Feb 27, 2012, 05.14 PM IST | Source: Moneycontrol.com

Budget 2012: NIP 2012- positive in long term, gas price remains a key

Prabhudas Lilladher has come out with its report on India agri products. According to the research firm NIP 2012 will be positive for players like Chambal, Tata Chemicals, RCF etc.

Prabhudas Lilladher has come out with its report on India agri products. According to the research firm NIP 2012 will be positive for players like Chambal, Tata Chemicals, RCF etc.

Much awaited new urea investment policy got final nod: According to Media and Industry sources, Group of Ministers (GoM) have given in-principle nod to the New Investment Policy (NIP 2012) to attract investments in the urea sector. Policy has to get an approval from the cabinet. Government has linked the subsidy of urea with the gas prices between US$6.5- US$14/mmbtu. We believe that the policy is positive for the sector as new investment is likely to kick-off post announcement. Availability of gas at US$14/mmbtu in FY17 onwards remains a key issue under NIP 2012. Our interaction with industry players suggest that government is expected to re-consider the ceiling gas cost. If government would not re-consider the same, we believe that new investment is unlikely to come under NIP 2012.

Key highlights of the NIP 2012: Under NIP 2012, subsidy is linked with gas price i.e. US$6.5/mmbtu in the case of Green-field and Brown-field projects (US$7.5/mmbtu in the case of revamp) subject to floor and ceiling urea price. Floor and ceiling urea price will upward revise by US$20/MT, with a change in US$1/mmbtu in the gas cost up to US$14/mmbtu. Government has considered energy norms of 5.0Gcal for new plants with the expected capex of ~Rs48bn/42bn for Green-field/Brown-field projects. According to the above, RoE is expected to work out at 8% to12% subject to the floor and ceiling urea price. However, we believe that actual capex amount would be lower than government estimate. Further, companies new plant is expected to be operated at energy norms of 4.7-4.8 Gcal as per international standard (v/s 5.0Gcal as per NIP 2012). Hence, we expect that company is likely to make post tax RoE of 14% (at floor urea price) to 20% (at ceiling urea price) in expansion projects v/s <12% in old policy (Refer Exhibit 3 &4). GoM has allowed five years from the date of notification (expected to be April 01, 2012) to commission the new projects. Hence, we believe that new projects are likely to get commissioned by FY17. Granulated urea will get additional US$10/MT in floor and ceiling.

Lack of investment resulted in sharp increase in urea imports as well as subsidy: Urea consumption has shown FY01-11 CAGR of 3.9% to 28.2m MT, while, production was shown at a CAGR of 1.1%. Since 1999, there were no plants which came on stream in the country due to lack of attractive urea investment policy. It leads to a sharp increase in imports from 0.1m MT in FY05 to 6.4m MT in FY11. Hence, expected upcoming projects are likely to replace imports. Further, we believe that the government is paying higher subsidy for imported urea as against domestic urea. Hence, government is likely to cut down its subsidy burden once the projects get commissioned.

Positive for sector in long term: We believe that NIP 2012 policy is positive for the sector in the long term as new investment is likely to kick off post announcement but, new projects are expected to start production only from FY17 onwards. According to FAI, eight brown-field and six green-field projects are expected to start setting up plants and require ~37mmscmd of gas once production commences (Refer Exhibit 7). Gas cost above US$14/mmbtu is likely to be a key risk for the urea players. We believe that ceiling gas cost of US$14/mmbtu should be upward revised as the present deliver cost of imported gas in India is ~US$16/mmbtu. We believe that NIP 2012 will be positive for players like Chambal , Tata Chemicals , RCF etc.

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