
This makes Zuari one of the most integrated and largest players in complex fertilizers
segment providing one stop solutions to all farm needs. Integrated manufacturing facilities of
Zuari Group at a glance:
Exhibit: Integrated Manufacturing Facilities
Facilities Installed Capacity Manufactures/Products

DAP/NPK:1,300,000 MTPA Raw materials: Sulphuric Acid,
PPL Facilities: Acquired through GOI Phosphoric Acid: 225,000 MTPA Phosphoric Acid
Paradeep,Odisha disinvestment plan
Sulphuric Acid: 660,000 MTPA Products: DAP/NPK
Raw material: Ammonia

Plant 1: Goa 4 manufacturing facilities 1,492,400 MTPA
Products: Urea, complex fertilizers
ZFCL and ZSFL

Plant 2: 600 MTPA – SSP 24,000 MTPA – SSP and 100% Water Soluble
amalgamated with Zuari
Maharashtra 100% Water Soluble Fertilisers Fertilisers
w.e.f. November 2017
Urea: 379,500 MT DAP: 255,500 MT

MCFL Facilities: Mangalore Chemicals
SNF: 21,000 MT WSF: 12,000 MT Urea and Complex fertilisers
Mangalore and Fertilisers Limited
ABC: 18,000 MT
Source: Company,SKP Research
Plant Capacity Commissioned / Revamped

Ammonia 233,100 MTPA 1973
Plant 1: Goa
Urea 399,300 MTPA 1973
Facility
NPK A 430,000 MTPA 1975 / 2005
NPK B 430,000 MTPA 1984 / 1998
Source: Company,SKP Research
 Fourth largest DAP manufacturer: Zuari Group is the fourth largest manufacturer of DAP
having market share of ~16% after IFFCO (~25%), Coromandel International (~20%) and IPL
(~20%). The market share of DAP producing companies can be seen as under:
15%
25%
IFFCO
4%
Coromandel International
Indian Potash Ltd
16% Zuari Agro Ltd

Chambal Fertilizers
20% Others
20%

 Robust distribution network:The Company has been able to retain its leadership for years
with the help of its robust distribution network comprising of ~8,000 dealers and ~75,000
subdealers nationwide with access to ~23 mn farmers. These dealers have played an
important role in fortifying the foundation of the Company across various markets, helping it
to gain a critical edge over competition.
 Maintains strong relationship with farmers through farmer education: Zuari imparts the
required education and customised knowledge to farmers which enhances their ability to take
right and timely decisions. Some of the initiatives taken by the Company are:
 Training programs: Zuari adds value to farmers by keeping them updated and
educated by organising crop seminars and farmer training programs throughout its
markets. Various faculties from Agricultural Research Stations, Agri Universities,
and Department of Agriculture etc, conduct these seminars which act as excellent
platforms for farmers to interact in person with agricultural experts. This model
ensures that farmers are provided with the latest information regarding scientific
techniques for crop cultivation and also enabling them to clarify any queries they
may have regarding any technique.
 Demonstrations: Demonstrating how to use a fertilizer appropriately is vital, in
ensuring farmers use fertilisers efficiently. Zuari started a demonstration program,
in early 1970s, for farmers in order to promote use of scientific methods and
fertilisers for farming. It teaches farmers how to use soil test reports to judge the
right type of fertilizer to be used in the right quantity at the right time. Soil testing
helps farmers know when to use fertilisers and reap most of it. On observing the
result during harvesting, farmers are encouraged to use appropriate fertilisers.
 Scientist and Farmers Interface: High-tech and precision agriculture is gaining

commercial importance and to succeed farmers should be well versed with the
latest scientific techniques. Speedy transfer of technology from laboratory to field is
accomplished by facilitating direct interaction between scientists and farmers. To
meet this objective, Zuari launched a new program – ‗Scientist and Farmers
Interface‘. With this farmers get an opportunity to interact directly with a panel of
scientists and experts on related subjects.
 Jai Kisaan Junction – One stop shop for farmers and farm support services:
Zuari is strategically changing its business model from a B2G to B2C player, a
potential game changing value creation move. For multi brand agri input retailing, it
has introduced its own retail chain of agri-business hubs under ‗Jai Kisaan
Junction‘ brand, as one stop agri shop for farmers‘ needs and convenience,
helping them to grow high quality products.
This chain serves farmers by facilitating all their agricultural needs and provides
free agricultural consultancy services ranging from sowing to harvesting. Through
this unique initiative the Company not only provides agri inputs to farmers but also
business opportunity to rural youth and employment to agriculture graduates.
The real-time information and customised knowledge provided by Jai Kisaan
Junction enhances the ability of farmers to take right decisions to secure quality
and productivity. Besides the artistic display of an entire range of agri inputs in a
typical area of 500-750 sq. ft, the Junction is equipped with internet supported
audio visual aids which display photos and video recordings on scientific crop
management practices. Over 300 Jai Kisaan Junction stores are already
operational in Karnataka and Maharashtra of which major are EBITDA
positive and Company has plans to reach 1,000 stores in next 2-3 years.

This one-stop-shop offers a complete range of fertilizers and wide array of agri
inputs such as pesticides, speciality fertilisers, crop nutrients, high yielding seeds
and agriculture equipment such as sprayers, tractors, micro irrigation systems,
tools arranging micro finance, crop insurance/crop loan, etc etc. This multi-utility
outlet is equipped to provide other supportive services such as soil testing, market
information, crop insurance and agronomic expertise.
The store is managed by a store manager and has a consulting agronomist to
advise farmers on modern scientific practices. Besides promoting products, Jai
Kisaan Junction provides trainings and idea-sharing opportunities enabling the
agricultural community to share and gain knowledge about new age farming
techniques and cultivation practices.
An attractive ‗loyalty rewards program‘ has been designed in order to retain the old
customers and attract new ones. Active participation of farmers in this rural
initiative has created a sense of ownership in the project among farmers.
This initiative continues to gather momentum and the enthusiastic response from
farmers has encouraged Zuari to expand its retail stores in Maharashtra,
Karnataka, Goa, Andhra Pradesh and North-East for exponential growth.
Key features of Jai Kisaan Junction at a glance:
Source: Corporate Presentation - 2017

 Development laboratories: Arriving at the right fertilizer that complements and
assists crop growth, giving high yield and better economics is not an act of
serendipity, it requires high-quality research. Zuari was first to establish a high-tech
agricultural development laboratory, dedicated to the service of Indian agriculture
in 1974 at Bangalore. Today, Zuari has agricultural labs in Maharashtra, Karnataka
and Andhra
Pradesh.
Initiatives taken by Zuari for

forging strong relationship
with farmers in nut shell is
given in the adjacent chart.
Source: The Company

Driven by customer relationships, ably supported by manufacturing facilities and
diversified products, Zuari has a well-established market position in the Indian
fertiliser industry with a network of overseas suppliers for importing fertilisers and raw
materials and robust dealer network.

2. Strategically located manufacturing facilities with long-term raw material tie-ups:

All Zuari group manufacturing facilities are strategically located near ports and in proximity to
inland domestic market, which makes it easier for the Company to import raw material and
complex fertilizers and sell it to the end consumer (farmers) in the respective states, thus
witnessing savings of logistic and other costs.
The Company has long standing tie-ups/agreements with its suppliers for sourcing key raw
materials namely Rock Phosphate, Phosphoric Acid, Ammonia, Potash etc., ensuring timely
production and availability of its products. It has a long term agreement with OCP S.A.
Morocco (which is also a shareholder in PPL) and off-take agreements for up to 75% of
output for sourcing Rock Phosphate and a long term agreement with IMACID for sourcing
Phosphoric Acid. The Company sources Ammonia from Muntajat, SABIC and Potash from
Arab Potash Company, Canpotex, Uralkali etc. and procures LNG from GAIL at the rate of
USD 9 per MMBTU (post gas price pooling mechanism), which is much lower than USD 21
per MMBTU it was procuring in 2016.
Such strategically located plants and long term tie-ups for key raw materials and
trading products with its suppliers not only provides their timely availability and ready
access to the market but also provides an edge over its peers, which in turn helps in
maintaining its market share.
3. Strategic change in product mix and well-timed capex to increase capacity and meet tightened
energy saving norms:
Although the Company has a diversified product portfolio, it has made a strategic change in
product mix with a higher focus on complex fertilisers like NPK compared to Urea, on account
of higher pricing flexibility and better margins.
 Urea unit revamp: As mentioned earlier, manufacturing and marketing of Urea is controlled
by GoI. With an aim to reduce subsidy burden, GoI is tightening energy savings norms and
has issued revised energy norms under the new Urea policy for existing 25 gas-based Urea
plants in the Country, a move that is expected to save about Rs. 8 bn in fertiliser subsidy.
Under the policy, the Government has shrunk the delta of pre-set energy norm and actual

consumption of energy (on Gcal/ton basis) from FY19 onwards. Industry has requested the
Government to continue with old norms for next three years, which Government has accepted
and extended the timeline till FY20.
 Zuari: To meet the tightened energy savings norms, Zuari is revamping its Urea unit with an
investment of Rs. 13 bn, at Goa, making it more energy efficient and increasing production.
Consequently, Urea capacity will increase from 1,210 MTPD to 1,800 MTPD and energy
consumption per tonne of Urea will improve to 5.39 Gcal as against existing 6.6 Gcal. Zuari
will become one of the highly energy-efficient plants in the country.
The Company is currently working on financial closure, which is likely to take place soon,
award EPC contract and prepare for invitation to bid documents by Project & Development
India Limited (PDIL). The capex is expected to be met by a mix of debt and equity of 70:30.
The revamped plant is expected to be commissioned by April 2021.
 MCFL: Zuari has also decided to revamp Urea unit of its subsidiary MCFL, at an estimated
cost of Rs. 3.5 bn. The revamp will improve the energy consumption to 5.25 G cal from the
present 6.65-6.7 GCal, though the capacity will remain unchanged at 1,150 MTPD. The capex
is expected to be met through internal accruals and debt. The plant is expected to be
commissioned by April 2020.
 Other Capex: MCFL adding new capacity for NPK with 800,000 MTPA to meet long term
growth: Keeping in view that all the complex fertilizer capacity of MCFL is running above 90%
capacity utilization, the Board of MCFL has decided to set up a new NPK plant with capacity
800,000 MTPA at Panambur. The capex is estimated at Rs. 6 bn to be met through a mix of
debt equity ratio of 70:30. The plant is expected to be commissioned by FY22E.
 Plans to raise funds by issue of compulsory convertible debentures (CCDs) and foreign
currency convertible bonds (FCCB’s): Zuari plans to raise funds through a Rights issue of
CCDs not exceeding Rs 5 bn and issue of FCCB or any other similar securities upto Euro 32
mn, on private placement basis.
 Zuari‘s future (FY22E) consolidated capacities at a glance:
Fertilizer Production Capacity (Consolidated)
Water
Particulars Urea DAP/NPK SNF SSP Solubles ABC Zypmite Total
Zuari Agro Chemicals Ltd. 5,94,000 8,60,000 - 2,00,000 24,000 - - 16,78,000

Mangalore Chemicals Fertilizers Ltd. 3,79,500 10,55,500 21,500 - 12,000 18,000 - 14,86,500
Paradeep Phosphates Ltd. - 17,00,000 - - - - 60,000 17,60,000

Total 9,73,500 36,15,500 21,500 2,00,000 36,000 18,000 60,000 49,24,500
Source: The Company, SKP Research
4. Favourable Government policies augers well:

Fertilizer industry is highly regulated and with an aim to boost investments, GoI has initiated
policy steps that could structurally improve fertiliser industry‘s dynamics with schemes like
gas price pooling, DBT, NPS III, Modified NPS III, New Investment Policy, and New Urea
policy. Manufacturers get subsidy based on the policies slated in these schemes.
NPS III (2006 onwards) - Salient features:
 Encourages indigenous Urea production: The policy seeks to encourage Urea production
from indigenous Urea units beyond 100% of their installed capacity by introducing a system
of incentives for additional Urea production subject to merit order procurement.
 Promotes usage of Natural Gas: It seeks to promote the usage of Natural Gas, which is the
most efficient and comparatively cheaper feedstock, for production of Urea. A definite time
schedule has been provided for conversion of all non-gas based Urea units to gas within next
three years. In case of non-conversion, the policy dis-incentivises high cost production by
non-gas based units by restricting their subsidy to import parity price of Urea, after three
years.

 Reimbursement of actual freight: To facilitate unhindered movement of fertilizers to far-
flung area, the reimbursement of freight is based on actual leads for rail and road movement.
The rail freight is reimbursed as per the actual expenditure and the road freight is escalated
with respect to the composite road transport index every year.
New Investment Policy 2012:
New Urea investment policy 2012 governs Urea producers in India for new capacities –
Greenfield or brownfield. Product pricing is linked to import parity price (IPP) of Urea. Salient
features of NIP 2012 is given below:
Source: Investor’s Presentation 2012 – National Fertilizers.

For greenfield/revival and brownfield projects, the new policy protects downside risk (high gas
price and low IPP ratio) through implicit pass through of gas.
It also provides a moderate upside (to the extent of RoE of 20% till gas price of
US$14/mmbtu) at high IPP and moderate to high gas prices compared to the old policy.
Modified NBS (2014):
Modified NBS scheme continued with the calculation of concession rate of Urea units subject
to following changes:
Modifications Clarification
The maximum additional fixed cost, towards increase of four components
such as salaries and wages, contract labour, selling & distribution
Additional Fixed
expenditure and repair and maintenance, of Rs. 350/mt to existing Urea units
Cost
or actual increase in above four components of fixed cost during the year
2012-13 compared to the year 2002-03, whichever is lower will be paid.
The minimum fixed cost of Rs. 2,300/mt or actual fixed cost prevailing during
Minimum Fixed Cost 2012-13, whichever is lower, after taking in to account the compensation of
‗Additional fixed Cost‘.
The special compensation of Rs. 150/mt will be paid to gas based Urea
plants which have converted to gas and are more than 30 years old.
Special
Old and inefficient units to be phased out in due course of time after addition
Compensation
of new capacity.
Source: Ministry of Chemicals & Fertilizers; only the provisions pertaining to Chambal is mentioned.
New Urea Policy for existing gas based Urea manufacturing units (2015):
The policy sets the norms for energy consumption. It throws light on the gains earned by the
Urea units as delta of pre-set energy norm and actual consumption of energy (on Gcal/ton
basis). The existing gas based Urea units is classified in the following three groups:

Group Pre-set energy norms Urea units
Chambal‘s Gadepan I & II among other Urea
I 5.0 Gcal/MT – 6.0 G Cal/MT
units (of other companies)
IFFCO-Kalol, GSFC-Baroda, RCF-Thal and
II 6.0 Gcal/MT – 7.0 G Cal/MT
GNVFC-Bharuch
Zuari‘s Goa unit and its subsidiary MCFL,
III 7.0 Gcal/MT and above
among other units (of other Companies).
Source: Ministry of Chemicals & Fertilizers; only the provisions pertaining to Chambal is mentioned.
As evident from the above table, Zuari falls under group III and energy norm set by the
Government, for FY18, was 7.23 Gcal/MT for Zuari’s Goa unit and MCFL’s Mangalore unit.
Both the plants of Zuari consume less energy (6.6 Gcal/MT and 6.7 Gcal/MT for Goa Unit and
MCFL unit respectively) than the above prescribed norms. Thus, Zuari enjoys energy
savings in both its plants.
From FY19 onwards, GoI wants to further tighten the energy norms with the purpose of
reducing the subsidy outgo. It has proposed to decrease the norm to 6.5 G cal/MT from
FY19 onwards, for the companies falling in Group-III. The industry has requested the
GoI to continue old norms for the next three years (providing them ample time to
upgrade their units), which GoI has accepted and extended the timeline till FY20.
Other Government policies - gas price pooling:
From July 1, 2015; there is a ‗gas price pooling‘ mechanism in place in India. Under this
scheme; the price of domestic Natural Gas is averaged or pooled with the cost of imported
LNG to create a uniform rate for fertilizer plants. All fertilizer plants in the country get the
feedstock natural gas to make Urea at this uniform price.
 Earlier arrangement: The gas price pooling seeks to change the industry dynamics in Urea
sector by levelling gas costs for all players. Earlier, every Urea unit that needed Natural Gas
was making its own arrangement/contracts individually on varied costs from different
suppliers. This situation was particularly disadvantageous for the plants which had no access
to cheap domestic gas. By pooling domestic gas with imported gas, the delivered gas cost for
all units become uniform for all players who are connected to the natural gas grid.
 Implications of this policy: Since price is same for input gas for all plants and the subsidy
provided by the Government is also same (MRP - Rs 5,360/ton); this policy has incentivised
the competition among fertilizers makers. The competition is mainly on energy efficiency and
production volume and not on price of natural gas input.
This policy allows the industry to focus on its core business of increasing Urea production at
healthy energy efficiency. Their problem of dealing with gas supply has been now left to LNG
suppliers and gas pool operator GAIL.
Fertiliser plants consume about 42.25 mmscmd of gas for manufacture of subsidised Urea.
Out of this, 26.50 mmscmd comes from domestic fields and the rest 15.75 mmscmd is
imported LNG.
5. Direct Benefit Transfer (DBT) with Adhaar linkage of soil health card, will lead to better
working capital cycle:
With the rollout of DBT for fertilizer subsidies, one of the largest subsidy reforms currently
underway, the massive amount of data being generated is expected to provide a clear picture
of farming activity in the country and help make future planning for the sector more effective.
GoI is keeping subsidy reform in the fertilizer sector low key for the complexities involved
which include improper land records and involvement of a large number of tenant farmers.

DBT is being implemented in two phases. During phase – I, subsidy will be transferred
directly to the manufacturer‘s account on weekly basis as shown below.
Source: Investor Presentation– Dec 2017
 Aadhaar linkage with soil health card – will lead to better soil health management: GoI
is also linking Aadhaar card with soil health cards and land records wherever possible, which
is helping policymakers get a better picture of the farming activity in the country. The data
helps in suggesting which crop can be grown where and in what season for optimum
productivity, based on soil health profile. The software system linked to the point of sale
(PoS) machines deployed by the retailers also suggests the best combination of fertilizers
needed. At present, farmers have the choice of going by the system‘s suggestion or make
their own choices. Till January 2018, 85% of the PoS devices have been deployed, 4,482
training sessions have been conducted and 1.7 lakh (approx.) retailers have been sensitised
across the Country.
Once the system functions fully, it will lead to better soil health management, balanced
fertilization and better productivity, besides increasing transparency. Earlier, officials could
only be aware that fertilizer supplies had reached a particular district and not whether they
had reached the farmer. With Aadhaar linkage, policy makers would know if a farmer has got
the plant nutrient. This will also stop any leakage that might be happening in the system.
 Functioning of DBT – curbs malpractices: Farmers who purchases fertilizers from the
retailers have to first give details of their Aadhaar card, which essentially will help the
Government to collect data, on purchasing pattern and size of the land of the farmer. This
move has helped curb hoarding of fertilisers by some of the bigger farmers or other industrial
players who use subsidised fertilisers for their manufacturing process.
Details of farmers‘ purchases are recorded in the PoS machines. This detail will subsequently
be mapped with a soil card and provide guidance on the use of fertiliser. This is expected to
improve health of the soil and subsequently help improve productivity and farmer income.
Since every kilogram of fertiliser sold at the retailer's end now has an address, retailers who
used to either help hoarding, sold spurious fertilisers or sold it to industries are shutting
shops. It is expected that the implementation of DBT to provide subsidy directly to farmers will
save the GoI, a minimum of Rs. 500 bn.
The Ministry of Agriculture, GoI is on target to provide soil health cards for all 120 mn farm
holdings by the end of this year. The scheme is progressing well. Cards have been provided
to 100 mn farmers by October 2017, inspite of lack of staff, power supply and internet
connectivity. According to the ministry, use of these cards have led to 8-10% lower
consumption of fertilizers in 2016-17 compared to the year before, while due to balanced use
of nutrients overall crop production went up by up to 12%.
Once the system will be in place Government will rollout phase – II of DBT wherein the
subsidy will be directly transferred to farmers‘ account. Thus, the farmer will make full
payment to the dealers at the point of purchase and Zuari‘s (and also of the industry‘s) wait
for subsidy disbursement from Government will be over, leading to improvement in working
capital requirement.

 Recent Development – disbursement of subsidy within a week: Under the fertiliser DBT
system, 100% subsidy on various fertiliser grades is released to the fertiliser companies on
the basis of actual sales made by the retailers to the beneficiaries who are identified through
documents like Aadhaar card, Kisan credit card and the voter identity. Between April – July
2018, 15.55 mnt of fertilisers were sold through POS machines. The payment is being done
within a week now after the bill is generated by the companies.
250 Debtor Days Creditor Days Inventory days
201 197 198

200 187
173
166 161
158
148
150
100
49 47 54 53 53
44 42 41 76 76 76
50 34
62
54
46 42
35
0 26
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
6. Robust Financials:
 Consolidated top-line to grow moderately with a CAGR of ~8.1% during FY18-20E: In
FY18, consolidated revenues of Zuari witnessed a significant increase of 14% to Rs72,647.8
mn vis-à-vis a dip of 16% last year due to better sales volumes of NPK and other complex
fertilizers, though volumes of Urea remained flat. Higher realisations from Urea and other
complex fertilizers also contributed to the growth.
Zuari witnessed robust consolidated sales growth of ~52% during Q1FY19 due to higher
production volumes and realisations. The company produced 300,000 MT of fertilizers vis-à-
vis 242,000 MT corresponding period last year. Though, due to acute shortage of Phosphoric
Acid globally, Zuari witnessed reduction in DAP production. The industry witnessed dip of
39% in DAP production during the quarter. Keeping this in view, the management of Zuari
has strategically shifted its focus from DAP to production of NPK and other complex
fertilizers, which requires lesser amount of Phosporic Acid and fetches higher margins.
Another reason for low DAP sales was massive congestion in Indian ports due to which
imported DAP could not reach in time. This has led to increase in retail DAP prices (by 20%,
as of June 2018, at Rs 1,290 per 50 kg bag). Inspite of this Zuari has gained market share in
many markets.
Going forward, we expect Zuari to grow with a CAGR of ~16.2% during FY18-FY20E.
Standalone manufacturing sales (Rs mn) Value wise mfg contribution (standalone)
40000.0 Complex Fertilizers Urea Complex Fertilizers Urea
100%
35000.0
90%
30000.0 80% 42%
54% 48%
70% 58%
16390.6
25000.0 65% 65% 66%

21614.2
11065.8
60% 74% 74%

20000.0
21756.4
13373.8
50%
20424.9
27409.3
25527.9
17115.9
15000.0 40%
10000.0 30% 58%

46% 52%
17626.4
11701.6
10451.7
11376.6
15391.8
15687.8
20% 42%
9066.6
9092.5
9466.9
35% 35% 34%

5000.0 26% 26%
10%
0.0 0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Revenue from Traded Fertilizer (Standalone) Mfd. vs Traded Fertilizer Sales (Stand)
30000.0 Traded Fertilizers (Rs mn) Growth (%) 60% 120% Other Operating Revenue Traded Revenue Manufacturing Revenue
47%
50%
25000.0 100%
40%
21% 30% 34% 32% 37% 33% 34%
20000.0 19% 80% 40% 43%
20% 50%
60%
15000.0 8% 10% 60%
0%
-30% 0%
10000.0 40%
-31% -10% 68% 67%
66% 63% 66% 60% 57%
25987.7
17852.1
17913.5
19318.7
13129.4
15595.7
22925.7
27740.1
-20% 50%
5000.0 -32% 20% 40%
-30%
0.0 -40% 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Overall Consolidated Revenues
120000.0 25%
20%
20%
100000.0 14% 13% 15%
80000.0 10%
4%
5%
60000.0 0%
-4% 0%
40000.0 -7% -5%

-16% -10%
76353.5
78891.6
73407.5
76114.1
63854.2
72647.8
87192.8
98116.9
20000.0
-15%
0.0 -20%
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

 EBIDTA margins to improve: The consolidated EBIDTA margins of Zuari have improved
significantly from 3.6% in FY16 to 7.4% in FY18 because the realizations of fertilizers has not
fallen in the ratio of fall in international fertilizer input prices during the period. Though, during
Q4FY18 and Q1FY19 margins declined to 6% and 5.1% due to rise in input prices coupled
with currency depreciation which the Company was not able to pass on to the end users (due
to lag period). The Company has taken price increase three times in last 4-5 months. Unless
there is further increase in raw material prices, no further price hike will be taken by the
company on account of Rupee depreciation. As mentioned earlier, prices of imported DAP
and Phosphoric Acid increased to USD 430 per MT and USD 758 per MT respectively. Going
forward, we expect EBIDTA Margins to improve by FY20E at 6.3% with the strategic
decision of the company to focus on high margin NPK and other complex fertilizers
and improvement in raw material pricing scenario.
 PAT margins to improve: PAT margin was negative in FY17 at -0.7% which has improved
to 1.8% in FY18 on the back of decrease in interest cost by ~11% to Rs 4,035.8 mn (mainly in
its subsidiary MCFL, where interest reduced from Rs. 1,162.9 mn in FY17 to Rs. 904.23 mn
during FY18). Though, PAT margin again went into negative trajectory in Q1FY19 with rising
interest cost again by 26% to Rs 1,164.2 mn due to change subsidy payment norms by GoI.
Earlier, Zuari was getting 90% of subsidy at the time of despatch of fertilizers to dealers. Now
with the change of norms, subsidy is disbursed by GoI at the point of sale through PoS
machine. Zuari has also increased the credit period of its vendors, some of which are interest
bearing. We expect PAT margin to remain in the vicinity of 1.7% by FY20E due to
improved working capital cycle on the back of improvement in DBT scheme, resulting
in timely payment (within 7 days of sale), lower working capital loan and interest outgo.
 Profitability of the Company at a glance:

7000.0 7.3% 7.4% 8.0% 2000.0 2.5%
EBIDTA 6.3% 2.0%
7.0% 1.8% 1.7% 2.0%
6000.0 EBIDTM 1500.0
5.8%
6.0% 1.5%
5000.0 1.0%
EBIDTA Margin (%)
1000.0 0.8%
EBIDTA (Rs mn)
1.0%
PAT Margin (%)
4.3% 4.2% 5.0%

PAT (Rs mn)
4000.0 3.9%
1682.5
1643.7
1289.9
500.0 0.5%
643.2
887.1
3.6% 4.0% 0.1%

89.3
3000.0 2.8% 0.0%

3.0% 0.0 -0.7%
-0.6%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
2000.0 -0.5%
2.0% -500.0
-442.6
-438.7
-1.0%
-1230.7
6204.2
3560.9
3351.2
2079.8
3002.8
2732.2
4656.6
5351.3
5077.5
1000.0 1.0%
-1000.0
-1.5%
0.0 0.0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E -1500.0 -1.6% -2.0%

Key Concerns
1. Heavily dependent on Government policies:
The fertilizer business of Zuari is heavily dependent on Government policies. For instance,
under NUP 2015, GoI has reduced energy consumption norms in comparison to NPS III,
which means efficiency of Urea units consuming more energy need to be revamped. GoI has
not provided any window for capital requirement for such revamp. Any such negative move by
GoI may negatively impact the profitability of the Company.
2. Delay in payment of subsidy by the Government:
As mentioned earlier, fertiliser industry is highly regulated and dependent on the GoI policies.
Subsidy from GoI is a major component of revenue of the Company. The delay in payment of
subsidy by the GoI creates stress on working capital and increases finance cost of Zuari.
Total subsidy outstanding for Zuari (group subsidy) during Q1FY19 is Rs 32.4 bn vis-à-vis Rs
22.1bn in Q1FY18.
3. Demand fluctuations due to monsoon:
The end use of fertilizers is heavily dependent on monsoon. One season of bad monsoon
depletes the demand of fertilizers, directly impacting top-line and margins of Zuari.
4. Forex Risk:
The Company imports it‘s raw materials and complex fertilizers and other agri products for
selling to the end consumers. The impact of recent ~12% devaluation of INR may have a
significant impact on business and financial outlook of Zuari, given this import content and lag
period in passing on cost escalation to the farmers, if at all, etc. Till certainty emerges about
the Government, Industry and Company strategy to tackle this situation, this will remain a
cause of concern.
Outlook & Valuations

Amongst India‘s largest pure play fertilizer manufacturers, Zuari has a strong brand recall,
robust distribution network and has planned a well-timed capex to expand capacity, improve
efficiency, productivity and energy saving. Strategic creation of a large retail network to
provide integrated solutions to farmers needs at one place, can be a game changing value
enhancer. It is well-placed to reap benefits of reforms like DBT of fertilizer subsidy, etc.
Although the long term big picture is more attractive, uncertainties have been created in the
near term by the recent devaluation of INR. Zuari has significant imports. Rising prices may
have a bearing on demand of its products amongst farmers; response by GoI, fertilizer
industry and the company needs to be seen. In view of this, we have currently valued the
stock at a P/E of 10x of FY20E EPS of Rs 40 and recommend buy on the stock with a target
price of Rs 400 (~65% upside) in 15 months, subject to future re-rating as clarity emerges.
One year forward looking EV/EBIDTA band at a glance:

100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
Apr-18
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Aug-13
Dec-13
Aug-14
Dec-14
Aug-15
Dec-15
Aug-16
Dec-16
Aug-17
Dec-17
Aug-18
9 11 13 15 17 EV
Source: SKP Research Desk

Q1FY19 Standalone Result Review
(All data in Rs.mn unless specified, Y/e March)
Standalone
Particulars Q1 FY19 Q1 FY18 % Change Q4 FY18 % Change FY18 FY17 % Change
Net Sales 13468.3 7413.6 81.7% 11176.4 20.5% 46475.7 40765.1 14.0%
TOTAL EXPENDITURE 12787.0 7165.1 78.5% 10566.0 1.8 43057.4 37809.6 13.9%
Raw Material Consumed 3181.3 1348.9 135.8% 5653.9 -43.7% 19691.5 18993.6 3.7%
% to Sales 23.6% 18.2% -- 50.6% -- 42.4% 46.6% --
Purchase of traded goods 6970.5 3855.7 80.8% 2497.9 -100.0% 14108.9 10757.5 31.2%
% to Sales 51.8% 52.0% -- 22.3% -- 30.4% 26.4% --
Employee Expenses 246.3 245.3 0.4% 216.7 13.7% 930.3 917.8 1.4%
% to Sales 1.8% 3.3% -- 1.9% -- 2.0% 2.3% --
Power, Fuel & Water 0.0 0.0 -- 783.7 -100.0% 2619.2 2064.5 26.9%
% to Sales 0.0% 0.0% -- 7.0% -- 5.6% 5.1% --
Outward Freight 0.0 0.0 -- 826.3 -100.0% 3915.1 3027.7 29.3%
% to Sales 0.0% 0.0% -- 7.4% -- 8.4% 7.4% --
Other Expenses 2388.9 1715.2 39.3% 587.5 306.6% 1792.4 2048.5 -12.5%
% to Sales 17.7% 23.1% -- 5.3% -- 3.9% 5.0% --
EBIDTA 681.3 248.5 174.2% 610.4 11.6% 3418.3 2955.5 15.7%
EBIDTA Margin 5.1% 3.4% -- 5.5% -- 7.4% 7.3% --
Depreciation 108.9 98.7 10.3% 112.9 -3.5% 425.8 392.1 8.6%
EBIT 572.4 149.8 282.1% 497.5 15.1% 2992.5 2563.4 16.7%
EBIT Margin 4.2% 2.0% -- 4.5% -- 6.4% 6.3% --
Interest 846.4 693.8 22.0% 901.1 -6.1% 3158.2 3300.2 -4.3%
Other Income 157.2 159.7 -1.6% 331.4 -52.6% 812.5 582.6 39.5%
EBT before Exceptional Items -116.8 -384.3 -69.6% -72.2 61.8% 646.8 -154.2 -519.5%
EBT Margin before Excep Items -0.9% -5.2% -- -0.6% -- 1.4% -0.4% --
Exceptional Items 0.0 0.0 -- -139.4 -- -139.9 -643.3 --
Forex Difference 0.0 0.0 -- 0.0 -- 0.0 0.0 --
EBT After Exceptional items -116.8 -384.3 -69.6% -211.6 -44.8% 506.9 -797.5 -163.6%
EBT Margin after Excep Items -0.9% -5.2% -1.9% -- 1.1% -2.0% --
Tax -33.5 -110.2 -69.6% -61.5 -45.5% 87.9 -193.9 -145.3%
Extraordinary Items 0.0 0.0 -- 0.0 -- 0.0 0.0 --
Share of P/L of an associate and JV 0.0 0.0 -- 0.0 -- 0.0 0.0 --
Monority Interest 0.0 0.0 -- 0.0 -- 0.0 0.0 --
Profit After Tax from Continued Operation -83.3 -274.1 -69.6% -150.1 -44.5% 419.0 -603.6 -169.4%
PAT Margin from Continued Operation -0.6% -3.7% -- -1.3% -- 0.9% -1.5% --
Diluted EPS (Rs) -2.0 -9.5 -79.2% -3.6 -44.5% 10.0 -14.4 -169.5%
Source: Company, SKP research

Q1FY19 Consolidated Result Review
(All data in Rs.mn unless specified, Y/e March)
Consolidated
Particulars Q1 FY19 Q1 FY18 % Change Q4 FY18 % Change FY18 FY17 % Change
Net Sales 20005.2 13182.0 51.8% 17015.9 17.6% 72647.8 63768.5 13.9%
TOTAL EXPENDITURE 18993.0 12669.1 49.9% 15987.4 -1.2 67296.5 59060.4 13.9%
Raw Material Consumed 5558.6 1757.0 216.4% 8703.9 -36.1% 31294.6 30007.6 4.3%
% to Sales 27.8% 13.3% -- 51.2% -- 43.1% 47.1% --
Purchase of traded goods 9384.8 7536.7 24.5% 3131.2 -100.0% 20574.6 15738.2 30.7%
% to Sales 46.9% 57.2% -- 18.4% -- 28.3% 24.7% --
Employee Expenses 436.1 413.6 5.4% 376.2 15.9% 1631.0 1605.1 1.6%
% to Sales 2.2% 3.1% -- 2.2% -- 2.2% 2.5% --
Power, Fuel & Water 0.0 0.0 -- 0.0 -- 4903.9 3861.2 27.0%
% to Sales 0.0% 0.0% -- 0.0% -- 6.8% 6.1% --
Outward Freight 0.0 0.0 -- 0.0 -- 5880.9 4853.1 21.2%
% to Sales 0.0% 0.0% -- 0.0% -- 8.1% 7.6% --
Other Expenses 3613.5 2961.8 22.0% 3776.1 -4.3% 3011.5 2995.2 0.5%
% to Sales 18.1% 22.5% -- 22.2% -- 4.1% 4.7% --
EBIDTA 1012.2 512.9 97.3% 1028.5 -1.6% 5351.3 4708.1 13.7%
EBIDTA Margin 5.1% 3.9% -- 6.0% -- 7.4% 7.4% --
Depreciation 207.2 187.4 10.6% 225.3 -8.0% 825.3 773.1 6.8%
EBIT 805.0 325.5 147.3% 803.2 0.2% 4526.0 3935.0 15.0%
EBIT Margin 4.0% 2.5% -- 4.7% -- 6.2% 6.2% --
Interest 1164.2 923.8 26.0% 1153.1 1.0% 4035.8 4395.4 -8.2%
Other Income 168.8 166.0 1.7% 356.8 -52.7% 871.4 563.5 54.6%
EBT before Exceptional Items -190.4 -432.3 -56.0% 6.9 -2859.4% 1361.6 103.1 1220.7%
EBT Margin before Excep Items -1.0% -3.3% -- 0.0% -- 1.9% 0.2% --
Exceptional Items 0.0 0.0 -- -255.6 -- -139.4 -643.3 --
Forex Difference 0.0 0.0 -- 0.0 -- 0.0 0.0 --
EBT After Exceptional items -190.4 -432.3 -56.0% -248.7 -23.4% 1222.2 -540.2 -326.2%
EBT Margin after Excep Items -1.0% -3.3% -1.5% -- 1.7% -0.8% --
Tax -62.9 -119.0 -47.1% -133.8 -53.0% 232.6 -86.8
Extraordinary Items 0.0 0.0 -- 0.0 -- 0.0 0.0 --
Share of P/L of an associate and JV 47.6 116.4 -- 0.0 -- 584.9 325.2
Monority Interest 0.0 0.0 -- 47.0 -- 0.0 0.0 --
Profit After Tax from Continued Operation -79.9 -196.9 -59.4% -161.9 -50.6% 1574.5 -128.2 -1328.2%
PAT Margin from Continued Operation -0.4% -1.5% -- -1.0% -- 2.2% -0.2% --
Diluted EPS (Rs) -1.5 -4.3 -66.3% -6.1 -76.1% 30.7 -52.2 -158.8%
Source: Company, SKP research

Consolidated Financials
Exhibit: Income Statement Exhibit: Balance Sheet
Particulars FY17 FY18 FY19E FY20E Particulars FY17 FY18 FY19E FY20E
Total Income 63,854.2 72,647.8 87,192.8 98,116.9 Sha re Ca pi ta l 420.6 420.6 420.6 420.6
Growth (%) -16.1% 13.8% 20.0% 12.5% Res erve & Surpl us 16,288.6 14,342.8 15,229.9 16,912.4
Expenditure 59,197.7 67,296.5 82,115.3 91,912.7 Shareholders Funds 16,709.2 14,763.3 15,650.5 17,333.0
Ma teri a l Cos t 29,227.7 31,294.6 35,749.1 38,265.6 Mi nori ty Interes t 0.00 3900.29 4241.87 4626.25
Pur of Tra ded Goods 15,906.6 20,574.6 27,988.9 32,967.3 Tota l Debt 41,209.0 43,544.1 48,594.0 55,713.5
Empl oyee Cos t 1,605.1 1,631.0 1,831.0 2,060.5 Deferred Ta x (Net) 149.5 133.8 133.8 133.8
Power & Fuel & Othr Exp. 0.0 0.0 0.0 0.0 Other Long Term Li a b 186.5 64.4 77.3 87.0
Other Expens es 12,458.2 13,796.3 16,546.3 18,619.3 Total Liabilities 58,254.2 62,406.0 68,697.4 77,893.5
EBITDA 4,656.6 5,351.3 5,077.5 6,204.2 Goodwi l l on Cons ol i da ti on 346.2 0.0 0.0 0.0
Depreci a ti on 776.1 825.3 879.4 851.4 Net Block inc. Capital WIP 19202.1 19444.3 23393.2 31826.9
EBIT 3,880.5 4,526.0 4,198.1 5,352.8 Inves tments 8,776.7 9,224.6 9,224.6 9,224.6
Other Income 761.1 871.4 784.7 784.9 Non-Current Asset 1556.5 1502.1 1802.8 2060.5
Interes t Expens e 4,541.5 4,035.8 4,301.9 4,494.2 Inventori es 7,084.9 10,511.4 12,643.0 14,128.8
Profit Before Tax (PBT) 100.1 1,361.6 681.0 1,643.5 Sundry Debtors 34627.1 34480.8 38364.9 39737.3
Excepti ona l Items 643.30 139.40 0.00 0.00 Ca s h & Ba nk Ba l a nce 722.8 1,686.9 878.7 933.5
Income Ta x 220.6 232.6 149.8 361.6 Other Current As s ets 2628.2 5200.9 6103.5 6868.2
Mi nori ty Interes t 0.00 284.60 341.58 384.38 Loa ns & Adva nces 356.0 209.3 261.6 245.3
Profi t/(Los s ) from As s oci a tes 325.10 584.90 697.54 784.94 Current Li a bi l i ti es & Prov 17136.0 20775.2 24895.6 28052.4
Profit After Tax (PAT) -438.7 1,289.9 887.1 1,682.5 Net Current As s ets 28,282.9 31,314.1 33,356.0 33,860.8
Growth (%) -64.3% 394.0% -31.2% 89.7% Deferred Ta x As s ets 89.72 920.80 920.80 920.80
Diluted EPS -10.4 30.7 21.1 40.0 Total Assets 58,254.2 62,406.0 68,697.4 77,893.5
Exhibit: Cash Flow Statement Exhibit: Ratio Analysis

Particulars FY17 FY18 FY19E FY20E Particulars FY17 FY18 FY19E FY20E
Profit Before Tax (PBT) (218.0) 1,807.0 681.0 1,643.5 Earning Ratios (%)
Sha re of Profi t from As s oci a tes -325.18 -584.90 697.54 784.94 EBIDTA Ma rgi n (%) 7.3% 7.4% 5.8% 6.3%
Depreci a ti on 776.1 825.3 879.4 851.4 PAT Ma rgi ns (%) -0.7% 1.8% 1.0% 1.7%
Interes t Provi ded 3,139.3 3,207.8 4,301.9 4,494.2 ROCE (%) 6.7% 7.8% 6.5% 7.3%
Chg. i n Worki ng Ca pi ta l 9,559.3 342.7 (2,895.0) (575.2) ROE (%) -2.6% 8.7% 5.7% 9.7%
Di rect Ta xes Pa i d (361.1) (206.7) (149.8) (361.6) Per Share Data (INR)
Other Cha rges (923.3) (2,464.1) (242.9) (122.6) Di l uted EPS -10.4 30.7 21.1 40.0
Operating Cash Flows 11,647.2 2,927.1 3,272.0 6,714.7 Ca s h EPS (CEPS) 8.0 50.3 42.0 60.2
Ca pi ta l Expendi ture (1,464.2) (721.7) (4,828.2) (9,285.1) BVPS 397.3 351.0 372.1 412.1
Inves tments 558.5 - - - Valuation Ratios (x)
Others 500.7 100.3 - - P/E -23.3 7.9 11.5 6.1
Investing Cash Flows (405.0) (621.4) (4,828.2) (9,285.1) Pri ce/BVPS 0.6 0.7 0.7 0.6
Cha nges i n Equi ty - - - - EV/Sa l es 0.8 0.7 0.7 0.7
Inc / (Dec) i n Debt (7,504.7) 1,837.3 5,049.8 7,119.5 EV/EBITDA 10.9 9.7 11.4 10.5
Di vi dend Pa i d (i nc ta x) (3.2) (103.0) - - EB/EBIT 13.1 11.5 13.8 12.1
Interes t Pa i d (3,195.2) (3,222.5) (4,301.9) (4,494.2) Balance Sheet Ratios
Others 0.00 0.00 0.00 0.00 Debt - Equi ty 2.5 2.9 3.1 3.2
Financing Cash Flows (10,703.1) (1,488.2) 748.0 2,625.2 Current Ra ti o 2.7 2.5 2.3 2.2
Chg. i n Ca s h & Ca s h Eqv 539.03 817.42 -808.22 54.86 Fi xed As s et Turn. Ra ti os 3.6 4.0 4.7 5.4
Openi ng Ca s h Ba l a nce 190.6 722.8 1,686.9 878.7
Di fference i n B/S a nd Ca s h Fl ow -6.76 146.64 0.00 0.00
Closing Cash Balance 722.8 1,686.9 878.7 933.5
Source: Company Data, SKP Research

Note:
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and Thomson First Call.
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October 3, 2018

Zuari Agro Chemicals Ltd.

CMP INR 243 Target: INR 400 Initiating Coverage: Buy

Key Share Data Company Background

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Fertilizer Industry –An Overview

Category Nutrients Comments

Nitrogen (N) These are basic nutrients

Iron, Cobalt, Chromium, Lack of micronutrients may

Source: SKP Research

 Micronutrients: Micronutrients which includes Iron, Cobalt, Chromium, Copper, Iodine,

Although required in smaller quantity, micronutrients are as important to plant nutrition as

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Exhibit:Total installed capacity of fertilizers in India

Total Installed Capacity

Source: Departm ent of fertilizers, SKP Research

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 Di-ammonium Phosphate (DAP): DAP is one of a series of water-soluble Ammonium

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fertilisers used worldwide. Its composition 1

Source: Investor Roadshow Presentation – May 2017 – Coromandel Fertilizers

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Source: Fertiliser Association of India (FAI),SKP Research

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the world, and rise in crop loss due 2

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 Dynamics of fertilizer business – Government regulated industry: Fertilizer business is

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SSP* Mahad 200,000

Water Soluble Fertilizers* Baramati 24,000

production for 100000 20%

Rs16,000-18,000 per ton after conversion).

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100000 Sales (MT)

Categories Products Manufactures/Trades

Crop Protection Insecticides, pesticides and fungicides Trade

Seeds Cotton, maize, paddy and mustard Trade

Micro Nutrients Zinc Sulphate, mustard and boron Trade

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Source: The Company & SKP Research

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Source: Corporate Presentation 2017

Source: Corporate Presentation 2017

 Well accepted brand and

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Phosphoric Acid: Phosphoric acid is another key raw material in manufacturing

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Facilities Installed Capacity Manufactures/Products

Raw material: Ammonia

ZFCL and ZSFL

Urea: 379,500 MT DAP: 255,500 MT

Source: Company,SKP Research

Plant Capacity Commissioned / Revamped

Source: Company,SKP Research

16% Zuari Agro Ltd

Source: The Company & SKP Research

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