Chambal & RCF to gains from new urea policy: Sunidhi Sec

Tarun Surana of Sunidhi Securities, says that the immediate beneficiary in terms of incremental EPS from the recent government's move to encourage investments in urea manufacturing will be Chambal Fertilizer and RCF.

Below is the edited transcript of his interview to CNBC-TV18.

Q: There have been reports of both Chambal Fertilisers and Tata Chemicals benefiting from government's move to approve a new policy to encourage investment in urea manufacturing because they are expanding into urea. Do you think any other company will benefit from this move?

A: Companies like Gujarat State Fertilizers & Chemicals (GSFC), Zuari Industries and Gujarat Narmada Valley Fertilizers & Chemicals (GNFC) are expanding into urea.

Q: Do you think the benefit is material. They are providing for the gas cost but gas itself is not available. So do you see this playing out in the next two-three years or could there be an immediate impact in one-two years?

A: There will not be any immediate impact as the construction itself requires around three year. So any new capacities will come on stream only after 3-4 years, plus the gas cost has been made pass-through even beyond USD 14 per mmbtu. So, I don't think gas at that price is a problem.

Companies can go ahead and tie-up for imported liquefied natural gas (LNG) which should be easily available to them and the actual requirement of gas arises once the plant is constructed. It gives enough time for related infrastructure also to be setup in terms of re-gasified LNG unit as well as the pipeline if at all capacity augmentation is needed.

Q: Now, under the new dispensation there is fixed post tax return on fresh capital employed as well one should be reasonably able to calculate returns RoE because gas has passed through therefore can you give us an idea of what kind of EPS growth you see for the companies you mentioned?

A: We have not yet calculated on impact base on EPS but on new investments at least 12 percent RoE would be given. So each company depending on the outstanding shares will have different impact. However, the material benefits can flow to Chambal, which is a pure urea play and Tata Chemicals since it is into so many other sectors, urea accounts only for 10 percent of its top line as of now.

So the impact on Tata Chemicals on overall consolidated basis would not be significant. However, RCF and Chambal could be material beneficiaries in terms of incremental EPS that would flow to them.

Q: So, in your hierarchy it would be Chambal and RCF and then the rest?

A: Yes.

Q: What is your view on FACT?

A: We don't have coverage on FACT plus the moves are always sharp in stocks like FACT, Madras Fertilizers Limited (MFL) and National Fertilizers Ltd (NFL) which are public sector undertakings (PSUs) with large government holdings. There is limited institutional participation in them and hence the moves are always sharp on any policy moves whenever it happens. However, FACT is going through trouble time and is making losses in its plant, it is running only on the support of government and will continue to remain so, till it converts from naphtha to gas. I hope the plant is not closed and the company continue to run the plant and does conversion in stipulated timeframe.

 

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