INSTITUTIONAL EQUITY RESEARCH Agri...

INSTITUTIONAL EQUITY RESEARCH

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Agri Inputs It’s a countdown to decontrol, buy for reasonable valn! INDIA | SECTOR | Sector Update

26 November 2014

An era of tough reforms has begun and the spotlight has now shifted to the fertilizer sector. Understandably, the street is agog with expectation of tough imperative reforms even in this sector. A new Urea pricing policy is due from April’15 and on run up to the Union Budget it’s plausible to expect some direction. The fertilizer sector has moved up from its lows; however it is still trading at a discount of 40/60% on FY15/16E to mid‐cap index. Considering the reasonable valuations and progressive policy announcement it may be an opportune time to invest in these names. In this report we take note of impending reforms in the fertilizer sector and its likely impact on key stocks, impact of fall in crude oil prices/savings in freight and deleveraging of working capital led by timely subsidy reimbursement. Chambal Fertilisers (Chambal): Chambal is the best candidate for playing the reform theme since it is the largest urea player in the private sector and its current valuation of 7x FY16E P/E is fairly reasonable with an attractive dividend yield of ~3.2%. Following the favorable investment policy, Chambal is likely to increase capacity further thus providing visibility to longer term growth. Shipping is showing signs of a turnaround with H1FY15 Ebit turning to profits of Rs 280 mn v/s a loss of Rs 88 mn in H1FY14. If the freights rates and sentiments do revive, we expect Chambal to re‐consider hiving off its shipping division to lower its huge debt burden. Tailwinds from regulatory upside (clarity on compensation for gas prices beyond cut off, urea price hikes) to aid further growth. We continue to assume losses in technology division in FY15/16E. Coromandel International (Coromandel): As a corollary to reforms in Urea we see P&K benefiting the most and as proxy play on P&K we like Coromandel. We see headwinds thinning for the sector (led by rising NPK retail prices, depleting inventories, stable INR, impending gas price hike that would pave way for reforms in urea) and all of these points to favorable turn of things for P&K sector. CRIN has potential to attain 5 mmt from current run‐rate of 3 mmt, thus any change in urea retail price could result in huge operating and financial leverage for P&K sector and Coromandel in particular. Tata Chemicals (Tata Chem): Tata Chem is energy and freight intensive and thus we expect it to benefit on falling crude oil prices. On expectations of healthy price hike in soda ash and restructuring led positives, earnings are expected to more than double in FY16E over FY14, a CAGR of 46%. Initiatives to enhance ROE (such as closure of loss making non‐core investments and capital light expansions), instills confidence with this given rising share of non‐cyclical businesses in earnings pie ‐ we see rerating imminent ahead of change in earnings mix. Zuari Agrochemicals (Zuari): Zuari is a fully integrated pan‐India fertilizer player with strategic partnership, making it a formidable player in the P&K sector. The demerged Agri Inputs entity, Zuari was caught up in myriad problems (read inside) that interrupted plant operations and thus profits all along. However with operations returning to normalcy, change over to LNG as feed, commissioning of major capex and on expectation of positive regulatory pronouncements it is at harbinger of multi‐year superior growth. To put this in perspective, we estimate PAT of Rs 1 bn in FY16E from a loss of Rs 560 mn in FY14. Further, its investment in Paradeep Phosphates (40% stake), Mangalore Chemicals (~16.5%) and other investments form ~ 65% of the current mcap, limiting investment downside. We initiate coverage on Zuari with a Buy. Comparative Valuation _Adj. EPS (Rs)_ CAGR ___PER (x) ___ ___PBR (x) ___ _EV/EBITDA (x)_ Div. yield % FY15E FY16E FY014‐16E FY15E FY16E FY15E FY16E FY15E FY16E FY14

Chambal Fert 7.7 8.1 21.7 8.1 7.7 1.1 1.1 6.8 5.9 3.2Coromandel Intl. 14.0 21.3 30.1 22.5 14.8 3.4 3.4 12.3 8.9 1.6Tata Chemicals 28.6 32.4 45.2 14.7 13.0 1.8 1.8 7.7 6.6 2.4Zuari Industries 7.8 24.1 NA 34.8 11.2 1.4 1.3 12.9 9.7 1.1

Source: PhillipCapital India Research Estimates

Companies Chambal Fertilisers Reco Buy CMP, Rs 62 Target Price, Rs 82 Coromandel International Reco Buy CMP, Rs 315 Target Price, Rs 370 Tata Chemicals Reco Buy CMP, Rs 421 Target Price, Rs 500 Zuari Agrochemicals Reco Buy CMP, Rs 271 Target Price, Rs 450 Gauri Anand (+ 9122 6667 9943) [email protected]


AGRI INPUTS SECTOR UPDATE

Table of Contents Awaited urea policy announcements ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3

Reforms galore and next in line is pooling of gas prices for fertilizer/power sector? 4

Policy for new investments in Urea sector ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 5

P&K fertilisers – structural positives begin to emerge ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 9

Valuations at a deep discount to Mid‐cap index despite better growth ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 11

Companies Section

Chambal Fertilisers & Chemicals ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 12

Coromandel International ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 17

Tata Chemicals ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 22

Zuari Agrochemicals ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 26



Indian fertilizer sector saw a slew of reforms in FY11 – such as decontrolling P&K retail prices and new investment policy for Urea. However, a part of that there has been a stillness in policy action. The policy for new investments did little to encourage new investments and it was revisited only lately. In the absence of new policy, the government has ratified the NPS III for a year more for Urea sector – which implies a definite policy is likely by April’15. We understand the government is seriously looking at options to progressively decontrol the fertiliser industry. There are many options been looked at to free prices or limit subsidy. A consensus on this has been achieved, but it is matter of political will, which is not timed. We take note of the awaited reforms in the fertilizer sector and its likely impact on key stocks and sector ahead. We expect some major reforms to be pronounced around budget. Awaited Urea policy announcements Objective and benefits Time frame and stage of execution Notification of urea investment policy

The policy will encourage investments in urea sector (~ 5 mmt) and concurrently lower import dependence. This will also lead to savings in subsidy given import substitution at prices below IPP. Among the listed entities Chambal and RCF have expressed interest to expand capacity, raising visibility for long term growth

Implemented and notified by DoF. Chambal Fert, Nagarjuna Fert, IndoGulf, RCF, Matix are some companies that have expressed interest to expand. Zuari for revamp, FACT for Brownfield and GSFC for Greenfield

Notifying adhoc subsidy increases

In the absence of new policy, the government has ratified the NPS III for a year more. However the CCEA has approved compensating urea producers for cost increases by a max of Rs 350/mt. And for higher vintage plants an additional Rs 150/mt. However the subsidy increase would be equal to actual increase in cost or Rs 500/mt whichever is lower. We expect FY15E for CHMB/TTCH IN to expand by 10~15% in FY15E on account

Implemented and notified by DoF. The audit of actual cost increase is in progress. As this policy will expire in March'15, a new policy or move to NBS is likely

Policy for quantity beyond cutoff limits

The policy for debottleneck promises a linkage of 85% of IPP subject to floor/ceiling of US$ 250/425/mt. Given the slump in urea prices to US$ 350/mt and considering delivered gas cost of US$ 14‐18/mmbtu, it is unviable to produce beyond cut off limits. Thus a revisit to this policy is essential as companies reach their cut‐off target sometime in Jan every year. About 2 mmt of production is above cut‐off, any delay can further risk urea subsidy bill

Chambal, RCF, Tata Chemical and Nagarjuna Fertiliser produce beyond cut‐off and keenly await the policy notification

Decanalising urea imports At present only state agencies such as STC, MMTC and IPL are allowed to import urea from International markets. However if urea imports are freed, it can get competitive and perhaps result in a lower subsidy bill to the exchequer. In the backdrop of limited visibility on availability of gas for expansions, future urea consumption could be met through imports, thus decanalising of urea imports could be an ideal option

The finance ministry is in favour of decanalising urea imports

Raising urea retail prices Urea prices are untouched for last 10 years, barring FY10 when it was raised by a meager 10%. With rampant increase in feed costs, the subsidy bill has been rising thus it is imminent to withdraw some subsidy support

Urea price hike is compulsion than a choice; however it calls for a greater political will. We see this government correcting the price disorder amongst competing fertilisers

Gas price pooling There is a proposal to pool domestic gas prices with RLNG (regasified liquid natural gas) for fertilizer use. As the domestic gas availability is limited, pooling of gas prices could be aimed at improving viability of Brownfield/Greenfield investments in Urea

On pooling of gas prices, the wt avg cost falls significantly. Also pooling brings in uniformity in gas prices, thus partially improving chances of a urea price decontrol. considering that RLNG is more reliable (20~25 years) it may be a preferred choice to pool gas prices

Timely reimbursement of subsidies

The fertilizer subsidy arrears are about Rs 300 bn for FY14, taking the total fertilizer subsidy burden to about Rs 1 trn. Also the gas price hike would cost the exchequer an additional Rs 40 bn, although partly it would be negated by fall in naptha prices/mothballing of Naphtha based urea capacities

With crude oil coming off, diesel retail price deregulation complimented with hike in diesel prices and intent to reform LPG retail prices, all points to savings in aggregate subsidy to the exchequer. Thus there is a high chance that the fertilizer sector could get subsidies in time. This will result in huge savings in interest outgo as it would lower the working capital burden

Urea retail price decontrol In all fairness, we cannot have one nutrient out of price control and the other under price control for too long. The excess consumption of highly subsidized urea is endangering soil health and lowering productivity and this would likely be corrected soon

A decision on this long awaited and certain. We expect some roadmap for decontrol to be announced around Budget

Source: Industry, DoF, PhillipCapital India Research



Gas price, retail fuel price reforms and next in line is pooling of gas prices for fertilizer/power sector? We gather there is a proposal to pool domestic gas prices with RLNG (regasified liquid natural gas) for fertilizer use. As the domestic gas availability is limited, the proposal could be aimed at improving viability of Brownfield/Greenfield investments in Urea. Urea consumption in FY14 was 30.47 mmt (of this ~ 22 mmt was production and about 8.5 mmt was imports). Urea consumption is estimated to rise to 35 mmt by FY20E and assuming the production stagnates at current levels, then the import dependence could rise to ~ 12 mmt by FY20E. At present India accounts for ~20% of global trade in Urea any excessive dependence could likely raise Urea International prices to the levels of 2008 (i.e US$ 800/mt) thus significantly aggravating the urea subsidy bill. It may be thus prudent to encourage domestic Urea capacity addition and pool gas prices to make such investments viable. Pooling of gas prices alone can turn expansions viable Gas consumption

(mcm/d) WACC delivered gas cost (US$/mmbtu)

Total gas supply (%)

Cost of Urea (US$/mt)

Domestic gas 30.30 8.1 52.8 228 Current gas supply RLNG 12.65 18.0 22.1 467 Current RLNG supply Total gas supply for fert in FY14 42.95 11.0 299Incremental demand three naphtha units switch over 3.90 18.0 6.8 467 (MCF, MFL, SPIC) five new plants/revival units 10.50 18.0 18.3 467 mostly all from RLNG Total gas reqd by fert by FY20E 57.35 12.7 100.0

*spot gas replacement of 2.3mcm/d not considered We highlight on pooling of gas prices, the weighted average cost falls to US$ 12.7/mmtbu, lower than spot RLNG or Naphtha. Also pooling brings in uniformity in gas prices, thus partially improving chances of a urea price decontrol. Given the limited availability of domestic gas in the near future and also considering that RLNG is more reliable (as a secured supply for longer term such as 20~25 years) it may be a preferred choice to pool gas prices. While pooling of gas prices is a positive it possess a significant challenge in practice, considering the enormous difficulty in doing away with multi‐year GTA’s (Gas transmission agreements), prevailing state levies such as VAT, Entry tax and gas marketers’ margins and all such costs that add up to the total. The government seriousness is seen in initiating touch reforms, but this could be a lot tougher than the as gas, retail fuel reforms. As per our understanding, the modalities of pooling the gas price could be akin to the one the government adopts in the power sector and likely this could be pooled in two phases (first for existing users and second for new big ticket expansions). To make pooling possible, the government also seeks to adjust duties – waiving of customs duty or exemption from VAT or including gas under declared goods category. Options touted to make gas price pooling viable $/mmbtu PhillipCapital comments Akin to power, waiver of 5% CD ‐0.7 Elimination from service/vat tax or declared goods status

‐0.7 declared goods status attracts tax at 5% ceiling rate in all States

Total reduction in gas cost ‐1.4

Source: Industry, DoF, PhillipCapital India Research



Policy for new investments in Urea sector After much ado, the department has finally notified the policy for new investments in Urea. The expansions are classified as Brownfield, Greenfield, revival and revamp projects for fixing of ceiling and floor prices. The government has assumed base delivered cost of gas at US$ 6.5/mmbtu (NCV) and for every 10 cent increase in gas cost, the floor and ceiling realizations to change by US$ 2/mt – thus making the project gas price neutral. When this policy was originally framed, there was expression of interest to augment 16 mmt capacity v/s the requirement of 8‐10 mmt, thus the government has dropped the ‘guaranteed buy‐back clause’ and imposed a bank guarantee of Rs 3 bn for pvt sector players (PSU’s are exempt). The companies will get a subsidy on production only if the urea production starts in the next 5 years. The subsidy will continue till 8 years after the commencement of production and not thereafter. As these new projects would have to solely rely on imported LNG (delivered cost of US$ 15‐18/mmbtu) the urea from such projects could cost about US$ 455‐535/mt), against imports of US$ 350/mt. However, as the guaranteed buy‐back arrangement lasts for 8 years and on expectation of pooling of gas prices and an eventual urea price decontrol, we expect new projects to be viable. The other thought is given the advent of shale gas production in the US, restart of Nuclear power plants in Japan too should increase supply and lower gas prices over the longer term.

New Investment Policy for Urea could augment 5 ‐ 7 mmt of capacity expansion • Gas costs over US$ 14/mmbtu considered ‐ The ministry has considered to

subsidize gas cost even beyond US$ 14/mmbtu, which is a positive – The gas cost refers to all inclusive delivered gas cost – The max/min gas prices of US$ 6.5/14 mmBtu is an all inclusive cost i.e it includes gas transportation costs, service tax, State VAT, CST and Entry tax. However, we expect the gas marketing margins to have been excluded in this; implies it wouldn’t be subsidized

• For Greenfield investments, the government has fixed a minimum floor‐ceiling price band for urea at $310‐340/mt at a landed gas price of $6.5/ mmBtu. For gas prices > $6.5/mmBtu, and going up to a maximum of $14/mmBtu, the floor/ceiling will keep going up at the rate of $2/mt for every 10 cents increase in the price of gas and above US$ 14/mmbtu, the floor alone will rise by US$ 2/mt for every 10 cent increase in gas price

• The government offers subsidy only when the cost of production remains within the stipulated band. Since the band has now been narrowed by raising the floor and reducing the ceiling, the government hopes to save on its subsidy bill.

• The debottleneck expansions made under the 2008 policy will continue to be reimbursed under those rules only i.e 85% of IPP subject to floor/cap of US$ 250/425/ mt. We also gather companies that have expanded their capacities (thru debottlenecks) are allowed to revamp further under 2008 policy, which in our view is a positive

• While prima‐facie the returns on floor/cap offer 12‐18% post tax RoE, it must be noted the new investments are accorded infrastructure status in UB 2011‐12; implies such firms will enjoy advantages such as cheaper lending from banks on a priority basis, easier norms for external commercial borrowings, and tax concessions (exemption from IT for a block of any 10 years). On a pre‐tax basis the ROE on floor/cap works 18/27%; which in our view is more appropriate



Assured 12% ROE is a huge +ve: The post tax return on investment (all forms ‐brownfield, Greenfield etc) ranges between 12 ‐18%. The assured higher ROE (on floor) in our view is a huge positive. Longer term urea prices are expected to be subdued, given excess production of shale gas in the US that have lowered gas prices disturbing urea price fundamentals. Thus in this context a reduced ceiling/ ROI of 12% is a positive New investment policy key assumptions Brownfield Greenfield Revamp Delivered Gas Cost US$/mmbtu 6.5 6.5 7.5# Energy Gcal (Norm) Gcal/mt 5 5 5.5 Urea Capacity mmt 1.27 1.27 NA Project Capex Rs bn 40 47 Rs 15000/mt Urea realisations $/mt Floor $/mt 285 305 245 Cap $/mt 310 330 255 Linkage to IPP % 90 95 85 Gas prices upto US$ 14/mmbtu

Assumes delivered gas price of US$ 6.5/mmbtu and that floor/ceiling to change by US$ 2/mt, for every 10 cents change in gas cost upto US$14/mmbtu of gas price

Assumes delivered gas price of US$ 6.5/mmbtu and that floor/ceiling to change by US$ 2/mt, for every 10 cents change in gas cost upto US$14/mmbtu of gas price

Assumed delivered gas price exceeding US$ 7.5/mmbtu, the

floor/ceiling would be raised by US$ 2.2/mt for every 10 cents increase in

gas cost Gas prices above US$ 14/mmbtu

Delivered gas price exceeding US$14/mmbtu, the floor to change by US$ 2/mt for every 10 cents

change in gas cost

Delivered gas price exceeding US$14/mmbtu, the floor to change by US$ 2/mt for every 10 cents

change in gas cost

Delivered gas price exceeding US$14 /mmbtu, the floor would be raised by

US$ 2.2/mt for every 10 cents increase in gas cost

# delivered gas price exceeding US$ 7.5/mmbtu, the floor/ceiling would be raised by US$ 2.2/mt for every 10 cents increase in gas cost ROE/ROCE workings for Brownfield/Greenfield investments at gas cost of US$ 15/mmbtu (tax payout considered at 30%) Brownfield Greenfield Delivered Gas Cost US$/mmbtu 15 15Energy Gcal (Norm) Gcal/mt 5 5Urea Capacity mmt 1.27 1.27Project Capex Rs bn 40 47Urea realisations $/mt Floor $/mt 285 305 Cap $/mt 310 330 Linkage to IPP % 90 95Debt Rs bn 59.99 30.67Equity Rs bn 30.01 20.44 Exch Rate US$/INR 60 60 Revenues Rs bn 34.67 36.20Costs Energy Rs bn 22.86 22.86Other overheads (conv costs) Rs bn 2.67 3.81Ebitda Rs bn 9.14 9.53Interest Rs bn 3.22 3.61Depreciation Rs bn 2.1 2.35PBT Rs bn 3.8 3.6Tax Rs bn 1.15 1.07PAT Rs bn 2.7 2.5ROE (%) % 19.1 16.0ROCE (%) % 16.8 15.3

Source: Industry, PhillipCapital India Research



Adhoc increase in urea subsidy of Rs 350/mt approved by the CCEA: After reviewing production costs, the CCEA has approved to reimburse uncompensated costs – as an extension to NPS III. It may be recalled that NPS III had expired in March 2010; however in the absence of new policy it has been extended by a year more to Mar’15. The conversion costs largely salaries, repairs and other overheads have increased at least by Rs 700/mt and haven’t been compensated for about a decade now. As these plants are fully depreciated but as the government continues to compensate them for their capital costs, the increase in urea fixed subsidy has been capped to a maximum of Rs 350/mt. However for higher vintage plants (units older than 30 years) it has been raised to a maximum of Rs 500/mt. This could likely increase Urea subsidies by Rs 70 bn. An increase in subsidy by Rs 350~500/mt would level fixed costs of all units to a uniform floor of Rs 2,300/mt. The audit of costs is being undertaken, the actual cost or the approved subsidy, whichever is lower would be reimbursed. The major beneficiaries of the subsidy hike are National Fert (Rs 635 mn), RCF (Rs 500 mn), Chambal Fert (Rs 424 mn) and Tata Chemicals (Rs 212 mn). Impact of adhoc increase in urea subsidy by Rs 350 ~500/mt (CCEA approved)

Reassessed Capacity ('000 mt)

Impact on Profit

(pre tax)

Impact on Profit (post tax)

Rs mn

PAT FY15E

(%)Chambal Fertilisers 1729 605 424 16.1GSFC # 371 130 91 1.8Mangalore Chemicals # 371 130 91 13.7National Fertilisers $ 2594 908 636 50.2RCF # 2037 713 499 17.8Tata Chemicals 865 303 212 2.7Zuari Agro # 399 140 98 40.0

$ PAT of FY13, made a loss in FY13E; # PAT of FY13E; Source: Industry, PhillipCapital India Research A revisit to policy for quantities beyond cut‐off‐limits is likely: A revisit to debottleneck expansion is under active consideration in view of rising gas/falling urea prices; the government intends compensating the industry for cost increases (higher gas cost) for quantities beyond cut off limits. News reports indicate that the government intends delinking International prices and compensating these companies on adhoc subsidy (i.e Rs 2300/mt). Urea markets are expected to be fairly balanced (following higher global capacity expansion than consumption). The global urea market could enter an era of oversupply post 2015, led by unprecedented expansion in low cost ME, Africa (MEA) and US, Brazil and India. That competition among traditional exporters in the MEA, China and FSU will intensify, resulting in price pressure. Thus it may well be a blessing in disguise for urea producers to move away from International prices to adhoc subsidy. In this note we also assess the ramifications of lower crude prices, likely fall in freight costs and improvement in working capital The Fertiliser industry consumed about 2.5 mmt of Naphtha, FO, LSHS in FY14, however given the current directive to mothball Naptha capacities following higher production cost, the Naptha consumption is estimated to fall in FY15E. However, theoretically, if these plants start production, with fall in crude oil prices, we expect naptha costs to trend lower and thus lower fertilizer subsidies by about Rs 15 bn. However, the fertilizer subsidy increase on account of gas price hike (wef 1st Nov) is Rs 35 bn, thus the net increase in fertilizer subsidy annually would be Rs 20 bn. Thus falling crude oil prices should lower fertilizer subsidies (primarily feed Naphtha); however this benefit will be negated by the increase in domestic gas prices from Nov’14. The fertilizer industry is also highly freight intensive, however with crude oil prices softening, we expect (to begin with the secondary freight) to soften as well, thereby improving operating margins. Since the gas price hike is in the order of 10%, the blended increase in power costs for fertilizer use would likely be minimal.

National Fertilisers, RCF and Chambal Fertilisers to gain the most



Freight cost* as a % of revenues

FY10 FY11 FY12 FY13 FY14Chambal Fertilisers 6.0 5.7 4.9 5.6 4.8Coromandel International 4.8 4.5 4.7 5.6 6.3GSFC 3.7 3.8 3.6 2.7 3.5Tata Chemicals 6.7 6.9 5.9 7.0 7.4Zuari Agrochem 4.1 5.0

* Standalone revenue/freight cost considered for all companies Power cost* as a % of revenues

FY10 FY11 FY12 FY13 FY14Chambal Fertilisers 15.7 13.8 12.3 15.0 16.2Coromandel International 1.0 1.1 0.9 1.3 1.5GSFC 7.9 7.1 7.1 6.3 10.1Tata Chemicals 7.9 9.0 8.4 8.3 9.4Zuari Agrochem 6.7 7.5

* Standalone revenue/power cost considered for all companies With improving fertilizer offtake, depleting inventories (particularly in P&K fertilizers) and government’s timely subsidy reimbursements, the working capital cycle time is expected to fall further. Easing pressure on aggregate subsidy (led by fall in crude prices and fuel reforms); improves chances of timely fertilizer subsidy disbursement

Source: RBI, PhillipCapital India Research Net working capital days for the industry to come off further No.of days FY10 FY11 FY12 FY13 FY14Chambal Fertilisers 54 48 120 193 163Coromandel International 3 ‐7 15 2 ‐4GSFC 69 57 79 160 119Tata Chemicals ‐13 3 23 67 52Zuari Agrochem 168 206 180

Source: RBI, PhillipCapital India Research

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

FY08

FY09

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FY12

FY13

FY14

FY15

BE

Fiscal deficit as a % of GDP

0.00

0.50

1.00

1.50

2.00

2.50

3.00

FY08

FY09

FY10

FY11

FY12

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BE

Aggregate subsidy as a % of GDP

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

BE

Fertilizer subsidy as a % of GDP

Fall in aggregate subsidy, improves chances of timely subsidy repayments, there by easing wcap pressure concurrently lowering interest outgo



P&K fertilisers – structural positives begin to emerge We see fortunes of P&K industry to be inter‐twined with that of Urea industry. Post decontrol in FY10, the industry’s profits have been volatile given unchanged retail prices of Urea, sudden jump in feed costs (such as ammonia, phosphoric acid, rock phosphate also led by weak INR), intense finished product imports and lower/inadequate monsoons. The industry volumes have fallen by over 30% during FY12‐14. However, following improved off take, lower imports and on expectation of reforms in urea sector, we see the industry volumes growing by 10/15% in FY15/16E. Fertiliser consumption trend in mmt FY10 FY11 FY12 FY13 FY14 H1FY15DAP 10 11 10 9 7 4Complex Fert 8 10 10 8 7 4AS 0 1 1 1 0 0SSP 3 4 5 4 4 2Phosp. 22 25 26 21 18 10MOP 5 4 3 2 2 1Total P&K 26 29 29 23 20 11Vol. Gr. (%) 10.41 ‐0.50 ‐18.85 ‐13.29Urea 27 28 30 30 30 14Vol. Gr. (%) 5.40 5.17 1.48 1.56Total Fert 53 57 59 53 51 25Vol. Gr. (%) 7.89 2.29 ‐8.58 ‐4.96

Source: Uravarak, DoF, PhillipCapital India Research DAP prices on a decline Urea prices slump too …however DAP integrated margins erode led by rise in ammonia/phosphoric acid prices

Source: Bloomberg, PhillipCapital India Research

P&K consumption set to improve, reforms in urea holds the key: The highly subsidized Urea has led to its higher application; that has affected P&K fertilizer demand. With urea subsidies rising to Rs 400 bn, reforms in urea are a compulsion than a choice and we expect a certain decision in FY15. With the approved gas price, the cost of urea production is estimates to rise by US$50/mt and cost additional subsidy of Rs 35 bn, with an already alarming fiscal deficit, it’s reasonable to expect that urea retail prices would be linked to cost of production. Our channel checks indicate that although NBS in urea is distant possibility but retail prices could double. About 63% of India’s land holdings by small and marginal farmers deters any ruling party from rolling out NBS in Urea.

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Gas price hike to pinch P&K producers: Our channel checks indicate that withdrawal of domestic gas for P&K fertilizer production is likely. As this remains unconfirmed, we work the impact of higher domestic gas prices on P&K players’ profitability. The industry was required to take a price hike of Rs 2000‐3000/mt to mitigate the impact of higher gas costs; which in most cases the industry has already taken. As Deepak Fertilisers, GSFC and RCF sell their produce in overlapping markets; we expect this price hike is achievable. Despite the price hike, we see players (GSFC, RCF and Deepak Fertilisers) profitability impacted by 4‐8%. P&K producers that use APM gas for fertilizer production under lens: Fertilisers makers that use APM gas for P&K production got an office memorandum from DoF for recovery of windfall profits. The ministry has already stop gas supplies to Deepak Fertilisers and routed it to National Fertilisers for Urea production. As for GSFC (other major beneficiaries), the matter is subjudice as this is being contested in High Court. Our rough cut estimates for GSFC retrospective impact works about Rs 3 bn against FY13 PAT of Rs 5.2 bn. A significant negative for all, although RCF has stated that it would strongly take up the matter again. Global fertilizer price outlook timid following balanced supply: IFA reports indicate global urea market to enter an era of oversupply post 2015, led by unprecedented expansion in low cost ME, Africa (MEA) and US, Brazil and India. That competition among traditional exporters in the MEA, China and FSU will intensify, resulting in price pressure. Also Morocco, China and Saudi Arabia is expected to see large capacity addition in Phosphoric acid as a result, prices could under pressure. World Phosphoric Acid Potential Supply/Demand Balance (in mmt) 2013 2014E 2015E 2016E 2017ESupply Capacity 54.6 57.2 58.7 60.3 63.7Potential Supply* 45.5 46.9 48.5 50.2 52Demand Fertilizer Demand 36.1 37.1 38.1 39 39.8Non‐fertilizer Use 5.2 5.4 5.5 5.7 5.8Distribution Losses 0.8 0.8 0.9 0.9 0.9Total Demand 42.1 43.3 44.5 45.5 46.5Potential Balance 3.5 3.6 4 4.7 5.5% of Supply 8% 8% 8% 9% 10% World Urea (Potential Supply/Demand Balance) (in mmt) 2013 2014E 2015E 2016E 2017ESupply Capacity 198.4 207 214.6 221.3 236.3Potential Supply* 182.1 188.6 195.3 202.3 207.4Demand Fertilizer Demand 143.2 147.6 151.4 154.4 157.4Non‐fertilizer Use 28.6 30.5 33.6 36.1 37.7Total Demand 171.8 178.1 184.9 190.6 195.2Potential Balance 10.3 10.5 10.4 11.7 12.2% of Supply 5.7% 5.6% 5.3% 5.8% 5.9%

Source: Industry, PhillipCapital Research

Urea capacity additions likely in China, North America, MEA and India

Morocco, China and Saudi Arabia to see large phosphoric acid capacity expansion



Valuations at a deep discount to Mid‐cap index despite better growth The markets has soared since BJP’s wider than expected victory in National polls and extended gains further on their victory in assembly polls. The fall in crude oil prices came at an opportune time, which also made some tough reforms in O&G sector possible. Lower crude oil prices also lower subsidies, current account deficit, inflation and makes fiscal deficit target achievable. All these positives have led to a rally in front line stocks. The fertilizer sector has moved up from its lows; however it is trading at a discount of 40/60% on FY15/16E to mid‐cap index. In the past (FY09‐13), the fertilizer sector has traded at 40% premium to the mid‐cap index. Given the impending reforms (likely to be pronounced around budget) we expect the momentum in fertilizer stocks to pick up and narrow the valuation gap to mid‐cap index. Fert sector to report better growth over Mid‐cap index …yet it trades at a deep discount to Mid‐caps

Source: Industry, PhillipCapital India Research Comparative Valuation

Company Mcap Revenues Ebitda PAT CAGR _____EPS Rs_____ ____PER (x) ____ PBR(x) EV/Ebitda

(x) Yield(%) ROE(%)

(Rs mn) US$ mn FY15E FY15E FY15E FY14‐16E FY15E FY16E FY15E FY16E FY15E FY15E FY14 FY15EChambal Fertiliser 416 98,283 8,122 3,169 4 7 7.7 8.8 8.0 1.0 8.9 2.8 13.8Coromandel Fertiliser 1425 126,734 9,954 4,811 33 22.3 22.4 13.9 13.8 2.8 10.8 1.4 21.7Deepak Fertiliser 189 38,815 4,926 2,698 9 30.6 30.6 4.3 4.3 0.8 4.1 4.6 15.8GNFC 221 41,993 6,439 2,815 ‐2 18.1 18.1 4.9 4.9 0.5 2.7 4.6 9.2GSFC 664 63,124 7,232 4,733 23 12 13.3 8.6 7.7 0.8 6.8 0.8 11.2RCF 581 81,160 7,339 3,761 10 6.8 6.8 9.6 9.6 1.2 7.3 2.1 14.3Tata Chemicals 1727 169,266 22,029 9,131 10 36.5 35.5 172.7 47.3 1.8 7.9 2.3 13.6Zuari Agrochemical 181 95,126 4,560 1,422 38 17.8 33.8 4.8 10.2 0.9 10.8 1.0 12.5Average 28.4 13.2 1.2 7.4 2.5 14.0

GNFC, GSFC, RCF are standalone numbers Source: Bloomberg, PhillipCapital India Research

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Large Urea Consuming States Large P&K Consuming States

Source: PhillipCapital India Research

UP(20.7%)

AP(9.5%)

Punjab(9.4%)

MAH(7.6%)

TN(3.1%)

Bihar(7%)

Gujarat(6.4%)

Haryana(6.7%)

MP(6.3%)

Rajasthan(6.1%)

Karnataka(4.8%)

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UP(20.7%)

AP(9.5%)

Punjab(9.4%)

MAH(7.6%)

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Bihar(7%)

Gujarat(6.4%)

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WB(4.6%)

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AP(12.8%)

MAH(13.1%)

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MP(11.1%)

Karnataka(7.2%)

WB(7.7%)

Orissa(2%)

AP(12.8%)

MAH(13.1%)

TN(4.7%)

MP(11.1%)

Karnataka(7.2%)

WB(7.7%)

Orissa(2%)



Chambal Fertilisers (CHMB IN)

Proxy play on reforms in Urea INDIA | AGRI INPUTS | Company Update

28 November 2014

A proxy play on urea in India: Chambal Fertiliser (Chambal) is the largest domestic private urea producer (~7% market share) with urea capacity of ~ 2 mmt. Proximity to markets (sells 80% of its produce in North India) and being on the gas hub (connectivity to HBJ gas pipeline) are its unequalled strengths. Following the favorable policy announcement, Chambal is likely to increase capacity further thus improving visibility on longer term growth. To broaden its product offerings, Chambal trades in P&K fertilizers, specialty fertilizers, pesticides, seeds and micro nutrients. The share of trading has been steadily increasing; while the management has stopped sharing segment wise details, we understand that non‐subsidized trading forms about 12% of their total Ebit (~ Rs 800 mn). While stress on textile remains, shipping seems improving, management is hopeful of a revival in the technology division. Earnings are estimated to compound 22% in FY14‐16E (assumes lower losses in tech and a no reform scenario). India to be a urea deficit market; reforms a compulsion than a choice: India produces ~22 mmt of urea against the demand of ~30 mmt, which is bridged through ~ 8 mmt of imports. The urea consumption over FY10‐14 has compounded by 3.4% and various agencies point towards a 3% growth rate going forward. To attract investments, industry friendly policy initiatives (new investments & NBS) are a compulsion than a choice. We thus expect an array of compulsive reforms to be pronounced benefiting the Urea sector in H2FY15. These reforms impact near term earnings and as a proxy play on reforms in Urea, expect Chambal to benefit the most. Shipping on a revival; technology losses declining: Chambal’s shipping division performance has been rather subdued and margins/returns have suffered due to excess global capacity that has led to fall in freight rates. However, shipping is showing signs of a turnaround with H1FY15 Ebit turning to profits of Rs 280 mn v/s a loss of Rs 88 mn in H1FY14. If the freights rates and sentiments do revive, we expect Chambal to re‐consider hiving off its shipping division to lower its huge debt burden. The board has already constituted a committee to to evaluate the opportunities in non‐core businesses of the Company. The Board has also appointed merchant bankers to give their recommendations. Further, the IMACAID performance in FY14 suffered due to lower production and drop in phosphoric acid realization however it’s expected to return to normalcy in FY15E. Technology division losses reduced by 84% to Rs 127 mn in FY14 and management indicated that it could breakeven at Ebit in FY16E. In a no loss scenario, Chambal’s FY16E EPS could increase by 6%. Tailwinds from regulatory upside to aid gr:. The policy for new urea investment has been already notified and in view of higher gas/falling urea prices; the government intends compensating the industry for cost increases (higher gas cost) for quantities beyond cut off limits as also a policy for gas price pooling is under active consideration. The notification could impact 15% of Chambal’s FY15E Earnings. The adhoc compensation of Rs 350/mt for production increases (already approved) would add about Rs 424 mn or 16% to Chambal’s earnings in FY15E (incl in estimates). The growth in FY15E would be helped by reforms in Urea (largely Rs 350/mt increase in fixed subsidy); higher margins for Urea quantities beyond cutoff limits, lower losses in tech division, dividends from IMACID and savings on interest somewhat. On FY16E, the stock trades at 8.1x PER, 1.1x PBR and offers 2.9% yield. We value Chambal at Rs 82 (~10xFY16E) and reiterate a Buy. The book value/dividends of Rs 63/2 sh limit investment downside.

BUY (Maintain) CMP RS 62 TARGET RS 82 (+32.3%) COMPANY DATA O/S SHARES (MN) : 416MARKET CAP (RSBN) : 26MARKET CAP (USDBN) : 0.452 ‐ WK HI/LO (RS) : 71 / 36LIQUIDITY 3M (USDMN) : 0.9PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 56.8FII / NRI : 6.5FI / MF : 10.8NON PROMOTER CORP. HOLDINGS : 3.1PUBLIC & OTHERS : 22.8 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 1.8 4.3 71.1REL TO BSE ‐3.7 ‐2.9 33.5 PRICE VS. SENSEX (Rebased)

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY13 FY14 FY15E FY16ENet Sales 81,987 89,106 87,436 82,642EBIDTA 6,809 6,739 8,550 8,584Net Profit 2,266 2,249 3,185 3,333EPS, Rs 5.4 5.4 7.7 8.1PER, x 11.4 11.4 8.1 7.7EV/EBIDTA, x 10.6 10.1 6.8 5.9P/BV, x 1.4 1.2 1.1 1.0ROE, % 12.4 11.2 14.3 13.5Debt/Equity (%) 264 211 180 155

Source: PhillipCapital India Research Est.

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CHAMBAL FERTILISERS COMPANY UPDATE

Management intent to hive off the shipping division still on agenda Since the year 2008 shipping business performance has been adversely impacted due to which financials remained under pressure, charter hire rates slipped to lowest levels in the region of US$10000‐13000/day. Further, magnifying interest burden aggravated the problem by deteriorating the financials as approximately 50% of the consolidated debt is shipping related. In FY12, Management boldly decided to hive off the shipping division into a separate entity to maximize the shareholder return; however, it couldn’t succeed as the creditors’ didn’t approve the proposed plan. However, now the Chambal board has constituted a committee to evaluate the opportunities in non‐core businesses of the Company. The Board has also appointed merchant bankers to give their recommendations. We believe that considering share holders’ interest it would once again revisit the decision to hive off the shipping business. Any decision to hive off shipping can meaningfully improve return ratios. Software division losses decline Chambal’s software division has been categorized into two services 1) Technology segment, where the scope of activities includes providing certain software to banks for taking care of mortgage activities 2) secondly extending services to KPO which is further subdivided into three segments a) valuation b) title c) mortgage. Of these two segments technology division continues to deliver strong performance, whereas the performance of the other segment remains lackluster. Since last several years software division has been reporting losses at EBIT level, however the magnitude of losses is declining. Management is confident of turning around the operations. We model losses at Ebit level in FY15/16E. Declining losses of technology subsidiary, EBIT Rs mn

Source: Company, PhillipCapital India Research Shipping to rebound – Aframax tanker freight rates are looking up Chambal has six ships on its board, of which five are double hull Aframax vessels and only one ship is single hull. Shipping accounts for more than 5% of its consolidated revenues, however, over the last couple of years its PBIT has witnessed a declining trend due to bleak scenario of global shipping industry and the charter rates are currently at their bottom. Most of the tankers are yet to enter into long term charter hire contracts as the charter rates quoting are quite low, hence most of the tankers have been given on spot rate basis. Long term charter freight rates earn better rates than spot charter rates. The outlook for near‐term freight rate is improving, due to improvement in economic activity. Thus some bounce is expected. The H1FY15 Shipping division Ebit of Rs 281 mn compares to the loss of Rs 88 mn in H1FY14, underscoring the improving fundamentals.

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Aframax tanker freight rates rebound.... Baltic Dry is seen moving up too lately

Source: Company, PhillipCapital India Research

Valuation & Target Price Chambal is expected to report growth in profits on the back of higher realization for quantities beyond cutoff limits and adhoc increase in subsidy by Rs 350/mt, reimbursement of subsidy in time and somewhat saving in freight costs. Gas price pooling should also lower working capital need (as Chambal’s meets 75% of its gas requirement from expensive LNG). Being the largest private sector urea play, Chambal is also expected to benefit the most in the case of any positive urea policy pronouncement. We value Chambal’s base business at ~7 x EBITDA. We have assumed investments at book. We arrive at a target price of Rs 82 per share, an upside of 32% from current levels. We reiterate with a BUY rating on the stock. Sum of parts valuation

FY16EChambal (base business value) 59,227 Investment 2 Enterprise Value 59,229 Less: Debt in FY16E 40,264 Add: Cash in FY16E 15,123 Implied Equity Value 34,088 Target Price 82CMP 62(%) 32

Source: Company, PhillipCapital India Research Estimates EBIT Bridge Figs. Rs mn FY12 FY13E FY14E FY15E FY16EUrea 5,031 4,770 3,942 5,507 5,542 Textile (120) 201 262 120 150 Shipping (55) (208) (141) 300 400 IMACID 860 15 184 500 700 Traded Goods 1,668 2,255 1,603 1,026 801 Technology (738) (793) (127) (600) (450)Source: Company, PhillipCapital India Research Estimates

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H1FY15 Results Figs. Rs mn Q2FY14 Q2FY15 YoY% QoQ% H1FY14 H1FY15 % chgNet Sales 24,888 25,082 1 26 41,760 45,048 8(Increase)/Decrease in stock 214 (2,503) 1,580 (3,047) (293)Consumption of Raw Materials 6,268 6,584 5 16 10,888 12,258 13As % of Sales 25 26 26 27Traded Goods 8,989 10,833 21 69 12,650 17,230 36As % of Sales 36 43 30 38Power & Fuel 3,794 3,875 2 19 6,439 7,123 11As % of Sales 15 15 15 16Staff costs 369 410 11 5 728 802 10As % of Sales 1 2 2 2Other expenditure 3,323 3,405 2 14 6,245 6,391 2As % of Sales 13 14 15 14Total Expenditure 22,957 22,603 (2) 25 38,530 40,758 6EBIDTA 1,931 2,479 28 37 3,230 4,290 33Depreciation 602 456 (24) 4 1,171 893 (24)EBIT 1,329 2,022 52 47 2,059 3,397 65Interest 435 450 3 2 929 890 (4)Forex fluctuation 0 0Other Income 424 166 (61) (43) 919 457 (50)PBT 1,317 1,739 32 42 2,049 2,965 45Tax 375 591 57 41 (23) 1,009 (4,575)Tax Rate % 28 34 (0) (1) 34Reported PAT 942 1,148 22 42 2,072 1,963 ‐5.2Adj PAT 752 1,052 40 48 1,543 1,868 21.1Adj EPS 1.8 2.5 39.8 30.2 3.7 4.5


Segmental Results Q2FY14 Q2FY15 YoY% QoQ% H1FY14 H1FY15 % chg

Fertilisers and Agri Inputs 22,118 22,399 1 28 36,901 39,880 8 Shipping 1,662 1,773 7 30 2,769 3,133 13 Textile 1,123 910 (19) (19) 2,129 2,035 (4)Total 24,903 25,082 1 26 41,799 45,048 8

PBIT Fertilisers and Agri Inputs 1,569 2,106 34 20 3,096 3,864 25 Shipping 51 223 340 279 (88) 281 (421)Textile 118 18 (85) (58) 156 60 (62)Total 1,738 2,346 35 26 3,164 4,205 33




Financials

Income Statement Y/E Mar, Rs mn FY13 FY14 FY15e FY16eNet sales 81,987 89,106 87,436 82,642Growth, % 9 9 ‐2 ‐5Total income 81,987 89,106 87,436 82,642Raw material expenses ‐21,913 ‐25,622 ‐24,476 ‐24,332Employee expenses ‐3,700 ‐4,098 ‐4,344 ‐4,648Other Operating expenses ‐49,566 ‐52,647 ‐50,066 ‐45,079EBITDA (Core) 6,809 6,739 8,550 8,584Growth, % (16.5) (1.0) 26.9 0.4Margin, % 8.3 7.6 9.8 10.4Depreciation ‐2,671 ‐2,824 ‐2,558 ‐2,584EBIT 4,138 3,915 5,992 6,000Growth, % (16.5) (1.0) 26.9 0.4Margin, % 8.3 7.6 9.8 10.4Interest paid ‐1,383 ‐2,074 ‐1,911 ‐1,816Other Non‐Operating Income 844 1,050 849 974Non‐recurring Items 120 0 0 0Pre‐tax profit 3,719 2,891 4,929 5,158Tax provided ‐1,597 ‐546 ‐1,643 ‐1,719Profit after tax 2,121 2,345 3,286 3,439Others (Minorities, Associates) 264 ‐96 ‐101 ‐106Net Profit 2,385 2,249 3,185 3,333Growth, % (22.8) (0.7) 41.6 4.6Net Profit (adjusted) 2,266 2,249 3,185 3,333Unadj. shares (m) 416 414 414 414Wtd avg shares (m) 416 414 414 414 Balance Sheet Y/E Mar, Rs mn FY13 FY14 FY15e FY16eCash & bank 3,991 1,975 9,473 15,123Debtors 35,864 35,595 33,777 30,566Inventory 12,553 6,855 6,484 6,087Loans & advances 3,247 4,366 3,666 2,666Other current assets 987 775 775 775Total current assets 56,642 49,565 54,174 55,217Investments 1 2 9 8Gross fixed assets 57,524 60,662 61,169 61,869Less: Depreciation ‐30,958 ‐33,782 ‐36,341 ‐38,924Add: Capital WIP 480 507 700 700Net fixed assets 27,045 27,386 25,528 23,644Non‐current assets 3,229 3,452 3,452 3,452Total assets 86,916 80,406 83,163 82,321 Current liabilities 11,385 8,727 11,259 10,147Provisions 2,220 1,633 2,077 2,252Total current liabilities 13,605 10,359 13,336 12,399Non‐current liabilities 54,240 48,790 46,241 43,935Total liabilities 67,844 59,149 59,576 56,334Paid‐up capital 4,162 4,140 4,140 4,140Reserves & surplus 14,267 16,330 18,560 20,854Shareholders’ equity 18,995 21,185 23,515 25,916Total equity & liabilities 86,916 80,406 83,163 82,321 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY13 FY14 FY15e FY16ePre‐tax profit 3,719 2,891 4,929 5,158Depreciation 2,671 2,824 2,558 2,584Chg in working capital ‐8,323 1,619 5,655 3,365Total tax paid ‐1,597 ‐546 ‐1,643 ‐1,719Other operating activities 209 1,702 1,040 1,039Cash flow from operating activities ‐3,323 8,489 12,539 10,426Capital expenditure ‐2,100 ‐3,165 ‐700 ‐700Other investing activities ‐15 ‐14 ‐14 ‐13Cash flow from investing activities ‐1,754 ‐3,119 ‐721 ‐712Free cash flow ‐5,076 5,370 11,818 9,715Equity raised/(repaid) 509 ‐23 0 0Debt raised/(repaid) 5,541 ‐5,476 ‐2,338 ‐2,000Dividend (incl. tax) ‐918 ‐915 ‐956 ‐1,039Other financing activities ‐1,026 ‐1,026 ‐1,026 ‐1,026Cash flow from financing activities 4,271 ‐7,386 ‐4,320 ‐4,065Net chg in cash ‐805 ‐2,016 7,498 5,650Pre‐tax profit 3,719 2,891 4,929 5,158 Valuation Ratios

FY13 FY14 FY15e FY16ePer Share data EPS (INR) 5.4 5.4 7.7 8.1Growth, % (22.8) (0.2) 41.6 4.6Book NAV/share (INR) 45.6 51.2 56.8 62.6FDEPS (INR) 5.4 5.4 7.7 8.1CEPS (INR) 11.6 12.3 13.9 14.3CFPS (INR) (34.2) 14.4 25.7 20.3DPS (INR) 1.9 1.9 2.0 2.2Return ratios Return on assets (%) 3.7 4.4 5.5 5.6Return on equity (%) 12.4 11.2 14.3 13.5Return on capital employed (%) 4.2 5.0 6.3 6.4Turnover ratios Asset turnover (x) 1.5 1.4 1.5 1.6Sales/Total assets (x) 1.0 1.1 1.1 1.0Sales/Net FA (x) 3.0 3.3 3.3 3.4Working capital/Sales (x) 0.5 0.4 0.4 0.4Working capital days 183.7 159.2 139.6 132.3Liquidity ratios Current ratio (x) 5.0 5.7 4.8 5.4Quick ratio (x) 3.9 4.9 4.2 4.8Interest cover (x) 3.0 1.9 3.1 3.3Dividend cover (x) 2.9 2.9 3.8 3.7Total debt/Equity (%) 263.6 210.5 179.7 155.4Net debt/Equity (%) 242.6 201.2 139.4 97.0Valuation PER (x) 11.4 11.4 8.1 7.7Price/Book (x) 1.4 1.2 1.1 1.0Yield (%) 3.1 3.1 3.2 3.5EV/Net sales (x) 0.9 0.8 0.7 0.6EV/EBITDA (x) 10.6 10.1 6.8 5.9EV/EBIT (x) 10.6 10.1 6.8 5.9



Coromandel International (CRIN IN) Pricing power is returning… INDIA | AGRI INPUTS | Company Update

28 November 2014

Rising retail prices, depleting inventories, impending gas price hike that would pave way for reforms in urea points to favourable turn of things for P&K sector. As we value these players on mid‐cycle margin of US$ 40~ 50/mt, we continue to believe in its structural growth story. On our estimates of Rs 14/21/25 for FY15/16/17E – i.e a 30% CAGR (FY15‐17E) ‐ trades attractive at 15x PER FY16E. The valuations ignore the integration (firm tie‐ups (strategic stakes in Foskor, Tunisia) and front end through ‘Mana Gromor’); its rising share of non‐subsidy businesses (crop protection revenues incl Sabero of Rs 12 bn in FY14) and subsidy reforms that can result in savings in interest cost and prop up P&K consumption. Buy. Thinning headwinds: The reduction in channel inventories (almost near normalcy); declining pace of imports, stable INR; almost unchanged fixed subsidies and huge capacity additions globally that lowers feed price outlook and on expectation of reforms in urea, we see positive turn of things for the P&K sector. Our channel checks suggests the DoF approves about Rs 2500/mt margins for Urea manufactures and this leads us to believe that there is little threat to sustenance of margins of ~ Rs 2000/mt for P&K producers on a mid‐cycle, thus we continue to believe in their structural growth story. To combat rise in feed cost (ammonia, phosphoric acid), the industry has taken price hikes across different grades and this should drive margins from current levels. Gas price reforms to pave way for reforms in Urea, benefitting P&K: The highly subsidized Urea has led to its higher application; that has affected P&K fertilizer demand (P&K consumption has declined from 30 mmt in FY12 to 22 mmt in FY14). With excessive imports and expensive feed (decline in KG D6 Gas led to use of expensive imports), urea subsidies have risen to Rs 400 bn, making reforms in urea a compulsion than a choice. As per our workings (for every US$1/mmbtu increase in gas cost, the urea subsidy bill could increase by ~ Rs 23 bn) and at the approved gas price, the additional cost to the exchequer is estimated to be Rs 35 bn, with an already alarming fiscal deficit, it’s reasonable to expect that urea retail prices would be linked to cost of production. Our channel checks indicate that although NBS in urea is distant possibility but retail prices could double, should domestic gas prices rise. The gas price hike would result in significant feed cost increase for the likes of GSFC, RCF and Deepak Fertiliser and they would have to take atleast 20% price hike to partly offset costs, this presents an opportunity to Coromandel (as its costs are unlikely to be impacted) to chase market share or margins. Potential to attain volumes of 5 mmt: CRIN has expanded its complex fertilizer manufacturing capacity in Kakinada to 4 mmt at a capex of Rs 4 bn in Dec’13. The environment clearance however is for 3.6 mmt at present, the management expects without any incremental capex to attain the 4 mmt target. Following its merger with Liberty Phosphates (SSP fertilizer capacity of 0.9 mmt), CRIN has potential to attain 5 mmt. As per the management, feedstock tie‐ups are also in place almost entirely. Although we model moderate volumes of 3/3.2/3.4 mmt in FY15/16/17E, below its potential of 5 mmt mark; we acknowledge with its rising market share (17% in Q2FY15 up from 11% in H1FY13) and overall volume resurgence (also led by an imminent urea price decontrol) 5 mmt by FY18E is attainable. The rise in share of high margin manufactured volumes over trading and higher utilization (better absorption of fixed cost), lower freight (diesel decontrol) and timely reimbursement of subsidies together should drive overall margins during FY15‐17E.

BUY (Maintain) CMP RS 315 TARGET RS 370 (+17%) COMPANY DATA O/S SHARES (MN) : 286MARKET CAP (RSBN) : 93MARKET CAP (USDBN) : 1.552 ‐ WK HI/LO (RS) : 340 /196LIQUIDITY 3M (USDMN) : 1.4PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 63.2FII / NRI : 11.7FI / MF : 5.8NON PROMOTER CORP. HOLDINGS : 7.4PUBLIC & OTHERS : 11.8 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 5.0 22.5 46.3REL TO BSE ‐0.5 15.3 8.7 PRICE VS. SENSEX (Rebased)

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15E FY16E FY17ENet Sales 103,013 112,689 120,325EBIDTA 8,767 11,423 12,966Net Profit 3,997 6,084 7,256EPS, Rs 14.0 21.3 25.4PER, x 22.5 14.8 12.4EV/EBIDTA, x 12.3 8.9 7.8P/BV, x 3.4 2.9 2.5ROE, % 15.0 19.8 20.3Debt/Equity (%) 71.4 53.7 36.3


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COROMANDEL INTERNATIONAL COMPANY UPDATE

Reach & offerings an unequalled strength: Albeit the disappointment in Q1, we highlight non‐subsidy related businesses earn margins of ~ 15% and account for ~40% of total Ebitda and thus CRIN plans to increase its share to ~50% overtime. CRIN’s initiatives to broaden its product offerings (pesticides, micro nutrients, specialty nutrients, organic compost, mechanized farming) and reach (about 646 agri‐retail centers in Andhra Pradesh & Karnataka) would likely act as a significant entry barrier for other players. Consumption of fertilisers in CRIN’s main markets have bettered industry growth rates and this has helped it improve market share further. Its proximity to markets is an unequalled strength and likely to give it an edge over competition given the diesel decontrol. With fall in crude oil prices, diesel prices are already tripping down; leading to savings in freight. Proximity to target markets, long term positive The company’s primary markets are Andhra Pradesh, Karnataka & Maharashtra. Its proximity to these markets is considered to be strong positive in terms of lower freight costs that ultimately improve its netbacks. Given the freeing up of diesel prices, we expect CRIN to protect its turf from competition and this enhances scope to earn better margins in its principal markets. While this is not working as at present due to lower crude oil prices, we expect CRIN to gain over the longer term. Subsidy as a % of total realization falls from 63% to 35%

AP, Maharashtra still consume higher P&K fertilizers, although consumption and gr. rates have declined

FY8 FY9 FY10 FY11 FY12 FY13CAGR%

(FY08‐13)Andhra Pradesh 2.6 3.2 3.3 4.1 4.1 3.0 3Maharashtra 2.2 2.5 3.2 4.6 4.5 3.0 7Karnataka 1.6 2.2 2.6 2.7 3.0 1.7 1West Bengal 1.3 1.6 1.8 2.1 2.0 1.8 7Tamil Nadu 1.1 1.3 1.4 1.5 1.7 1.1 ‐1Madhya Pradesh 1.0 1.1 1.3 2.8 2.9 2.6 22Orissa 0.4 0.6 0.6 0.6 0.6 0.5 1Total 17.0 21.1 23.3 28.5 30.4 22.8 6

Source: FAI, PhillipCapital India Research Coro inches up its market share Industry FY08 FY09 FY10 FY11 FY12 FY13 H1FY14Coromandel Int. Trading 74,186 174,827 251,511 261,945 777,574 859,035 435,937Manufactured 1,011,574 1,899,364 2,566,001 2,604,598 2,466,371 1,799,211 1,118,834Total 1,085,760 2,074,191 2,817,512 2,866,543 3,243,945 2,658,246 1,554,771Gr. Rate (%) yOY 91.0 35.8 1.7 13.2 ‐18.1 27.9CORO’s MKT SH (As a % of Industry) 6.5 9.8 12.1 10.0 10.7 11.7 16.8

Source: FAI, PhillipCapital India Research

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Valuation & Target Price We value CRIN using the sum‐of‐parts method. We assign CRIN’s fertilizer business 7.5x FY16E EBITDA; whilst the non‐subsidy business is valued at 9.5x. To this, we add investments (not including investments in Foskor/Tifert) at book and adjust the net debt. We have valued CRIN’s 15% stake in Foskor/Tifert at 21 /share. We arrive at a price target of Rs 370, which corresponds to PER of 17x FY16E EPS and PBR of 3.4x FY16E book. We reiterate with a BUY rating on the stock. Valuation Summary SOTP

Ebitda (Rs mn) Multiple (x) EV (Rs mn) Rs/shCRIN IN (base business) 5,939 7.5 44,545 156CRIN IN (non‐subsidy businesses) 5,483 9.5 52,092 182Add: Investments 3,480 12Assuming: Invt in overseas Phos.acid ventures 6,077 21Total Enterprise Value 106,194 372Less: Net Debt (Adj for subsidies) 1,171 4Implied Equity Value 105,023Equity Value Rs. 370

Source: Company, PhillipCapital India Research Estimates Manufactured fertilizer margins rebound

Source: Company, PhillipCapital India Research Ebitda Bridge Figs (in Rs mn) FY13 FY14 FY15E FY16E FY17E PhillipCapital assumptions Mfg fertiliser 3,778 4,169 4,621 5,683 6,845 Ebitda of Rs2200/2500mt in FY16/17e Mfg SSP 73 268 415 549 582 Fert traded 497 213 270 257 244 margins of 3% Pesticides 885 1,016 1,289 1,526 1,743 margins of 18% Gypsum 1,000 900 810 900 900 Gypsum sale at netback of Rs 1,000/mtOthers 791 713 965 1,149 1,256 margins of 20% Sabero 807 891 1,069 1,400

Source: Company, PhillipCapital India Research Estimates

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Q2FY15 Standalone and Consolidated Results _________Standalone_________ _________Consolidated_________

Rs Mn. Q2FY14 Q2FY15 YoY % Q2FY14 Q2FY15 YoY %Net Sales 28,988 32,454 12 32,154 34,660 8(Increase) /Decrease in stock ‐942 3,981 ‐522 ‐751 3,823 ‐609As % of Sales ‐3 12 ‐2 11Consumption of raw materials 19170 16,620 ‐13 21,076 18,141 ‐14As % of Sales 66 51 66 52Purchase of traded goods 4166 4,227 1 4,151 4,232 2As % of Sales 14 13 13 12Employee costs 583 622 7 680 694 2As % of Sales 2 2 2 2Other expenditure 3377 3,830 13 4,023 4,305 7As % of Sales 12 12 13 12EBIDTA 2,633 3,174 21 2,976 3,467 16Depreciation 200 225 13 249 264 6EBIT 2,434 2,949 21 2,727 3,203 17Interest 435 540 24 527 601 14Other Income 126 135 7 130 139 7Exceptional items ‐126 ‐126PBT 1,999 2,544 27 2,204 2,741 24Tax 546 841 54 559 911 63Tax Rate % 27 33 21 25 33PAT 1453.3 1,703 17 1,645 1,830 11Minority Interest 44 31 ‐29PAT after MI 1,601 1,799 12Adj PAT 1,542 1,703 10 1692 1,799 6Adj EPS Rs. 5.45 5.96 9.4 5.65 6.29 11OPM % 9.08 9.78 9.3 10NPM % 5.3 5.2 5 5.2

Source: Company, PhillipCapital India Research Estimates Half yearly results

_________Standalone _________ _________Consolidated_________Rs. Mn H1FY14 H1FY15 YoY % H1FY14 H1FY15 YoY %Net Sales 45,360 49,308 9 50,982 53,468 5 (Inc) /Dec in stock ‐1431 (584) (59) ‐1234 (795) (36)As % of Sales ‐3 ‐1 ‐2 ‐1Raw materials 28150 28,938 3 31684 31,755 (39)As % of Sales 62 59 62 59Traded goods 7951 8,876 12 7951 8,867 (4)As % of Sales 18 18 16 17Employee costs 1131 1,194 6 1313 1,329 6 As % of Sales 2 2 3 2Other expenditure 6,146 6,736 10 7,348 7,626 (4)Total expenses 41,947 45,159 8 47,063 48,781 4 EBIDTA 3,413 4,148 22 3,919 4,686 20 Depreciation 395 441 12 492 521 6 EBIT 3,019 3,707 23 3,427 4,165 22 Interest 1,045 1,097 5 1,228 1,210 (1)Other Income 352 300 (15) 441 304 (31)Exceptional items (126) 0 (126) ‐ (100)PBT 2,200 2,911 32 2,514 3,259 30 Tax 603 955 58 624.3 1079.7 73PAT 1,597 1,956 22 1,890 2,180 15 Minority Interest ‐ 75 55 (26)PAT after MI 1,815 2,124 17 Adj PAT 1,746 1,956 12 1,875 2,124 13 EPS Rs. 6 7 21 7 7 9 Adj EPS Rs. 6.17 6.84 11 6.3 7.4 18




Financials

Income Statement Y/E Mar, Rs mn FY14 FY15e FY16e FY17eNet sales 100,532 103,013 112,689 120,325Growth, % 11 2 9 7Total income 100,532 103,013 112,689 120,325Raw material expenses ‐63,521 ‐67,302 ‐73,194 ‐76,280Employee expenses ‐2,705 ‐2,884 ‐3,268 ‐3,850Other Operating expenses ‐26,254 ‐24,060 ‐24,805 ‐27,229EBITDA (Core) 8,052 8,767 11,423 12,966Growth, % 4.9 8.9 30.3 13.5 Margin, % 8.0 8.5 10.1 10.8 Depreciation ‐961 ‐1,035 ‐1,140 ‐1,246EBIT 7,091 7,732 10,282 11,720Growth, % 1.8 9.0 33.0 14.0 Margin, % 7.1 7.5 9.1 9.7 Interest paid ‐2,403 ‐2,390 ‐2,225 ‐1,925Other Non‐Operating Income 608 507 748 768Non‐recurring Items 126 0 0 0Pre‐tax profit 5,327 5,850 8,805 10,563Tax provided ‐1,521 ‐1,721 ‐2,554 ‐3,063Profit after tax 3,806 4,128 6,252 7,499Others (Minorities, Associates) ‐84 ‐131 ‐167 ‐243Net Profit 3,722 3,997 6,084 7,256Growth, % (16.7) 11.1 52.2 19.3 Net Profit (adjusted) 3,596 3,997 6,084 7,256 Unadj. shares (m) 286 286 286 286 Wtd avg shares (m) 286 286 286 286 Balance Sheet Y/E Mar, Rs mn FY14 FY15e FY16e FY17eCash & bank 4,722 876 4,329 1,739Debtors 14,835 14,111 12,350 13,186Inventory 17,529 15,492 13,872 17,648Loans & advances 18,044 19,173 19,173 19,173Other current assets 142 126 126 126Total current assets 55,270 49,779 49,850 51,873Investments 3,418 3,480 3,480 3,480Gross fixed assets 21,841 24,191 26,541 28,891Less: Depreciation ‐8,149 ‐9,183 ‐10,324 ‐11,570Add: Capital WIP 744 1,000 2,000 2,000Net fixed assets 14,436 16,008 18,217 19,321Non‐current assets 3,641 3,538 3,538 3,538Total assets 76,766 72,805 75,086 78,212 Current liabilities 46,195 39,832 37,176 37,594Provisions 1,927 1,547 1,738 1,619Total current liabilities 48,123 41,378 38,914 39,214Non‐current liabilities 4,859 4,877 5,377 2,877Total liabilities 52,982 46,255 44,290 42,091Paid‐up capital 286 286 286 286Reserves & surplus 22,529 26,313 30,428 35,511Shareholders’ equity 23,784 26,550 30,795 36,121Total equity & liabilities 76,765 72,805 75,085 78,211 Source: Company, PhillipCapital India Research Estimates

Cash Flow FY14 FY15e FY16e FY17e

Pre‐tax profit 5,327 5,850 8,805 10,563Depreciation 961 1,035 1,140 1,246Chg in working capital 5,055 ‐4,996 918 ‐4,313Total tax paid ‐1,508 ‐1,734 ‐2,554 ‐3,063Cash flow from operating activities 9,835 154 8,310 4,433Capital expenditure 2,502 ‐2,606 ‐3,350 ‐2,350Chg in investments ‐1,819 ‐62 0 0Cash flow from investing activities 683 ‐2,668 ‐3,350 ‐2,350Free cash flow 10,518 ‐2,514 4,960 2,083Equity raised/(repaid) 3 1,459 37 0Debt raised/(repaid) ‐8,004 31 500 ‐2,500Dividend (incl. tax) ‐1,505 ‐1,672 ‐2,006 ‐2,174Cash flow from financing activities ‐9,771 ‐1,331 ‐1,507 ‐4,674Net chg in cash 747 ‐3,845 3,453 ‐2,591 Valuation Ratios

FY14 FY15e FY16e FY17ePer Share data EPS (INR) 12.6 14.0 21.3 25.4Growth, % (17.7) 11.1 52.2 19.3Book NAV/share (INR) 79.8 93.1 107.5 125.3FDEPS (INR) 12.6 14.0 21.3 25.4CEPS (INR) 15.5 17.6 25.3 29.7CFPS (INR) 41.1 (8.4) 37.0 16.3DPS (INR) 4.5 5.0 6.0 6.5Return ratios Return on assets (%) 6.7 7.6 10.4 11.4Return on equity (%) 15.8 15.0 19.8 20.3Return on capital employed (%) 15.6 17.8 21.7 22.2Turnover ratios Asset turnover (x) 2.6 2.8 2.8 2.9Sales/Total assets (x) 1.3 1.4 1.5 1.6Sales/Net FA (x) 6.2 6.8 6.6 6.4Working capital/Sales (x) 0.0 0.1 0.1 0.1Working capital days 15.8 32.1 27.0 38.0Liquidity ratios Current ratio (x) 1.2 1.2 1.3 1.4Quick ratio (x) 0.8 0.9 1.0 0.9Interest cover (x) 3.0 3.2 4.6 6.1Dividend cover (x) 2.8 2.8 3.5 3.9Total debt/Equity (%) 74.6 71.4 53.7 36.3Net debt/Equity (%) 53.9 68.1 39.6 31.5Valuation PER (x) 25.0 22.5 14.8 12.4Price/Book (x) 3.9 3.4 2.9 2.5Yield (%) 1.4 1.6 1.9 2.1EV/Net sales (x) 1.0 1.0 0.9 0.8EV/EBITDA (x) 12.7 12.3 8.9 7.8EV/EBIT (x) 14.4 14.0 9.9 8.6



Tata Chemicals (TTCH IN) Deleveraging to drive equity value INDIA | AGRI INPUTS | Company Update

28 November 2014

Firing on all cylinders! Tata Chem also expects favorable policy pronouncements for Urea sector such as gas price pooling and an eventual decontrol. Given its energy and freight intensity, we expect it to benefit on falling crude oil prices. On expectations of healthy price hike in soda ash and restructuring led positives, earnings are expected to more than double in FY16E over FY14, a CAGR of 46%. With restructuring of loss making European and African operations, the accretion to Ebitda is estimated to be Rs 2.5 bn in FY16E and with improved cash flows, limited capex and consequent fall in high cost debt (~ Rs 20 bn) the interest savings (~ Rs 1.5 bn) too should help drive the Rs 4 bn accretion in PAT. With signs of a revival (in the USA and Europe), we do expect Tata Chemicals to benefit enormously overtime. Its improving product mix (beyond FY17‐18E and superior profit growth (on low base) is a further positive. We value Tata Chemicals at Rs 500 and reiterate Buy. Initiatives to enhance ROE, instills confidence: TCL divested its non‐core‐ low‐profit ventures like Khet‐Se and Bio fuels. This followed the closing down of loss making Netherlands unit and STPP plant ops in Haldia. In FY14 it also restructured BMGL, UK and Kenya and has charged off one‐expenses in FY14 and partly in H1FY15. These actions were followed by capital light, high margin debottlenecks (GCIP & domestic Salt) and acquisition of Rallis and British salt; which has improved the earnings, returns and instills confidence in the future growth. While the company has addressed most major issues that have dragged profits and hurt growth, it is still reviewing other smaller non‐core/non‐profits ops and a decision is likely by Mar’15. The company has pulled out of slow moving investments such as Urea Greenfield, Gabon and has decided against investing in Urea Brownfield in India. Thus it assures that only return maximizing investment proposition would be given a go ahead, instilling confidence. GCIP, US holds immense value: GCIP, US accounts for 17/33% of Tata Chem’s overall FY15e Revenues/Ebitda. Given the advent of shale gas in the US, the cost of production is estimated to fall. This along with fall in crude oil prices, should lower freight too, driving margins for the entity. Recently Tata Chem has invested in improving efficiency of this unit, the company further contemplates expanding capacity by 0.4 mmt, however the details aren’t firmed up as yet. With signs of revival in US and Europe, the soda ash prices are estimated to increase in CY15E. We estimate GCIP’s Ebit/PAT compounding by 7/11% during FY14‐17E. The glass/detergent manufacturers have shown interest in backward integrating by acquiring soda ash assets globally. Benchmarking, such transaction, we see immense value unlocking potential in GCIP (~ 40% of CMcap). Non‐cyclical businesses share to increase in earnings pie ‐ Rerating ahead of change in earnings mix, imminent: TCL has forayed into branded pulses (or lentils), retailing under its 'i‐Shakti' brand. The pulses are priced around Rs 95~100/kg. The consumption of pulses in India is around 18.5mmt (FY06‐12 CAGR of 6%), with production at ~15mmt. The industry opportunity is huge (US$ 40bn) with the organised market accounting for just about 4%. Tata Chemicals aims to capture 3% of the US$ 40bn market in the next five years (turnover of Rs 54bn). The company, along with its (50.06%) subsidiary, Rallis India, encourage farmers to grow pulses, provide them necessary farm inputs (seeds/pests/fertilisers and other technical inputs) and would also pay them a higher price (compared to support prices) for their produce. At 4% net margins, pulses can form ~ 20% Tata Chemicals overall profits in FY20E. With Its acquisition of British Salt, UK in Dec' 2010 (for 6.5bn) and domestic salt capacity expansion by 0.2 mmt, has already raised the share of earnings from non‐cyclical business to the total. With improvement in salt through‐put (highest gross margins of ~ 55‐60%); we estimate margins and share of resilient businesses to total to rise further. We also view lower diesel prices to lower freight costs for Tata Chem’s salt vertical.

BUY (Maintain) CMP RS 421 TARGET RS 500 (+19%) COMPANY DATA O/S SHARES (MN) : 255MARKET CAP (RSBN) : 107MARKET CAP (USDBN) : 1.752 ‐ WK HI/LO (RS) : 435 / 245LIQUIDITY 3M (USDMN) : 5.2PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 31.1FII / NRI : 21.9FI / MF : 23.6NON PROMOTER CORP. HOLDINGS : 1.9PUBLIC & OTHERS : 21.4 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 2.7 13.1 50.0REL TO BSE ‐2.8 5.9 12.5 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15E FY16E FY17ENet Sales 175,301 181,959 187,807EBIDTA 21,651 23,368 24,787Net Profit 7,279 8,259 8,801EPS, Rs 28.6 32.4 34.5PER, x 14.7 13.0 12.2EV/EBIDTA, x 7.7 6.6 5.5P/BV, x 1.8 1.7 1.5ROE, % 12.2 12.8 12.7Debt/Equity (%) 128 103 76


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TATA CHEMICALS COMPANY UPDATE

Branded pulses retailing—A huge opportunity During FY11 TCL forayed into branded pulses (or lentils), retailing under its 'i‐Shakti' brand under which it introduced four variants—toor, moong, chana and urad—priced reasonably around Rs 95‐Rs 100 per kg. The consumption of pulses in India is more than 20mmt (FY08‐14 CAGR of 5%), with production at ~16mmt. The industry opportunity is huge (US$ 40bn) with the organised market accounting for just about 4%. TCL aims to capture 3% of the US$ 40bn market in the next five years (indicating a turnover of Rs 54bn). The company, along with its (50.06%) subsidiary, Rallis India, would encourage farmers to grow pulses, provide them necessary farm inputs (seeds/pests/fertilisers and other technical inputs) and would also pay them a higher price (compared to support prices) for their produce. At about 4% net margins pulses could form 20% of Tata Chemicals Ebitda in FY20E. In H1FY15, the revenues have touched Rs 1 bn and the company has covered 55,000 retail outlets. It aims to double its retail reach by FY15 end. Pulses are being sold through modern retail formats, traditional stores, Tata Kisan Sansar outlets as well as through its existing strong salt distribution network across the country. Quarterly Consolidated Result Rs mn Q2FY14 Q1FY15 Q2FY15 YoY% QoQ% H1FY14 H1FY15 % YoYNet Sales 43,440 38,466 48,032 11 25 76,556 86,498 13(Inc) / Dec in stock (2,440) (7,595) 904 (137) (112) (6,042) (6,692) 11Raw Material Consumed 13,941 12,611 11,465 (18) (9) 22,134 24,077 9Cost of traded goods 6,502 8,433 9,122 40 8 12,759 17,555 38Employee Expenses 3,032 3,136 3,117 3 (1) 6,130 6,253 2Power & Fuel 5,478 5,150 5,231 (5) 2 10,006 10,381 4Freight & forwarding charges 4,668 4,524 4,783 2 6 8,661 9,308 7Other Expenses 6,515 7,172 6,879 6 (4) 13,049 14,050 8Total Expenditure 37,696 33,430 41,501 10 24 66,697 74,931 12EBITDA 5,743 5,036 6,531 14 30 9,858 11,567 17EBIDTA % 13 13 14 3 4 13 13Depreciation 1,201 1,123 1,201 0 7 2,346 2,324 (1)EBIT 4,542 3,913 5,330 17 36 7,513 9,243 23EBIT % 10 10 11 6 9Interest expenses 1,794 1,034 1,256 (30) 21 2,924 2,290 (22)Exceptional items (284) ‐ (9) (97) #DIV/0! 150 (9) (106)Other Income 432 271 437 1 61 632 709 12PBT 3,464 3,150 4,520 30 43 5,071 7,670 51Total Tax 1,350 823 1,181 (12) 44 1,713 2,004 17Tax rate % 39 26 26 (33) 0 34 26PAT 2,115 2,328 3,339 58 43 3,358 5,666 69Share of loss of Assoc 8 11 23 192 100 19 34 80Minority int 762 561 746 (2) 33 1,243 1,307 5RPAT 1,344 1,755 2,570 91 46 2,097 4,325 106APAT 1,661 1,755 2,561 54 46 2,847 4,316 52OPM% 13 13 14 3 4 13 13NPM% 4 5 5 39 17 4 5AEPS 7 7 10 54 46 11 17




Segmental break‐up (Rs mn) Q2FY14 Q1FY15 Q2FY15 YoY% QoQ% H1FY14 H1FY15 % YoYRevenues Inorganic Chemicals 20,156 19,930 20,231 0 2 38,852 40,161 3Fertilisers 16,437 11,880 19,760 20 66 24,883 31,639 27Other Agri Inputs (Rallis) 6,432 5,954 7,125 11 20 11,954 13,079 9Others 322 616 723 124 17 729 1,338 84Total 43,346 38,380 47,837 10 25 76,418 86,217 13EBIT Inorganic Chemicals 4,075 2,886 3,477 (15) 20 6,505 6,363 (2)Fertilisers 1,126 1,014 1,480 31 46 1,563 2,494 60Other Agri Inputs (Rallis) 1,033 671 1,166 13 74 1,574 1,837 17Others (148) (130) (156) 5 20 (238) (286) 20Total 6,086 4,441 5,967 (2) 34 9,404 10,408 11


Valuation Summary We adopt sum‐of‐the‐parts valuation methodology for Tata Chemicals, where we assigned 7x multiple to TCL consol FY16E Ebitda and assume quoted investments at 70% of market value (most of the investments are in group companies, so we assume a discount of 30%) and unquoted investments at book. We arrive at a PT of Rs 500. As the road to recovery has been sooner than we had assumed, we reiterate Buy. Valuation table Rs mn FY16E Rs/sh PC Comments Fert & Chem business 161,241 633 7x Ebitda Investments Quoted 10,715 42 30% disc to CMP, Rallis excluding Investments unquoted 2,278 9 Value of firm 174,234 684 Add: Cash FY16E 20,257 79 Less: Debt FY16E 66,596 261 Enterprise value 127,896 500 Target Price Rs. 500 CMP Rs. 420 Long term positives: A hold on big‐ticket expansions (Urea projects in Babrala & Gabon) and fuel switch over project/expansion in Kenya does lower the immediate need for heightened cash. To fund any such mega projects, monetizing investments would be the preferred route; risking the debt/equity mix marginally (Investments in Tata Sons equals gross debt; not considered in our PT). We expect a tighter control on credit, fall in commodity prices and refinancing of debt to result in interest savings in FY15/16E. On FY16E Tata Chemicals is trading at 1.5x book and 13x PER and offers 2.8% yield. Europe soda ash prices moderates…however SE Asia prices rise Henry hub gas prices cools off

Source: Bloomberg, PhillipCapital India Research

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Financials

Income Statement Y/E Mar, Rs mn FY14 FY15e FY16e FY17eNet sales 157,353 175,301 181,959 187,807Growth, % 6 11 4 3Other Operating expenses ‐85,301 ‐93,958 ‐99,192 ‐101,790EBITDA (Core) 18,094 21,651 23,368 24,787Margin, % 11.5 12.4 12.8 13.2 Depreciation ‐4,712 ‐4,412 ‐4,534 ‐4,492Interest paid ‐5,793 ‐4,550 ‐3,938 ‐3,276Other Non‐Operating Income 1,424 1,500 1,480 1,360Non‐recurring Items 14,202 0 0 0Pre‐tax profit 22,682 14,109 16,265 18,221Tax provided ‐2,888 ‐4,115 ‐4,913 ‐6,065Profit after tax 19,794 9,994 11,352 12,157Others (Minorities, Associates) ‐2,177 ‐2,715 ‐3,093 ‐3,356Net Profit 17,618 7,279 8,259 8,801Growth, % (55.0) 85.9 13.5 6.6 Net Profit (adjusted) 3,915 7,279 8,259 8,801 Unadj. shares (m) 255 255 255 255 Wtd avg shares (m) 255 255 255 255 Balance Sheet Y/E Mar, Rs mn FY14 FY15e FY16e FY17eCash & bank 17,530 18,186 20,257 22,302Debtors 32,659 29,777 29,911 30,872Inventory 16,490 25,258 23,897 22,332Loans & advances 11,616 9,616 7,616 5,616Total current assets 78,295 82,836 81,682 81,122Investments 4,409 4,409 4,409 4,409Gross fixed assets 113,767 118,951 122,951 127,951Less: Depreciation ‐67,636 ‐74,214 ‐78,748 ‐83,240Add: Capital WIP 5,184 4,000 5,000 3,000Net fixed assets 51,315 48,736 49,203 47,710Non‐current assets 67,226 67,226 67,226 67,226Total assets 202,104 204,067 203,379 201,326 Current liabilities 30,846 35,782 36,932 40,197Provisions 19,636 19,891 20,146 20,400Total current liabilities 50,482 55,672 57,078 60,597Non‐current liabilities 89,415 79,363 69,365 55,303Total liabilities 139,897 135,035 126,443 115,900Paid‐up capital 2,548 2,548 2,548 2,548Reserves & surplus 53,107 57,176 61,932 66,988Shareholders’ equity 62,207 69,032 76,936 85,426Total equity & liabilities 202,104 204,067 203,378 201,326 Source: Company, PhillipCapital India Research Estimates

Cash Flow FY14 FY15e FY16e FY17e

Pre‐tax profit 22,682 14,109 16,265 18,221Depreciation 4,712 4,412 4,534 4,492Chg in working capital ‐12,758 1,305 4,632 6,124Total tax paid ‐922 ‐4,115 ‐4,913 ‐6,065Cash flow from operating activities 13,714 15,711 20,517 22,773Capital expenditure ‐9,324 ‐1,848 ‐5,018 ‐2,968Chg in investments 1,588 0 0 0Cash flow from investing activities ‐7,703 ‐1,808 ‐4,962 ‐2,890Free cash flow 6,012 13,903 15,555 19,883Debt raised/(repaid) 17,140 ‐10,052 ‐9,998 ‐14,062Dividend (incl. tax) 2,905 3,195 3,486 3,776Cash flow from financing activities 19,059 ‐6,817 ‐6,456 ‐10,207Net chg in cash 25,071 7,086 9,099 9,676 Valuation Ratios

FY14 FY15e FY16e FY17ePer Share data EPS (INR) 15.4 28.6 32.4 34.5Growth, % (55.0) 85.9 13.5 6.6Book NAV/share (INR) 218.4 234.4 253.0 272.9FDEPS (INR) 15.4 28.6 32.4 34.5CEPS (INR) (21.9) 45.9 50.2 52.2CFPS (INR) 54.1 56.1 75.1 84.6DPS (INR) 10.0 11.0 12.0 13.0Return ratios Return on assets (%) 11.7 6.4 6.8 7.0Return on equity (%) 7.0 12.2 12.8 12.7Return on capital employed (%) 14.3 7.6 8.3 8.7Turnover ratios Asset turnover (x) 2.2 2.2 2.4 2.7Sales/Total assets (x) 0.8 0.9 0.9 0.9Sales/Net FA (x) 3.2 3.5 3.7 3.9Working capital/Sales (x) 0.2 0.2 0.1 0.1Working capital days 69.4 60.1 49.1 36.2Liquidity ratios Current ratio (x) 2.5 2.3 2.2 2.0Quick ratio (x) 2.0 1.6 1.6 1.5Interest cover (x) 2.3 3.8 4.8 6.2Dividend cover (x) 1.5 2.6 2.7 2.8Total debt/Equity (%) 155.7 128.2 103.3 75.5Net debt/Equity (%) 124.2 97.8 71.9 43.5Valuation PER (x) 27.4 14.7 13.0 12.2Price/Book (x) 1.9 1.8 1.7 1.5EV/Net sales (x) 1.1 0.9 0.8 0.7EV/EBITDA (x) 9.7 7.7 6.6 5.5EV/EBIT (x) 13.2 9.6 8.2 6.8



Zuari Agrochemicals (ZUAC IN) Operations stabilize, superior growth phase to commence INDIA | AGRI INPUTS | Initiating coverage

28 November 2014

We initiate coverage on Zuari Agrochemicals (Zuari) with a positive view. The demerged Agri Inputs entity, Zuari was caught up in myriad problems (read inside) that interrupted plant operations and thus profits all along. However with operations returning to normalcy, change over to LNG as feed, commissioning of major capex and on expectation of positive regulatory pronouncements it is at harbinger of multi‐year superior growth. To put this in perspective, we estimate PAT of Rs 1 bn in FY16E from a loss of Rs 560 mn in FY14. Further, its investment in Paradeep Phosphates (40% stake), Mangalore Chemicals (~16.5%) and other investments form ~ 65% of the current mcap, limiting investment downside. Zuari is a fully integrated pan‐India fertilizer player with strategic partnership, making it a formidable player in the P&K sector. The synergy benefits on acquisition of Mangalore Chemicals/Paradeep Phoshates too would be realized over time (perhaps in the advent of raising urea retail price). Zuari is expected to be one of the major beneficiaries of gas price pooling for fertilizer use as it will lower its working capital need immensely and improve earnings. Initiate with a Buy and a PT of Rs 450. Margin expansion key to near term earnings growth Zuari’s operating profit margins slid to a low of 3% following steep weakening of INR to the USD, however with stable INR and improved operations, we estimate margin to improve by 100 bps every year in FY15/16E. Falling crude oil prices should lower freight costs (~ 5% of revenues) thereby further lifting margins. Weak INR has also leapt up the working capital burden and led to higher interest and forex charges. However, with timely disbursement of subsidy and stable INR, we estimate finance costs to fall. Net‐net we estimate PAT of Rs 1 bn in FY16E from a loss of Rs 560 mn in FY14. Our numbers don’t capture the entire benefit of synergy such as bulk procurement, logistics arising from Zuari’s investment in Paradeep Phosphates and Mangalore Chemicals. Capex initiatives provides visibility to longer term growth Zuari has commenced work on expansion/energy saving projects totaling a capex of Rs 360 bn that would commission in a phased manner from H2CY15. The significant capex being that of ammonia/urea revamp, that would raise urea capacity by 0.1 mmt and entail energy saving of 1.1Gcal/mt – implying accretion to Ebitda of Rs 1.65 bn in FY18E. However, the company awaits clarity on if it will be allowed to retain energy savings, would it have to meet the stipulated bank guarantee of Rs 3 bn etc. The other major capex SSP (0.2 mmt commissioning in Dec’14) and NPK expansion (by 0.2 mmt in H2CY15) could add Rs 550 mn to Ebitda in FY17E. These expansion/retrofits initiatives provide visibility to near term and long term growth. A major beneficiary of gas price pooling From Feb’13 Zuari has switched over to LNG as feed from Naphtha (Capex Rs 600 mn), which has also lowered its energy consumption by 0.1 Gcal/mt (or Rs 300/mt saving). However due to an entry tax of 20% in the state of Goa, the LNG remains as expensive as Naphtha at ~ US$ 20/mmbtu in H1FY15, thus giving no respite to working capital burden. The management is holding talks to do away with the entry tax and the DoF seems to have commenced work on pooling gas prices for fertilizer use. Any favourable move in this regard can lower Zuari’s working capital and thus interest outgo immensely. Zuari services an interest of Rs 2.5 bn p.a (on a recurring annual EBiT of Rs 3‐3.5 bn).

BUY CMP RS 271 TARGET RS 450 (+66%) COMPANY DATA O/S SHARES (MN) : 42MARKET CAP (RSBN) : 11MARKET CAP (USDBN) : 0.252 ‐ WK HI/LO (RS) : 310 / 123LIQUIDITY 3M (USDMN) : 0.3PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 73.4FII / NRI : 2.9FI / MF : 14.0NON PROMOTER CORP. HOLDINGS : 2.9PUBLIC & OTHERS : 6.8 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 33.8 43.0 96.9REL TO BSE 28.3 35.9 59.4 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY14 FY15E FY16ENet Sales 51,759 53,769 57,372EBIDTA 1,759 2,793 3,416Net Profit ‐559 327 1,016EPS, Rs (13.3) 7.8 24.1PER, x (20.4) 34.8 11.2EV/EBIDTA, x 21.3 12.9 9.7P/BV, x 1.4 1.4 1.3ROE, % (6.9) 4.0 11.2Debt/Equity (%) 324.4 311.3 261.0


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Zuari Chem BSE Sensex


ZUARI AGROCHEMICALS INITIATING COVERAGE

Investment Thesis Zuari Agro Chemicals Limited is a leading fertilizer conglomerate with an annual installed capacity of 0.946 mmt of fertilizers (0.4 mmt of Urea and 0.55 of NPK). It was promoted in 1967 in Goa, by industrialist Dr KK Birla. The company produces high‐quality complex fertilizers of various grades along with seeds, pesticides, micro nutrients, and specialty fertilizers. The company is also a significant importer of fertilizers and farm nutrients. In 2010‐11, Zuari Agro Chemicals recorded the highest ever sales of 2.21 mmt of fertilizer of which over 1 mmt were traded fertilizers. The traded fertilizers have given the company’s profitability some fillip. All products are marketed under the “Jai Kissan” brand. Its principal markets are Goa, Maharashtra, AP, Karnataka and TN, but as these markets are at about a min 300 km run from factory we expect the company to benefit from falling crude oil prices (thus lower diesel prices). We also note that the company has significantly higher net working capital exposure (compared to its peers), which we see coming down following change over to Gas as feed from Naphtha (converted in FY13 – however production level is estimated to fall in FY15 over FY13). We see Zuari gaining majorly in the advent of pooling of gas prices for fertilizers use, lowering wcap and thus savings on interest. …expensive feed usage has led to heightened w’cap need relative to peers.. Net working capital days/Revenues % FY10 FY11 FY12 FY13 FY14

Chambal Fertilisers 16.10 14.10 33.66 53.84 45.20Coromandel International 3.27 0.12 5.31 4.47 0.67GSFC 20.18 19.22 25.23 45.58 34.27Tata Chem 0.62 3.88 10.34 21.46 16.70Zuari Agrochemical 46.45 56.94 49.99

Source: Company, PhillipCapital India Research ….however we estimate w.cap dependence to fall

Source: Company, PhillipCapital India Research Estimates Production interruptions that galored… may finally ease Vol’s in mt Urea DAP NPK SSP Total FY12 281,556 77,179 305,452 32,088 696,275 Ruptured naphtha pipeline leak, that caused a blast and disturbed plant operations FY13 353,028 62,021 222,915 33,211 671,175 DAP/Complex fertilizers plants remained shut from Dec, 2012 and resumed full operations

only in Aug'13 post successful settlement of contract labours FY14 410,268 47,983 435,494 32,629 926,374 Ammonia/Urea plant ops remained under maintenance shutdown from Mar'13 through

June'13 H1FY15 133,992 129,268 170,234 8,006 441,500 Ammonia/Urea plans were shutdown in Q1FY15 due to mechanical breakdown, however

operating at optimum capacity FY15E 348,379 245,609 323,444 18,414 935,846 FY16E 372,765 257,889 339,616 121,176 1,091,447


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Zuari has many‐a‐ investment in JV’s, the largest being Zuari Maroc Phosphates. Besides this it also has 16.5% stake in Mangalore Chemicals and fertilizers. However, along with the UB Group, Zuari’s holding in MCFL is 38.5% and it has a board seat too. These strategic acquisition makes Zuari a pan‐India player, this along with its partnership with OCP, Morocco makes it a significant player in the P&K industry. Key joint ventures JV ZMPL Zuari Rotem Speciality MCA Phosphate Pte % stake in JV 50% 50% 30% Country of Incorportion India India Singapore ZMPL is a 50:50 JV with OCP, Morocco.

The JV holds 80% stake in Paradeep Phosphates and balance 20% is with GOI. Paradeep Phosphates Ltd ‐ Located in Paradeep, Orissa was acquired through GoI disinvestment plan. It has DAP capacity of 0.72 mmt, Sulphuric Acid plant of 0.66 mt and Phosphoric acid of 0.225 mmt.

It is a 50:50 joint venture between Zuari Industries Limited and the Israel based Rotem Amfert Negev Limited. Zuari Rotem was created to produce state‐of‐the‐art, zero‐ waste, Water‐Soluble fertilisers in Baramati, Maharashtra.

It is a 30:70 JV between Zuari and Mitsubishi Corp, registered in Singapore. The JV holds 30% stake in FOSPAC (a company in exploration and production of rock phosphate in Peru). FOSPAC is expected to have an initial production capacity of 2.5 mmt and commercial production is expected to commence in 2016. The JV will purchase entire production of rock for export for a min of 20 years.

FY14 FY13 FY14 FY13 FY14 FY13 Assets 19,889 24,552 150 233 956 Liab 12,990 17,025 113 178 1 Revenue 21,627 26,867 188 203 Depreciation 124 130 4 4 Other expenses 22,173 26,078 201 192 PBT (670) 659 (18) 7 Contingent Liab 7,247 12,488 0 0 Capital commitments 1,472 2,719 Parent co., share in assets

5,328 44 1,095

Cost of investment 1,798 35 1,021

Source: Company, PhillipCapital India Research Zuari’s operating profit margins slid to a low of 3% following steep weakening of INR to the USD, however with stable INR and improved operations, we estimate margin to improve by 100 bps every year in FY15/16E. Falling crude oil prices should lower freight costs (~ 5% of revenues) thereby further lifting margins. Weak INR has also leapt up the working capital burden and led to higher interest and forex charges. However, with timely disbursement of subsidy and stable INR, we estimate finance costs to fall. Net‐net we estimate PAT of Rs 1 bn in FY16E from a loss of Rs 560 mn in FY14. Our numbers don’t capture the entire benefit of synergy such as bulk procurement, logistics arising from Zuari’s investment in Paradeep Phosphates and Mangalore Chemicals. Margins to expand, key to earnings growth


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Zuari has commenced work on expansion/energy saving projects entailing a capex of Rs 360 bn that would commission in a phased manner from H2CY15. The significant capex being that of ammonia/urea revamp, that would raise urea capacity by 0.1 mmt and entail energy saving of 1.1Gcal/mt – implying accretion to Ebitda of Rs 1.65 bn in FY18E. However, the company awaits clarity on if it will be allowed to retain energy savings, would it have to meet the stipulated bank guarantee of Rs 3 bn etc. The other major capex SSP (0.2 mmt commissioning in Dec’14) and NPK expansion (by 0.2 mmt in H2CY15) could add Rs 550 mn to Ebitda in FY17E. These expansion/retrofits initiatives provide visibility to near term and long term growth. Capex initiatives to drive near and longer term growth Capex Capacity Rs crore Timeline PC Comments Ammonia/Urea ‐ revamp

To enhance capacity from 700/1210 tpd to 1050/1500 tpd

1100 Mar'17E Could also lower energy from 6.7 to 5.6 Gcal/mt. Basic engineering and revamp study currently in progress. Need clarity if the company has to provide bank guarantee of Rs 3 bn as per new policy. Also current energy norms are 7.3 Gcal/mt against consumption of 6.7 Gcal/mt, thus it needs clarity on how long can the co., retain energy gains. The revamp work would be parallely in progress and would be hooked up on two shut downs

Ammonia/Urea ‐ Super revamp

Super revamp of ammonia/urea plants to enhance capacity to 1500/2400 tpd. Could also lower energy to 5.3 Gcal/mt

NA NA Zuari contemplates setting up a Brownfield capacity, but this is subject to environmental approval and on further clarity of the Invt policy

NPK Raising capacity by 0.2 to 0.9 mmt 190 H2CY'15 Current swing capacity is 1350/1600 tpd of DAP/NPK. Revamp of NPK plants is for better handling and capacity expansion

MOP Capacity for storing MOP intermediate 48 April'15 Ammonia storage tank

Improving handling/safety and capacity of ammonia storage tank

45 Dec'14

SSP Greenfield SSP unit of 600 tpd at Mahad, Maharashtra

65 Dec'14

Total 359




Valuation Summary Zuari Industries Ltd. (Zuari) is a major player in phosphatics fertilizers (2.5 mmt – about 1 mmt by itself and 1.2 mmt of PPL). We expect the company’s margins to expand by 100bps each in FY15/16E led by improved utilization rate, savings on freight and energy savings. We estimate PAT of Rs 1 bn in FY16E from a loss of Rs 600 mn in FY14. The target price for the stock is arrived by the sum‐of‐parts method. Our estimates are for the standalone entity and we value its investment in Paradeep Phosphates, Mangalore Chemicals separately. The standalone fertilizer is valued at 3x FY16E Ebitda, whilst the investment in Paradeep is valued at 2.5x cost of investment. We value investments in Mangalore Chemicals at CMP and consider other investments at book. In our opinion, the fertiliser business alone is too undervalued. We value the fair price at Rs 450, offering a +66% upside from current levels. We initiate with a BUY rating. SOTP based target price valuation based on FY16E estimates

multiple (x) Rs mn Rs/sh PC Comments Standalone Fertilisers 3 10,248 244 3xFY16E Standalone Ebitda Paradeep Phosphates (40% Equity) 2.5 4,495 107 2.5x Book Seeds 1 207 5 1x Book Managalore Chemicals (~ 16.5% Equity) 1,752 42 CMP Other investments (@ book) 1,131 27 @ book Value of the firm 17,833 424Add: Cash FY16E 2,033 48Less: Long term debt FY16E 788 19Enterprise value 19,078 450Target Price Rs. 450CMP Rs. 271Upside from current levels 66%


Quarterly financial summary (in mn) 13‐Jun 13‐Sep 13‐Dec 14‐Mar 14‐Jun 14‐Sep YoY% H1FY14 H1FY15 YoY% FY13‐14 Income Statement Revenue 7,296 14,218 15,567 14,890 10,339 15,355 8 21,514 25,694 19.4 51,971 Other Income 116 70 56 (14) 50 63 (11) 187 113 (39.5) 228 Total Income 7,412 14,288 15,622 14,876 10,389 15,418 8 21,701 25,807 18.9 52,199 Expenditure (7,833) (14,132) (14,672) (12,543) (10,174) (14,542) 3 (21,965) (24,716) 12.5 (49,180) Operating Profit ‐421 157 950 2334 215 876 460 ‐265 1091 (512.4) 3019 Interest (632) (500) (726) (747) (680) (567) 13 (1,132) (1,247) 10.1 (2,605) PBDT (1,053) (344) 224 1,587 (464) 309 (190) (1,396) (155) (88.9) 414 Depreciation (48) (54) (53) (52) (56) (29) (46) (102) (86) (15.8) (207) PBT (1,100) (398) 171 1,534 (521) 279 (170) (1,498) (241) (83.9) 207 Tax 117 ‐ ‐ (62) 142 (60) 117 82 (29.9) 54 Net Profit (983) (398) 171 1,472 (379) 219 (155) (1,381) (159) (88.5) 262 Equity 421 421 421 421 421 421 421 421 421 EPS Rs. (23.39) (9.46) 4.07 35.00 (9.01) 5.22 (155) (32.84) (3.79) (88.5) 6.22 OPM % ‐5.77 1.1 6.1 15.67 2.08 5 1.1 1.1 5.81 NPM % ‐13.48 ‐2.8 1.1 9.89 ‐3.66 1 ‐2.8 ‐2.8 0.5




Financials

Income Statement Y/E Mar, Rs mn FY13 FY14 FY15e FY16eNet sales 52,374 51,759 53,769 57,372Growth, % ‐15 ‐1 4 7Raw material expenses ‐19,629 ‐23,586 ‐24,502 ‐26,971Employee expenses ‐754 ‐777 ‐968 ‐1,033Other Operating expenses ‐29,924 ‐25,637 ‐25,506 ‐25,952EBITDA (Core) 2,067 1,759 2,793 3,416Growth, % (9.4) (14.9) 58.8 22.3Margin, % 3.9 3.4 5.2 6.0Depreciation ‐238 ‐207 ‐165 ‐173EBIT 1,829 1,552 2,628 3,243Growth, % (12.9) (15.2) 69.4 23.4Margin, % 3.5 3.0 4.9 5.7Other Non‐Operating Income 579 440 300 300Non‐recurring Items 0 820 0 0Pre‐tax profit 305 207 409 1,269Tax provided ‐60 54 ‐82 ‐254Profit after tax 244 261 327 1,016Net Profit 244 261 327 1,016Growth, % (76.3) (328.7) (158.5) 210.3Net Profit (adjusted) 244 (559) 327 1,016Unadj. shares (m) 42 42 42 42Wtd avg shares (m) 42 42 42 42 Balance Sheet Y/E Mar, Rs mn FY13 FY14 FY15e FY16eCash & bank 1,568 18 867 1,988Debtors 29,629 28,626 26,516 23,577Inventory 5,811 5,590 5,586 5,617Loans & advances 388 2,608 3,108 3,608Other current assets 1,763 483 500 500Total current assets 39,159 37,325 36,577 35,290Investments 1,975 3,289 3,289 3,289Gross fixed assets 1,882 2,362 3,145 3,895Less: Depreciation 0 0 0 0Add: Capital WIP 808 783 750 800Net fixed assets 2,690 3,145 3,895 4,695Total assets 43,824 43,759 43,761 43,274 Current liabilities 34,755 34,482 34,157 32,655Provisions 468 432 580 777Total current liabilities 35,223 34,914 34,737 33,431Non‐current liabilities 658 788 788 788Total liabilities 35,881 35,702 35,524 34,219Paid‐up capital 421 421 421 421Reserves & surplus 7,522 7,636 7,816 8,634Shareholders’ equity 7,943 8,057 8,236 9,055Total equity & liabilities 43,824 43,759 43,761 43,274 Source: Company, PhillipCapital India Research Estimates

Cash Flow FY13 FY14 FY15e FY16e

Pre‐tax profit 305 207 409 1,269Depreciation 238 207 165 173Chg in working capital ‐1,232 58 1,419 1,103Total tax paid ‐93 102 ‐82 ‐254Cash flow from operating activities ‐782 574 1,912 2,291Capital expenditure ‐828 ‐662 ‐915 ‐973Chg in investments 0 ‐1,314 0 0Cash flow from investing activities ‐828 ‐1,976 ‐915 ‐973Free cash flow ‐1,611 ‐1,402 996 1,318Equity raised/(repaid) 97 114 180 819Dividend (incl. tax) ‐148 ‐148 ‐148 ‐197Cash flow from financing activities ‐51 ‐34 32 622Net chg in cash ‐1,662 ‐1,435 1,028 1,940 Valuation Ratios

FY13 FY14 FY15e FY16ePer Share data EPS (INR) 5.8 (13.3) 7.8 24.1Growth, % (76.3) (328.7) (158.5) 210.3Book NAV/share (INR) 188.8 191.6 195.8 215.3FDEPS (INR) 5.8 (13.3) 7.8 24.1CEPS (INR) 11.5 (27.9) 11.7 28.3CFPS (INR) (20.2) 74.5 50.2 94.9DPS (INR) 3.0 3.0 3.0 4.0Return ratios Return on assets (%) 0.5 0.6 0.7 2.3Return on equity (%) 3.1 (6.9) 4.0 11.2Return on capital employed (%) 2.7 2.8 3.5 10.0Turnover ratios Asset turnover (x) 1.6 1.6 1.7 2.0Sales/Total assets (x) 1.2 1.2 1.2 1.3Sales/Net FA (x) 21.9 17.7 15.3 13.4Working capital/Sales (x) 0.1 0.1 0.0 0.0Fixed capital/Sales (x) 0.0 0.0 0.1 0.1Receivable days 206.5 201.9 180.0 150.0Inventory days 40.5 39.4 37.9 35.7Payable days 40.8 60.9 61.0 61.0Working capital days 19.8 19.9 10.5 4.1Liquidity ratios Current ratio (x) 1.1 1.1 1.1 1.1Quick ratio (x) 1.0 0.9 0.9 0.9Interest cover (x) 0.9 0.6 1.0 1.4Dividend cover (x) 1.9 (4.4) 2.6 6.0Total debt/Equity (%) 366.8 324.4 311.3 261.0Net debt/Equity (%) 347.1 324.2 300.8 239.1Valuation PER (x) 46.6 (20.4) 34.8 11.2PEG (x) ‐ y‐o‐y growth (0.6) 0.1 (0.2) 0.1Price/Book (x) 1.4 1.4 1.4 1.3Yield (%) 1.1 1.1 1.1 1.5EV/Net sales (x) 0.7 0.7 0.7 0.6EV/EBITDA (x) 18.9 21.3 12.9 9.7

PHILLIPCAPITAL INDIA RESEARCH | 33 | P a g e


Contact Information (Regional Member Companies)

SINGAPORE Phillip Securities Pte Ltd

250 North Bridge Road, #06‐00 Raffles City Tower, Singapore 179101

Tel : (65) 6533 6001 Fax: (65) 6535 3834 www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

Management (91 22) 2300 2999

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946(91 22) 6667 9735

Research Engineering, Capital Goods Pharma

Dhawal Doshi (9122) 6667 9769 Ankur Sharma (9122) 6667 9759 Surya Patra (9122) 6667 9768Priya Ranjan (9122) 6667 9965 Hrishikesh Bhagat (9122) 6667 9986

Retail, Real EstateInfrastructure & IT Services Abhishek Ranganathan, CFA (9122) 6667 9952

Manish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Neha Garg (9122) 6667 9996Pradeep Agrawal (9122) 6667 9953 Varun Vijayan (9122) 6667 9992Paresh Jain (9122) 6667 9948 Technicals

Midcap Subodh Gupta, CMT (9122) 6667 9762Consumer, Media, Telecom Vikram Suryavanshi (9122) 6667 9951Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Production ManagerJubil Jain (9122) 6667 9766 Metals Ganesh Deorukhkar (9122) 6667 9966Manish Pushkar, CFA (9122) 6667 9764 Dhawal Doshi (9122) 6667 9769

Ankit Gor (9122) 6667 9987 Database ManagerCement Vishal Randive (9122) 6667 9944Vaibhav Agarwal (9122) 6667 9967 Oil&Gas, Agri Inputs

Gauri Anand (9122) 6667 9943 Sr. Manager – Equities SupportEconomics Deepak Pareek (9122) 6667 9950 Rosie Ferns (9122) 6667 9971Anjali Verma (9122) 6667 9969

Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Sidharth Agrawal (9122) 6667 9934 ExecutionBhavin Shah (9122) 6667 9974 Mayur Shah (9122) 6667 9945Dipesh Sohani (9122) 6667 9756

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles

Banking, NBFCs

PHILLIPCAPITAL INDIA RESEARCH | 34 | P a g e


Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence/Conflict: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its employees, directors, or affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd may not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

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