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jasavi
Platinum
stocks of 2009/2010/2011
IEC , Shardul Sec , Mangalore Chem , Reliance Ind
IEC , Shardul Sec , Mangalore Chem , Reliance Ind
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21 Aug 2008 16:45
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NEW DELHI: The fertiliser industry has urged the government to provide subsidy in the form of cash and not bonds, saying the long-term special securities are trading at heavy discounts impacting the balance sheet of companies.
"The bonds given to fertiliser companies are quoting at a discount of about 15 per cent. So a bond with a face value of Rs 100 will fetch only Rs 85. This amounts to the government paying only Rs 85 against the dues of Rs 100," Fertiliser Association of India Director General Satish Chander said.
Since these bonds are classified under the Other Approved Securities, banks and insurance firms are not obliged to buy them, making them unattractive against other AAA rated corporate bonds with higher yields, industry experts said.
To further his point, the FAI official said, "The companies are asking for delivered costs of fertilisers. They have to give cash to raw inputs providers, transporters and others. Moreover, when they deposit tax, they will have to give it in cash. So what they need is cash and not bonds."
These apart, the government imports urea at about Rs 31,000 per ton where as domestic producers get about Rs 13,000 a ton, Chander said, adding that the government has been paying in cash to overseas sellers. Moreover, payment in the form of bonds is not an economically viable option for a cash-strapped sector like fertiliser, the experts said.
Fertiliser companies will find it extremely difficult to either gather additional working capital to meet requirements of funds blocked in bonds of 16 to 18 years long tenure or sell them in markets at heavy discounts and incur losses, the FAI DG explained. Experts also said that if the government decides to issue bonds in the same proportion as last year and keeps it at 18 per cent of the total subsidy bill, the amount of such securities this year may be to the tune of Rs 21,560 crore, based on a subsidy estimate of Rs 1,19,772 crore for 2008-09.
At the current discount rate of 15 per cent, such bonds will land the companies in a capital forgo of more than Rs 3,200 crore, they added. The MRPs of fertilisers have not been changed since February 2002, even though the cost of production has increased significantly.
Earlier, the MRPs contributed about 70 per cent to the total delivered costs of fertilisers while they account for only 20 per cent of costs now, the FAI DG said, adding that the companies, at present, need to depend on the government to recover the balance 80 per cent of total delivered costs. Moreover, he said, the concession is paid after prolonged delays with some portions in bonds.
"Delayed disbursement of concession means protracted recovery period of the major portions of cost already incurred by the fertiliser companies. This seriously affects cash flows of fertiliser companies," he pointed out. The industry has also sought compensation against the loss in sale of bonds during the last fiscal. The government had issued bonds worth Rs 7,500 crore out of the Rs 40,338 crore fertiliser subsidy during 2007-08. ...
"The bonds given to fertiliser companies are quoting at a discount of about 15 per cent. So a bond with a face value of Rs 100 will fetch only Rs 85. This amounts to the government paying only Rs 85 against the dues of Rs 100," Fertiliser Association of India Director General Satish Chander said.
Since these bonds are classified under the Other Approved Securities, banks and insurance firms are not obliged to buy them, making them unattractive against other AAA rated corporate bonds with higher yields, industry experts said.
To further his point, the FAI official said, "The companies are asking for delivered costs of fertilisers. They have to give cash to raw inputs providers, transporters and others. Moreover, when they deposit tax, they will have to give it in cash. So what they need is cash and not bonds."
These apart, the government imports urea at about Rs 31,000 per ton where as domestic producers get about Rs 13,000 a ton, Chander said, adding that the government has been paying in cash to overseas sellers. Moreover, payment in the form of bonds is not an economically viable option for a cash-strapped sector like fertiliser, the experts said.
Fertiliser companies will find it extremely difficult to either gather additional working capital to meet requirements of funds blocked in bonds of 16 to 18 years long tenure or sell them in markets at heavy discounts and incur losses, the FAI DG explained. Experts also said that if the government decides to issue bonds in the same proportion as last year and keeps it at 18 per cent of the total subsidy bill, the amount of such securities this year may be to the tune of Rs 21,560 crore, based on a subsidy estimate of Rs 1,19,772 crore for 2008-09.
At the current discount rate of 15 per cent, such bonds will land the companies in a capital forgo of more than Rs 3,200 crore, they added. The MRPs of fertilisers have not been changed since February 2002, even though the cost of production has increased significantly.
Earlier, the MRPs contributed about 70 per cent to the total delivered costs of fertilisers while they account for only 20 per cent of costs now, the FAI DG said, adding that the companies, at present, need to depend on the government to recover the balance 80 per cent of total delivered costs. Moreover, he said, the concession is paid after prolonged delays with some portions in bonds.
"Delayed disbursement of concession means protracted recovery period of the major portions of cost already incurred by the fertiliser companies. This seriously affects cash flows of fertiliser companies," he pointed out. The industry has also sought compensation against the loss in sale of bonds during the last fiscal. The government had issued bonds worth Rs 7,500 crore out of the Rs 40,338 crore fertiliser subsidy during 2007-08. ...
21 Aug 2008 16:32
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21 Aug 2008 16:03
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The government has cleared Rs 22,000 crore in cash as subsidy to the fertilizer industry. Sanju Verma, ED & Head of Institutional Business at HDFC Securities said that the fertiliser sector is poised for a huge growth trajectory. The gas pricing for fertiliser is circumspect and needs to be addressed, she said.
According to Verma, gas pricing is the key to alleviate margin pressures of fertiliser companies. The downside would be limited, provided the government evolves a rational pricing policy, she said. Her top pick is Tata Chemicals. Her price target for it is Rs 444. The Sensex may retest 13000-13500 levels, Verma said.
Excerpts from CNBC-TV18’s exclusive interview with Sanju Verma:
Q: How is the fertilser sector looking?
A: I think this sector is poised for a huge growth trajectory going forward. I think we need to differentiate between how this sector is poised fundamentally and how the stocks will perform going forward. As usual stocks have already reacted and made a significant upmove ahead of the actual numbers kicking in with respect to the positive fallout that will eventually happen because of policy announcements on both urea and phosphates.
So companies going forward should benefit tremendously because one of the biggest drawbacks in the fertiliser space apart from the lack of availability of feedstock like gas has been the archaic fertiliser policies, I think the government has done quite a bit of damage control there by agreeing to market-linked pricing or as you would call it import parity pricing at least for incremental capacities beyond 110% of current production capacities.
So to that extent, a part of the problem has been addressed. However what has not been addressed is the pricing of gas. As a layman, one should rightly assume that if the current global price of gas is anywhere between USD 10-12 per mmbtu, why should an ONGC or any other PSU supply gas to the fertiliser units at about USD 2.5 or 2.9 and why should Reliance once the KG-D6 gas basin comes on stream? Why should they continue to supply gas at USD 4.4? So they have agreed to do that in principle.
Going forward, the pricing of gas needs to be addressed just as much as the pricing of n products like urea and phosphates has been partially addressed in this policy.
Q: If that is indeed rationalised won’t it mean negative news for the fertiliser stocks. Do you see pressure on margins off their backs anytime soon?
A: I think from a margin perspective, things can only go better from here because most fertiliser companies today either operate on naphtha which is more than 50% more expensive than gas. Two, a couple of fertiliser units operate partially on naphtha and partially on gas. Given that gas availability in India over the next two years as per official estimates is likely to have a 2.7 times jump, I think availability of gas is not a concerned; it is the pricing of gas which remains slightly circumspect and if that is addressed then the margin pressures will not be something to contend with.
Most of the fertiliser units today in any case are having operating margin to the tune of just about 11-12%. The most cost efficient ones like Tata Chemicals or Chambal Fertilisers have margins in the region of 18-20%. So the downside is limited provided the government comes out with a rational policy with respect to pricing of gas which they will do going forward because it isn’t the government interest to ensure that incentives are given to local producers here rather than importing fertilisers from abroad.
The price of urea has jumped primarily thanks to India; all the way from USD 200 to USD 750 in a year ditto with phosphoric acid which we import. The prices there globally have gone up from USD 500 to close to USD 2000; a four times jump in just about 12-18 months. So it makes sense for the government to ensure that there is a rational pricing policy with respect to end products like urea, phosphate, chemicals and also a rational pricing policy with respect to gas which is a key feedstock given that naphtha will increasingly get phased out as it is very expensive and it does not make sense for the government to incentives players to use naphtha because at the end of the day the government in a lot of cases is still giving companies the benefit of cost plus pricing.
Q: What would be your pick of the pack?
A: Our top pick at this point in time is Tata Chemicals. We have a price target there of Rs 444. I think it combines the best of both; the earnings growth compounded will be in excess of more than 25%. At the same time unlike the crazy run-up in valuations that we have seen across space with respect to be it a Chambal Fertilisers or Nagarjuna valuations are still looking sane and sanguine in the case of Tata Chemicals. It’s trading at less than ten times on price to earnings and less than six times in EV/EBITDA (Enterprise Value/ Earnings Before Interest, Taxes, Depreciation and Amortization) less than two times on EV/Sales which is a very important parameter for valuing fertiliser companies.
I think in case of Tata Chemicals, the big trigger is the fact that today soda ash prices in the spot market are trading in excess of USD 400 a tonne whereas we have assumed that going forward given the Tata Chemical contract its soda ash prices every December; we have not given them the benefit of more than USD 286 in our assumptions. So there could be significant upside and Tata Chemicals is the only company which has not just announced capex anticipating a positive urea policy. Unlike the others it has gone ahead and invested in capex and the full impact of the benefit of capacities in urea going up from 0.8 to 1.2 million tonne in the case of Tata Chemicals will be felt in the Q4 of FY09.
In the case of Chambal and Nagarjuna the actual benefits from a capacity increase will only happen 18-20 months down the line. So the stocks have gone up more on the back of hoopla because the actual numbers will start playing out only by FY10 in a best case scenario.
Q: Well you are meeting all the fertiliser majors tomorrow in the HDFC Conference. What are you really expecting to, want to learn from them? Are Chambal Fertilisers and Nagarjuna Fertlisers coming there by the way?
A: That’s a very difficult question. I think you have everything to learn in the fertiliser space given that there is so much of confusion still with respect to how to differentiate between urea and phosphates and why is it that certain raw materials are compensated under the cost plus regime, and why not certain others? Why is that there is a differential pricing with respect to units that earned Hazira- Bijapur- Jagdishpur (HBJ) pipeline and units that are not. So there are still a lot of grey areas that need to be sorted out with respect to who is coming.
Q: Just a word on the markets at this point in time - we have seen a fairly big fall a 200-point fall it didn’t begin that way but markets are crawling lower. Your perspective for a slightly longer-term, do you expect that the markets are not showing enough strength to build on the kind of move we saw from 12,500 or 3,800? Do you think a revisit is possible?
A: I think maybe a revisit to 13,000-13,500 is possible. But I am surprised at the fall today and at the stickiness of the markets even yesterday because while I have always maintained I am a long-term India bull and that continues because even before anyone else was saying so in June, we had put out a strategy note where we categorically said we expect oil prices to cool-off to about USD 110-115/bbl or so by August. We stand vindicated on that front. If indeed oil is going to recoil downwards, then the market should look up.
Speaking of the negative sentiment in the last two-days, it has to do with inflation more than anything else. While a lot has been made of the fact that the incremental pace of inflation on that front has come down to 0.05 from 0.5 two-months back, I think the big concern is food inflation. If one looks at the inflation numbers that were announced for the week ending August 2, the incremental pace of inflation on the food inflation front has been 0.9. So that is a bit of a concern.
While the monsoons have played catch up, I think there are still large parts of Maharashtra, Andhra Pradesh, Gujarat, which are a large oil seeds and pulses producing states where the monsoons may have played catch up - but still there is a lot of work to be done there. So the big swing factor will be inflation based on how monsoons play out going forward and of course the fact that sugar prices have jumped all the way from Rs 14 a kg six-months back to about Rs 19 a kg and actually in some places at about Rs 22 a kg.
Benchmark raw sugar prices have gone up 28% year-on-year. The scenario going forward could only get worse because of a lot of problems from Brazil while they have sown 12% extra; the production could actually be down by 12-13% which means that inflation from the food front could actually play a bit of a spoil sport gong forward though oil and commodities might take a breather thanks to the strengthening dollar. I do believe that the dollar will strengthen going forward.
Speaking of the immediate markets, actually the derivative indicators are showing positive trends. After a long time the Put IVs (Implied Volatility) are just about 25-26% and the Call IVs are higher at about 35-36%, which indicates that there should not be a downside bias. The only concern is that the Put-Call ratio has dropped from 1.4 to about 1.1, which indicates that maybe a lot of Put writing is not happening. I think if you see more aggressive Put writing happening, then I won’t be surprised if we go back to about 4,500-4,600 levels over the next ten-days or so.
So yes, there is an upside bias on the back of derivative indicators; there is an upside bias on the back of fundamental indicators as well, but I think inflation and the monsoons will be two variables which could play spoilt-sport or otherwise.
...
According to Verma, gas pricing is the key to alleviate margin pressures of fertiliser companies. The downside would be limited, provided the government evolves a rational pricing policy, she said. Her top pick is Tata Chemicals. Her price target for it is Rs 444. The Sensex may retest 13000-13500 levels, Verma said.
Excerpts from CNBC-TV18’s exclusive interview with Sanju Verma:
Q: How is the fertilser sector looking?
A: I think this sector is poised for a huge growth trajectory going forward. I think we need to differentiate between how this sector is poised fundamentally and how the stocks will perform going forward. As usual stocks have already reacted and made a significant upmove ahead of the actual numbers kicking in with respect to the positive fallout that will eventually happen because of policy announcements on both urea and phosphates.
So companies going forward should benefit tremendously because one of the biggest drawbacks in the fertiliser space apart from the lack of availability of feedstock like gas has been the archaic fertiliser policies, I think the government has done quite a bit of damage control there by agreeing to market-linked pricing or as you would call it import parity pricing at least for incremental capacities beyond 110% of current production capacities.
So to that extent, a part of the problem has been addressed. However what has not been addressed is the pricing of gas. As a layman, one should rightly assume that if the current global price of gas is anywhere between USD 10-12 per mmbtu, why should an ONGC or any other PSU supply gas to the fertiliser units at about USD 2.5 or 2.9 and why should Reliance once the KG-D6 gas basin comes on stream? Why should they continue to supply gas at USD 4.4? So they have agreed to do that in principle.
Going forward, the pricing of gas needs to be addressed just as much as the pricing of n products like urea and phosphates has been partially addressed in this policy.
Q: If that is indeed rationalised won’t it mean negative news for the fertiliser stocks. Do you see pressure on margins off their backs anytime soon?
A: I think from a margin perspective, things can only go better from here because most fertiliser companies today either operate on naphtha which is more than 50% more expensive than gas. Two, a couple of fertiliser units operate partially on naphtha and partially on gas. Given that gas availability in India over the next two years as per official estimates is likely to have a 2.7 times jump, I think availability of gas is not a concerned; it is the pricing of gas which remains slightly circumspect and if that is addressed then the margin pressures will not be something to contend with.
Most of the fertiliser units today in any case are having operating margin to the tune of just about 11-12%. The most cost efficient ones like Tata Chemicals or Chambal Fertilisers have margins in the region of 18-20%. So the downside is limited provided the government comes out with a rational policy with respect to pricing of gas which they will do going forward because it isn’t the government interest to ensure that incentives are given to local producers here rather than importing fertilisers from abroad.
The price of urea has jumped primarily thanks to India; all the way from USD 200 to USD 750 in a year ditto with phosphoric acid which we import. The prices there globally have gone up from USD 500 to close to USD 2000; a four times jump in just about 12-18 months. So it makes sense for the government to ensure that there is a rational pricing policy with respect to end products like urea, phosphate, chemicals and also a rational pricing policy with respect to gas which is a key feedstock given that naphtha will increasingly get phased out as it is very expensive and it does not make sense for the government to incentives players to use naphtha because at the end of the day the government in a lot of cases is still giving companies the benefit of cost plus pricing.
Q: What would be your pick of the pack?
A: Our top pick at this point in time is Tata Chemicals. We have a price target there of Rs 444. I think it combines the best of both; the earnings growth compounded will be in excess of more than 25%. At the same time unlike the crazy run-up in valuations that we have seen across space with respect to be it a Chambal Fertilisers or Nagarjuna valuations are still looking sane and sanguine in the case of Tata Chemicals. It’s trading at less than ten times on price to earnings and less than six times in EV/EBITDA (Enterprise Value/ Earnings Before Interest, Taxes, Depreciation and Amortization) less than two times on EV/Sales which is a very important parameter for valuing fertiliser companies.
I think in case of Tata Chemicals, the big trigger is the fact that today soda ash prices in the spot market are trading in excess of USD 400 a tonne whereas we have assumed that going forward given the Tata Chemical contract its soda ash prices every December; we have not given them the benefit of more than USD 286 in our assumptions. So there could be significant upside and Tata Chemicals is the only company which has not just announced capex anticipating a positive urea policy. Unlike the others it has gone ahead and invested in capex and the full impact of the benefit of capacities in urea going up from 0.8 to 1.2 million tonne in the case of Tata Chemicals will be felt in the Q4 of FY09.
In the case of Chambal and Nagarjuna the actual benefits from a capacity increase will only happen 18-20 months down the line. So the stocks have gone up more on the back of hoopla because the actual numbers will start playing out only by FY10 in a best case scenario.
Q: Well you are meeting all the fertiliser majors tomorrow in the HDFC Conference. What are you really expecting to, want to learn from them? Are Chambal Fertilisers and Nagarjuna Fertlisers coming there by the way?
A: That’s a very difficult question. I think you have everything to learn in the fertiliser space given that there is so much of confusion still with respect to how to differentiate between urea and phosphates and why is it that certain raw materials are compensated under the cost plus regime, and why not certain others? Why is that there is a differential pricing with respect to units that earned Hazira- Bijapur- Jagdishpur (HBJ) pipeline and units that are not. So there are still a lot of grey areas that need to be sorted out with respect to who is coming.
Q: Just a word on the markets at this point in time - we have seen a fairly big fall a 200-point fall it didn’t begin that way but markets are crawling lower. Your perspective for a slightly longer-term, do you expect that the markets are not showing enough strength to build on the kind of move we saw from 12,500 or 3,800? Do you think a revisit is possible?
A: I think maybe a revisit to 13,000-13,500 is possible. But I am surprised at the fall today and at the stickiness of the markets even yesterday because while I have always maintained I am a long-term India bull and that continues because even before anyone else was saying so in June, we had put out a strategy note where we categorically said we expect oil prices to cool-off to about USD 110-115/bbl or so by August. We stand vindicated on that front. If indeed oil is going to recoil downwards, then the market should look up.
Speaking of the negative sentiment in the last two-days, it has to do with inflation more than anything else. While a lot has been made of the fact that the incremental pace of inflation on that front has come down to 0.05 from 0.5 two-months back, I think the big concern is food inflation. If one looks at the inflation numbers that were announced for the week ending August 2, the incremental pace of inflation on the food inflation front has been 0.9. So that is a bit of a concern.
While the monsoons have played catch up, I think there are still large parts of Maharashtra, Andhra Pradesh, Gujarat, which are a large oil seeds and pulses producing states where the monsoons may have played catch up - but still there is a lot of work to be done there. So the big swing factor will be inflation based on how monsoons play out going forward and of course the fact that sugar prices have jumped all the way from Rs 14 a kg six-months back to about Rs 19 a kg and actually in some places at about Rs 22 a kg.
Benchmark raw sugar prices have gone up 28% year-on-year. The scenario going forward could only get worse because of a lot of problems from Brazil while they have sown 12% extra; the production could actually be down by 12-13% which means that inflation from the food front could actually play a bit of a spoil sport gong forward though oil and commodities might take a breather thanks to the strengthening dollar. I do believe that the dollar will strengthen going forward.
Speaking of the immediate markets, actually the derivative indicators are showing positive trends. After a long time the Put IVs (Implied Volatility) are just about 25-26% and the Call IVs are higher at about 35-36%, which indicates that there should not be a downside bias. The only concern is that the Put-Call ratio has dropped from 1.4 to about 1.1, which indicates that maybe a lot of Put writing is not happening. I think if you see more aggressive Put writing happening, then I won’t be surprised if we go back to about 4,500-4,600 levels over the next ten-days or so.
So yes, there is an upside bias on the back of derivative indicators; there is an upside bias on the back of fundamental indicators as well, but I think inflation and the monsoons will be two variables which could play spoilt-sport or otherwise.
...
14 Aug 2008 19:28
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