Urea decontrol: Positive for Chambal Fert, Tata Chem

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Urea decontrol: Positive for Chambal Fert, Tata Chem

Emkay Global Financial Services has come out with its report on fertilizer space. Empowered Group of Ministers (EGoM) approved partial decontrol of urea, bringing it under Nutrient Based Subsidy (NBS) policy, which will allow companies to increase the farmgate prices to farmers.

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Emkay Global Financial Services has come out with its report on fertilizer space.

EGoM approves partial decontrol of urea: Recently, the Empowered Group of Ministers (EGoM) approved partial decontrol of urea, bringing it under Nutrient Based Subsidy (NBS) policy, which will allow companies to increase the farmgate prices to farmers. The proposed policy is likely to be implemented from Apr'2012. The proposal however, is yet to be approved by CCEA.

We believe that this will be positive for efficient players: We believe that this move is in favor of the industry and is likely to have positive impact on efficient urea players. Government has also proposed to increase the urea prices by 10% from the current level of Rs 5,310 / mt (likely from Oct'2011). Urea players with lower energy consumption are likely to gain on efficiency. Further, we expect urea players to also enjoy premium pricing based on product differentiation & brand equity.

Additional profit may vary from -32% to 147% based on efficiency: We expect that under NBS, companies' profitability is likely to increase, which may vary from company to company based on efficiency and also, subject to the final outcome of the policy. However, based on, available information & most likely scenario (Scenario 3 in our analysis), we est incremental profit to vary from -32% (for inefficient players) to 147% (for efficient players) of their existing fertiliser profits.

Higher profitability and improved returns should re-rate the sector: We argue that with better profitability, improvement in return ratios, reduced dependency on government for subsidy and lower working capital requirement, reduced government intervention and company's ability to charge premium for their products / brands, fertiliser companies have strong scope for re-rating. We expect valuations to improve by approximately 20-30% (in line with global players). We remain positive on efficient urea players like Chambal Fertilisers (recommend BUY), Tata Chemicals (Recommend Accumulate). Other beneficiaries (not covered by us) are likely to be Indogulf Fertilisers (Aditya Birla Nuvo), Nagarjuna Fertiliser .

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