Emkay positive on Chambal Fert, Tata Chem, RCF

Emkay Global Financial Services has come out with its report on agriculture and chemical sector. According to the research firm, Media reports suggest that CCEA has approved the New Urea Investment Policy. Remain positive on Chambal Fertilisers (accumulate) and Tata Chemicals (buy) are key beneficiaries along with RCF (NR) and Zuari (NR).

• Media reports suggest that CCEA has approved the New Urea Investment Policy. The New UIP is expected to pave way for fresh investments and boost urea production domestically.
• New investment ensures post tax returns of 12-20% as against <12% earlier. It also bears the entire cost of gas which earlier was proposed with ceiling of US$14 / mmbtu.
• This is likely to attract investments of Rs 350-400bn over a period of next 3-4 years. However, securing gas sourcing contracts will be next key hurdle for companies.
• We remain positive on the sector. Chambal Fertilisers (Accu) and Tata Chemicals (Buy) are key beneficiaries along with RCF (NR) and Zuari (NR).

CCEA approves New Investment Policy on urea:

 Yesterday, the Cabinet Committee on Economic Affairs (CCEA) approved the New Investment Policy (UIP) on urea. The New UIP is expected to pave the way for fresh investments in urea sector thereby restricting the level of imports.

Govt. to bear entire gas cost thereby assuring players of 12-20% returns-

Under the new draft policy announced yesterday, govt. will assure 12-20 % post-tax return on fresh capital infused by the manufacturers for setting up of new plants as well as for expansion and revamp of the existing ones. To ensure that players are able to generate the desired returns, government would cover the entire cost of natural gas, which is the main feedstock of urea. The New Policy announced yesterday has safeguarded the interests of the stakeholders as industry was previously skeptical of going ahead with setting up of new capacities due to lack of clarity on gas price beyond $14/mmbtu.

Gas availability and long term contract remain our key concerns-

Though the government has linked floor / ceiling price with gas price & committed to cover the entire gas cost, however gas availability remains key concern hereon. It is also likely that with lucrative returns in urea (12-20% ROE) some non urea players with gas sourcing arrangements may also enter into urea production.

Positive for the sector-Chambal and Tata Chemicals to benefit-

We believe this policy will be favorable for the industry in long term as it will lead to investments in the sector & also benefit existing players with new investments. New investment is likely to fetch higher returns of 12-20% as against earlier returns of <12%. Though the benefit may accrue in next 3-4 years due to long gestation period of the projects, it will be beneficial for the companies. We remain positive on Chambal (Accu) due to its strong presence in urea & Tata Chemicals (Buy) as both these companies have plans to put up new plant. RCF (NR) and Zuari Ind (NR) are also likely to benefit.

What is the New Urea Investment Policy?

The new UIP is aimed at creating additional capacities in the domestic urea industry. India currently consumes 29mn mt of urea while the domestic production stands at 22mn mt leading to import of around 7mn mt. Following are the key features-

Under the new policy, the government will assure 12-20 % post-tax return on fresh capital infused by the manufacturers for setting up of new plants as well as for expansion and revamp of the existing ones. To ensure return generation for the urea manufacturers, government would cover the entire cost of natural gas, which is the main feedstock of urea.

In order to determine the cost of production of new plants to be set up, the government has set a floor and ceiling price of urea, based on the price of natural gas plus 12-20 %t equity returns.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More