Q3FY2011Update Sector: Fertilisers BSE Sensex: 18,037

RESEARCH

NAGARJUNA FERTILISERS & CHEMICALS LTD

Nagarjuna Fertilisers' (NFCL) Q3FY11 results were better than our expectations as net sales doubled to Rs8.5bn (+40.0% YoY) on the back of higher trading volume. Higher trading led OPM to contract by 113bps to 13.3% despite improved margins for manufactured Urea. Lower depreciation (-39% YoY) and effective tax rate (32.1% against 54.1% YoY) resulted in net profit to surge by 175.1% to Rs334mn (PINCe Rs207mn). Higher trading drives revenues: Trading revenues has increased significantly in FY11 (import of DAP and MOP). For Q3FY11, trading is contributing around one-third of revenues. Decontrol still away: As we have been saying, unlike complex fertiliser, decontrol in Urea is difficult currently with the heterogeneity involved in the sector. We expect this to happen only after 2 years once all players switch to gas. However, in the forth coming budget we expect increase in Urea fixed cost subsidy for all the players (~Rs350/ MT) on the back of cost escalation over the year and a price hike of 5% at farm gate level.
QUARTERLY SNAPSHOT
Jun-10 Net Sales YoY Gr (%) Op .Profits OPM (%) Adj. Net Profit YoY Gr. (%) 3,308 0.5 1,018 30.8 271 17.5

HOLD CMP Rs30 TP Rs45

07 Feb 2011

Satish Mishra

+91-22-6618 6488

satish.mishra@pinc.co.in Urvashi Biyani +91-22-6618 6334

urvashi.biyani@pinc.co.in

(Rs mn)

Quarter Ended Sep-10 11,220 110.4 1,162 10.4 284 246.7 Dec-10 8,535 40.0 1,133 13.3 334 175.1

Result Review

Investment in NOCL: Nagarjuna Fertiliser holds 51% stake in Nagarjuna Oil Corporation Limited. This is a 6mn MT p.a. refinery coming up at Cuddalore, Tamil Nadu and is expected to be commissioned by FY13. Total capex for this project is Rs70bn. NOCL is contributing Rs9 in our target price with a GRM of USD6.5/ bbl against management guidance of USD8.5/bbl. VALUATIONS AND RECOMMENDATION At CMP of Rs30, NFCL is trading at P/E & EV/EBITDA of 8.3x & 12.2x respectively for FY12 estimates. Availability of natural gas coupled with benefits from revamping should enhance net profits by 3.7x in FY11 from FY09. We maintain our earning estimates for FY11 & FY12, and SOTP target price is Rs45 (10x P/E FY12E EPS for fertiliser business and Rs9 for NOCL). However, we maintain our HOLD recommendation due to huge capex involved in the refinery business and ambiguity on equity structure post proposed amalgamation of different group companies. KEY FINANCIALS
FY08 Net Sales YoY Gr.(%) Op. Profits Op. Marg.(%) Adjusted Net Profit YoY Gr.(%) 21,936 20.8 3,034 13.8 225 (29.1) 0.5 7.5 1.3 57.1 1.3 8.8 FY09 23,719 8.1 3,286 13.9 324 44.1 0.8 8.1 2.0 39.6 1.3 8.8 FY10 19,879 (16.2) 3,669 18.5 664 104.8 1.6 8.6 4.2 19.4 1.8 9.3 FY11E 28,169 41.7 4,322 15.3 1,185 78.5 2.8 8.2 7.3 10.8 1.8 11.3
Rs mn

STOCK DATA
Market Cap Book Value per share Eq Shares O/S (F.V. Rs10) Free Float Avg Traded Value (6 mnths) 52 week High/Low Bloomberg Code Reuters Code Rs12.8bn. Rs36.9 428.2mn. 61.7% Rs285mn Rs42/27 NFCL IN NGFR.BO

PERFORMANCE (%)
Absolute Relative 1M (18.8) (8.1) 3M (17.8) (9.0) 12M (19.8) (27.6)

FY12E 26,117 (7.3) 4,910 18.8 1,539 29.9 3.6 6.9 8.9 8.3 2.4 12.2
1

RELATIVE PERFORMANCE
Nagarjuna Fert 60 45 30 15 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 BSE Rebased

KEY RATIOS
Dil. EPS (Rs) ROCE (%) RoE (%) PER (x) EV/Net sales (x) EV/EBITDA (x)

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RESEARCH
Nagarjuna Fertilisers & Chemicals Ltd.

Financial Table (Rs mn)

Dec-09 Net Sales EBITDA EBITDA Margins % Other Income Interest Depreciation PBT Tax (%) PAT EPS 6,096 879 14.4 40 327 327 264 54.1 121 0.3 Dec-10 8,535 1,133 13.3 30 474 198 491 32.1 334 0.8 175.1 175.1 (23.9) 45.0 (39.5) 85.9 YoY (%) 40.0 29.0 Sep-09 11,220 1,162 10.4 44 510 204 492 42.4 284 0.7 17.7 17.6 (31.9) (7.0) (3.1) (0.2) QoQ (%) (23.9) (2.4) 9M FY10 14,718 2,568 17.4 62 967 959 705 38.4 434 1.0 9M FY11 23,063 3,313 14.4 85 1,296 722 1,380 35.6 889 2.1 104.8 104.8 36.6 34.0 (24.7) 95.8 YoY (%) 56.7 29.0

satish.mishra@pinc.co.in

RESEARCH

Nagarjuna Fertilisers & Chemicals Ltd.

Year Ended March (Figures in Rs mn)

Income Statem ent Net sales Growth (%) Operating Profit Growth (%) Other income EBDITA Growth (%) Depreciation EBIT Interest paid PBT (before E/o items) Tax prov ision E/o Income / (loss) Net profit Adjusted net profit Growth (%) Diluted EPS (Rs) Growth (%)

FY08 21,936 20.8 3,034 8 198 3,232 5 1,202 2,031 1,630 401 176 225 225 (29.1) 0.5 (29.1)

FY09 23,719 8.1 3,286 8 120 3,406 5 1,210 2,196 1,693 503 179 324 324 44.1 0.8 44.1

FY10 19,879 (16.2) 3,669 12 218 3,886 14 1,282 2,605 1,490 1,114 450 664 664 104.8 1.6 104.8

FY11E 28,169 41.7 4,322 18 131 4,453 15 925 3,528 1,691 1,837 652 1,185 1,185 78.5 2.8 78.5

FY12E 26,117 (7.3) 4,910 14 207 5,117 15 970 4,147 1,779 2,368 829 1,539 1,539 29.9 3.6 29.9

Cash Flow Statem ent Pre-tax profit Depreciation Total tax paid Chg in w orking capital Other items Cash flow from oper. (a) Capital ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Interest Paid Div idend (incl. tax ) Others Cash flow from fin. (c) Net chg in cash (a+b+c)

FY08 401 1,202 (389) 535 1,630 3,380 (1,923) 353 (1,570) 1,810 375 241 (1,624) (12) 53 (967) 843

FY09 458 1,210 (396) 944 1,693 3,909 (3,162) 0 3,680 (1,667) 0 2,357 4,371 1,209

FY10 1,114 1,282 (526) (780) 1,490 2,580 (1)

FY11E 1,837 925 (652) (480) 1,560 3,189 (269)

FY12E 2,368 970 (829) (1,902) 1,572 2,180 (193)

(7,071) (10,015) (15,000) (12,000)

(7,071) (10,015) (15,269) (12,193) (7,436) (12,080) (10,013) 13 14,561 (1,492) 0 126 13,208 5,772 8,000 (1,691) (250) 6,059 (6,021) 12,000 (1,779) (250) 9,970 (43)

Balance Sheet Equity capital Reserves & Surplus Shareholders' funds Deferred Tax Liability Total debt Minority Interest Capital Employed Net fix ed assets Cash & cash Eq. Net other current assets Ex p pending allocation Total assets

FY08 4,652 12,395 17,047 1,966 16,721 0 35,734 29,556 1,950 2 4,226 35,734

FY09 4,652 12,079 16,731 1,812 19,250 2,848 40,641 33,114 2,946 2 4,579 40,641

FY10 4,654 11,129 15,783 1,811 31,317 3,439 52,351 38,266 7,132 2 6,951 52,351

FY11E 4,654 12,064 16,717 1,811 39,317 3,439 61,285 52,342 1,591 2 7,351 61,285

FY12E 4,654 13,352 18,006 1,811 51,317 3,439 74,574 63,371 3,450 2 7,751 74,574

Key Ratios OPM(%) Net margin (%) Div idend y ield (%) Net debt/Equity (x ) Net Working Capital (day s) Asset turnov er (x ) ROCE (%) ROE (%) EV/Net sales (x ) EV/EBITDA (x ) PER (x ) Price/Book (x )

FY08 13.8 1.0 0.0 1.0 (50.1) 0.6 7.5 1.3 1.3 8.8 57.1 0.8

FY09 13.9 1.4 0.0 1.2 (71.1) 0.6 8.1 2.0 1.3 8.8 39.6 0.8

FY10 18.5 3.3 1.7 2.0 (104.9) 0.4 8.6 4.2 1.8 9.3 19.4 0.8

FY11E 15.3 4.2 1.7 2.4 (97.8) 0.5 8.2 7.3 1.8 11.3 10.8 0.8

FY12E 18.8 5.9 1.7 2.9 (65.0) 0.4 6.9 8.9 2.4 12.2 8.3 0.7

1-year forward P/E Band

1-year forward EV/EBITDA

200
50x

80,000 60,000

16x 14x 12x 10x

150

40x 30x 20x

100

40,000 20,000 -

8x

50
10x

Apr-04 Dec-05 Aug-07 May -09 Jan-11

Apr-04

Dec-05

Aug-07

Apr-09

Jan-11

satish.mishra@pinc.co.in

RESEARCH

T E A M
EQUITY DESK
Sadanand Raje Head - Institutional Sales Technical Analyst sadanand.raje@pinc.co.in 91-22-6618 6366

RESEARCH
Vineet Hetamasaria, CFA Nikhil Deshpande Vinod Nair Ankit Babel Hitul Gutka Subramaniam Yadav Madhura Joshi Satish Mishra Urvashi Biyani Naveen Trivedi Rohit Kumar Anand Karan Taurani Namrata Sharma Ronak Bakshi Bikash Bhalotia Harleen Babber Dipti Vijaywargi Sushant Dalmia, CFA Suman Memani
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vineet.hetamasaria@pinc.co.in nikhil.deshpande@pinc.co.in vinod.nair@pinc.co.in ankit.b@pinc.co.in hitul.gutka@pinc.co.in subramaniam.yadav@pinc.co.in madhura.joshi@pinc.co.in satish.mishra@pinc.co.in urvashi.biyani@pinc.co.in naveent@pinc.co.in rohit.anand@pinc.co.in karan.taurani@pinc.co.in namrata.sharma@pinc.co.in ronak.bakshi@pinc.co.in bikash.bhalotia@pinc.co.in harleen.babber@pinc.co.in dipti.vijaywargi @pinc.co.in sushant.dalmia@pinc.co.in suman.memani@pinc.co.in

91-22-6618 6388 91-22-6618 6339 91-22-6618 6379 91-22-6618 6551 91-22-6618 6410 91-22-6618 6371 91-22-6618 6395 91-22-6618 6488 91-22-6618 6334 91-22-6618 6384 91-22-6618 6372 91-22-6618 6382 91-22-6618 6412 91-22-6618 6411 91-22-6618 6387 91-22-6618 6389 91-22-6618 6393 91-22-6618 6462 91-22-6618 6479

SALES
Rajeev Gupta Himanshu Varia Shailesh Kadam Ganesh Gokhale
Equities Equities Derivatives Derivatives

rajeev.gupta@pinc.co.in himanshu.varia@pinc.co.in shaileshk@pinc.co.in ganeshg@pinc.co.in

91-22-6618 6486 91-22-6618 6342 91-22-6618 6349 91-22-6618 6347

DEALING
Mehul Desai Naresh Panjnani Amar Margaje Ashok Savla Sajjid Lala Raju Bhavsar Kinjal Mehta Chandani Bhatia Hasmukh D. Prajapati Kamlesh Purohit
Head - Sales Trading Co-Head - Sales Trading

mehul.desai@pinc.co.in naresh.panjnani@pinc.co.in amar.margaje@pinc.co.in ashok.savla@pinc.co.in sajjid.lala@pinc.co.in rajub@pinc.co.in kinjal.mehta@pinc.co.in chandani.bhatia@pinc.co.in hasmukhp@pinc.co.in kamlesh.purohit@pinc.co.in

91-22-6618 6303 91-22-6618 6333 91-22-6618 6327 91-22-6618 6321 91-22-6618 6337 91-22-6618 6322 91-22-6618 6333 91-22-6618 6324 91-22-6618 6325 91-22-6618 6357

SINGAPORE DESK
Amul Shah amul.shah@sg.pinc.co.in 0065-63270626/27/28

DIRECTORS
Gaurang Gandhi Hemang Gandhi Ketan Gandhi gaurangg@pinc.co.in hemangg@pinc.co.in ketang@pinc.co.in 91-22-6618 6400 91-22-6618 6400 91-22-6618 6400

COMPLIANCE
Rakesh Bhatia Head Compliance rakeshb@pinc.co.in 91-22-6618 6400

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