Tracom RESEARCH

Special Report
Economic Analysis
GDP growth weakens further to 4.5% in Q3
The pace of economic growth weakened further in the third quarter after remaining in the range of 5-5.5% in the previous three quarters, mainly on the back of growth moderation witnessed in the services sector. Further, poor performance of agriculture, mining and manufacturing sectors, also dragged the third quarter growth numbers to over 3-year low. Though the widespread slowdown could be seen across all sectors, weak growth seen in private consumption spending, which contributes around 58% to overall GDP, remained a matter of concern. Moreover, prevailing high interest rates, declining rupee and slowing down of investment played the major part in drying out the consumer sentiments. With this, growth for the first nine months of the current financial year came at 5% much lower than 6.6% growth witnessed in the same period previous year. On the supply-side front, growth in agricultural sector slowed further to 1.1% in the third quarter as against 1.2% in Q2 of 201213, and considerably lower than 4.1% in the same quarter previous year, mainly due to unfavourable distribution and amount of monsoon rainfall, which dampened yields of some crops. As per the second advance estimates of crop production for the kharif crop of 2012, the decline is expected in production of coarse cereals, pulses, sugarcane, oilseeds, cotton and rice as against the final production figures if previous fiscal. Reversing the trend so far followed by the industrial sector, growth for the third quarter stood at 3.3% marginally higher than 2.7% in the previous quarter and 26% in the same quarter previous year, mainly on the back of increase seen in manufacturing and electricity. Growth of manufacturing improved to 2.5% in the third quarter against 0.7% growth in the same period previous year and 0.8% in the previous quarter. Even data from the IIP showed that there was considerable improvement when compared with a 8% contraction seen in the previous quarter against 1% de-growth in the third quarter. The input of manufacturing to GDP growth, however remained low at 0.4% in the third quarter.
Growth trends in major sectors (%)
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Date : 22 March 2013

Performance of electricity, gas & water supply too, improved moderately to 4.5% in Q3 from 3.4% recorded in the previous quarter, however remained comparatively lower to the 7.7% growth witnessed in the same quarter previous fiscal, belowaverage monsoon rainfall, which extremely affected the growth of hydroelectricity generation on a yearly basis and thereby affecting power supply to industrial sector. Similarly, mining and quarrying sector, though recording a de-growth of 1.4% in the third quarter, showed improvement against 2.6% decline witnessed in the same quarter last fiscal, mainly reflected due to subdued growth of coal output and worsening de-growth of natural gas output, which were mainly on the back of the continuing ban on iron ore mining in some states. The economys another bellwether, services sector moderated to 6.1% in the third quarter from 7.2% in the previous quarter and 8.3% in the same quarter previous fiscal. Similarly, contribution of services to GDP growth declined to 76% of the reporting period from 83% in record in the previous quarter. The weakness mainly contributed by further downturn seen in trade, hotels, transport and communication at 5.1% as against 6.9% in the same quarter a year-ago. Similarly, the financing, insurance, real estate & business services sector witnessed an all-time low growth of 7.9% in the quarter against 9.4% in the previous quarter and comparatively lower than 11.4% in the same quarter a year before. Even growth of community, social & personal services segment slowed to 5.4% for the reporting quarter. Private final consumption expenditure improved to 4.6% as against 3.7% seen in the previous quarter, however substantially weaker when compared with 9.2% growth recorded in the same quarter a year-ago, which shows that purchasing power still remains subdued, though consumer sentiments improved somewhat in recent months. The growth in gross fixed capital formation as a percentage of GDP stood at 32.4% in the third quarter, as against 31.8% growth in the same quarter last fiscal. On the whole, with across the board slowdown and continued contraction witnessed in mining growth, overall growth came at 15-quarter low-level, highlighting continuing signs of slowdown and high interest rates. However, showing a remarkable increase in the months of January and February, the manufacturing PMI, signaled a likely turnaround in the manufacturing activity, though sustainability remains doubtful. Further, risks emanating from the US and Euro-zone, may affect the growth going forward, mainly exports which will remain subdued given low growth in the US and Europe, despite a weaker rupee. On the agricultural front, favourable rainfall in the enduring quarter and prospects of rabi crop appearing to be somewhat

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Manufacturing Headline Inflation Mining

Electricity IIP Growth

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Date : 22 March 2013
better, growth in the fourth quarter is expected to improve. As a result, mild recovery seen in industrial activity and expected improvement in service sector activity, may help the GDP growth to show some improvement in the upcoming quarter. Further, the sluggish growth witnessed in Q3 may prompt the Reserve Bank of India (RBI) to to cut the repo rate in the mid-quarter policy review in March, which may improve the business sentiments. solved, are unlikely to come down anytime soon.

Price-rise across product groups:

Inflation related to fuel & power group rose sharply to 10.5%

mirroring the recent increase in fuel prices.

for the reporting month as against 7.1% in January, mainly due to price-rise seen in LPG, high speed diesel and petrol,

Inflation accelerates marginally to 6.8% in Feb; remains below 7-percent mark

Snapping trend of four consecutive monthly declines, inflation based on the wholesale price index (WPI) for the month of February rose marginally to 6.8%, however remained below the psychological 7-percent mark. The price rise was mainly on the back of upward revision of diesel prices and further decision to adjust prices on a monthly basis by the government, though prices in other major categories was on a softening pace. Inflation for the month of December was revised marginally upwards to 7.3% as compared to earlier estimates of 7.2%, mainly revealing the impact of fuel price hike. So far in the financial year, build-up inflation was 5.7% as against 6.6% in the same period a year ago. Further, receding for the sixth straight month, core inflation for the reporting stood at 3.8% as against 4.1% in the previous month, mirroring the slowdown in prices of commodities. On the other hand, coming in sharp contrast to WPI, inflation based on the consumer price index (CPI) accelerated to 10.9% in February from 10.8% in the previous month - the fifth consecutive monthly rise. The upward pressure was mainly due to higher prices of vegetables, edible oil, cereals and protein-based items, which kept the retail inflation in the double-digit terrain for the third successive month. The highest price-rise of 21.3% was witnessed in vegetable basket followed by cereals 17%, egg, meat and fish by 15.7% and pulses by 12.4%. On the whole, food prices increased by 13.7% for the reporting month against 13.36% in the previous month. Further, in urban areas, retail inflation rose to 10.8% in February from 10.7% in the previous month and for rural areas, it increased to 11% for the month. The rising difference between WPI and CPI inflation is mainly due to higher weightage of food articles, which until and unless supply side constraints are
WPI / CPI Inflation
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Inflation

related to non-food manufacturing products also

termed as core inflation continued its declining trend for the sixth consecutive month to 3.8% as compared to 4.1% in the previous month.

Mineral inflation moderated to 0.6% in February against 2.1%

in the previous month, mainly due to decline witnessed in copper and iron ore prices.

Inflation

related to primary food articles eased slightly to

11.4% for the reporting month from 11.9% in January, mainly on the back of decline seen in prices of vegetables (4.3%), pulses (2.7%) and fruits (0.7%).

Inflation for primary non-food items too softened to 10.1% for

the month as compared to 10.5% in January, reflecting decline prices of oilseeds (23.4%).

Inflation

related to manufactured food products remained

steady at 8.2% in February, primarily led by a fall in prices of sugar (1.3%) and edible oils (0.6%).

Overall food inflation including primary and manufacturing

remained relatively firm at 10.2% in February. The trend reversal in the inflation number was mainly due fuel and power category, which paced higher to 10.5% for the reporting month against 7.1% seen in the previous month, primarily reflecting the lagged impact of fuel price hike effected in January and subsequent months. The price-rise in LPG component was the highest at 26.2% followed by high speed diesel, petrol, kerosene, ATF, which gained pace. The government, in a move that could drastically trim its budget-busting subsidy bill, allowed the staterun oil marketing companies to raise the price of subsidised diesel in small amounts every month and capping of subsidized LPG cylinders to 9 per household. The impact of Rs 0.45 per litre diesel price hike has finally entered the system, fuelling the overall inflation. Apart from this, even the transporation cost are also revised on account of the higher fuel costs. Not only this, full impact of the diesel price hike is yet to come, which will get passed in the subsequent months. Moreover, the movement of international crude oil prices and rupee would

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also impact the inflation route going forward. Similarly, food inflation for the month though moderating, remained in the double-digit zone at 11.4%, mainly highlighting

WPI Inflation

CPI Inflation

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Date : 22 March 2013
the prevailing supply-side and institutional pricing constraints. Further, estimation of lower production of vegetables, cereals, pulses and oilseeds in the current year owing to severe winter in the northern food producing states, is also likely to impact the prices going forward. On the other hand, the decline in non-food articles inflation mainly in the prices of oil seeds and minerals have led to the overall decline in inflation. Inflations monthly trend: 12-Nov Primary Articles Food Articles Fuel & Power Manufactured Products All Commodities 9.4 8.5 10 5.4 7.2 12-Dec 10.6 11.2 9.4 5 7.1 13-Jan 10.3 11.88 7.1 4.8 6.6 13-Feb 9.7 11.4 10.5 4.5 6.8 high inflation, continue to affect the overall industrial output. On a collective basis, growth in April-January period of current fiscal expanded by 1% as compared to 3.4% in the same period a year ago. Similarly, growth in eight core industries also registered a growth of 3.9% in January as against 2.5% growth in the previous month.

Sectoral Performance:

Manufacturing sector, which accounts for 75.5% of the overall

index, registered a growth of 2.7% for the reporting month as against a de-growth 0.5% in the previous month. In terms of industries, sub-sectors displaying growth leveled at 11 and sub-sectors undergoing contraction stood at 11 in January. Amongst the 22 industry groups, electrical machinery & apparatus recorded the highest growth of 46.7%, followed by tobacco products by 19.8%, wearing apparel, dressing and dyeing of fur with 18.1%. On a collective basis, growth in April-January period witnessed a growth of 0.9% as against 3.7% in the same period the previous fiscal.

Inflation related to manufactured products also eased to 36month low level of 4.5% for the reporting month from 4.8% in the previous month, mainly due to moderation seen in prices of global commodity and the continuing subdued demand conditions. Moderation in both its food and non-food components led to the decline. Further, indicating moderation of demand side pressures, the non-food manufacturing component of inflation also called as core inflation eased to 3.8% as compared to 4.1% in January, reflecting the fall in commodity prices - sixth consecutive decline. On the whole, inflation based on WPI though remained below the psychological 7-percent mark, increased owing to upsurge seen in fuel prices. However, going forward trend is likely to be on the declining side with prices of vegetables and pulses expected to continue its softening tendency, though drastic changes are not expected with a lower production estimation. More than that, core inflation continuing its declining trend and food inflation being supply driven and not owing to excess demand, is the most cooling factor for the policy makers. On the other hand, the retail inflation measured by the CPI with its persistent upward movement is also likely to come down, but will remain in the double-digit zone going ahead.
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Contracting

further for the reporting month, mining &

quarrying output declined by 2.9% as compared to a contraction of 2.1% in the previous month, mainly on the back of regulatory and environmental issues, which is still continuing to plague the mining sector. However, on a cumulative basis, the pace of contraction for the first 10-month of the fiscal eased to 1.9% as against a de-growth of 2.5% in the same period a year ago.

Showing a marked improvement, electricity output expanded

by 6.4% for the reporting month as against 3.2% in January. However, the pace of growth on a collective basis, slowed to 4.7% for the first 10-month of fiscal from 8.8% growth in the corresponding months a year ago.
GDP at factor cost

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Industrial growth rebounds to 2.4% in January; shows signs of recovery

After remaining in negative territory for two consecutive months, industrial growth rebounded in January to 2.4% as against a revised de-growth of 0.5% in the previous month, mainly on the back of pickup in manufacturing output, further signaling improvement in the underlying trend. Though continued contraction is witnessed in capital goods and consumer durables output, which is dampening the industrial outputs further upmove, thereby highlighting the continued weakness of investment activity. Further, the existing high interest rate scenario and varied consumption pattern due to

GDP at fac tor c ost elec tric ity, gas & water supply agric ulture, forestry & fishing trade, hotels, transport

mining & quarrying c onstruc tion manufac turing financ ing, ins., real est. & bus.

Performance in the Use-based category:

Reflecting the persistent weakness in the investment cycle,

capital goods sector again registered a negative growth of 1.8% for the reporting month against a revised 0.6% in the previous month and de-growth of 2.7% a year ago, further signifying that investment demand is yet to pick up. On a collective basis, the sector showed a dismal performance amongst usbased categories with output contracting by 9.3% in the April-

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Date : 22 March 2013
January period against a 2.9% fall in the same month a year ago.

RBIs Mid-Quarter Monetary Policy Review: March 2013

Much in-line with the streets expectation and based on an assessment of the current macroeconomic situation, the Reserve Bank of India (RBI), in its mid-quarter monetary policy review, slashed key interest rates for the second time year this year by 25 basis points to 7.5% and consequently the reverse repo, determined at a spread of 100 basis points, was revised to 6.5%. Marginal Standing Facility (MSF) and bank rate have been revised to 8.5%, lower than the 8.75% prior to the rate cut. However, left the cash reserve ratio (CRR) unchanged at 4%, since a major section of market partakers were expecting a cut in this section, mainly on the backdrop of liquidity tightness. Banks on an average have been borrowing more than Rs 1 lakh crore on a daily basis from RBIs Liquidity Adjustment Facility (LAF) facility, which is way above its comfort zone. The apex bank had slashed the CRR by 25 basis points in the last policy review in January. On the other hand, moderating core inflation and slowing economic growth prompted the RBI to go in for a repo rate-cut this time, which would help to reduce the cost of borrowing for individuals and corporate, provided banks pass-on the benefits to end-users.

Recovering some lost ground, intermediate goods expanded

by 2% for the reporting month from a revised 0.7% in the previous month, mainly on the back of pickup in the pace of growth of refinery products. Output for the first 10-month of fiscal registered a positive growth of 1.7% against a contraction of 0.8% in the same period of last fiscal.

Output of consumer durables though remained in negative

January against a fall of 8.2% in the previous month, mainly

zone, the pace of contraction eased substantially to 0.9% in reflecting the impact of high interest rate. On a cumulative basis, output somewhat eased to 3.2% against 3.7% witnessed in the same period a year ago.

Coming in contrast, consumer non-durables output witnessed

an expansion of 5.3% for the reporting month against degrowth of 0.4% recorded in December 2012. However, output during April-January period witnessed a moderate growth of 2.3% as compared to 6.6% growth in the corresponding months a year ago.

Basic goods also registered a growth of 3.4% in January against

a revised 1.8% in the previous month. On a cumulative basis, growth stood at 2.8% for the first ten months of the fiscal against 5.8% growth in the corresponding months of the previous year.

RBIs Policy Decision

Short-term lending rate called repo lowered by 25 bps to 7.50%

from 7.75%

Reverse repo rate and Marginal Standing Facility (MSF) rate

8.50% respectively.

On the whole, industrial growth for the reporting month have come in better than expected, reflecting a pickup in manufacturing activity and good show by the electricity sector. Though some signs of recovery is seen, but it would be too early to presume that the slowdown has bottomed out and recovery is around the corner. Similar is the case with the HSBC manufacturing PMI, which increased to 54.2 in February up from 53.2 in January, which also shows that the slowdown in growth is bottoming out, but how long it sustains remains a question. Apart from manufacturing and electricity, consumer goods output moving into the positive territory for the month, after showing de-growth in the last two months, indicates a turnaround in consumption demand. On the other hand, continuous fall in capital goods output signifying that investment demand is yet to pick up and slowing consumer demand, as seen by the steepest fall in car sales in 12-year remain a cause for concern. Meanwhile, data released by the SIAM showed commercial vehicles registered a de-growth of 24%, followed by passenger vehicles (8%) and two-wheelers (1%) in February. Taking a view of this, IIP growth is expected to perform somewhat better in the remaining months of the current financial year, however, in view of low base, output may record a lower growth for the upcoming month.

stands automatically lowered by 25 bps each to 6.50% and

CRR unchanged at 4%
RBIs Policy Stance

and SLR unchanged at 23% of NDTL.

Leaving the hawkish monetary policy stance, the apex bank for the second time this year, slashed the repo rate, which was much in-line with the streets expectation. Further, slowing economic growth, along with recent moderation in WPI numbers, mainly the core inflation and governments move headed for fiscal consolidation have prompted the apex bank to shift its stance to support growth, while remaining cautious on inflationary expectations. However, what came as a disappointment, was the RBI leaving CRR unchanged, since liquidity conditions have remained comparatively tight after the apex bank Q3 policy review. This time also the RBI clearly reinstated its stance to boost growth and also emphasized on addressing growth risks emanating from global as well as domestic fronts. However, going forward as per the RBI, the headroom for further easing is quite limited given the elevated food inflation, recent change in fuel prices, increasing wedge between WPI & CPI and high current account deficit.

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Date : 22 March 2013

Company Research
Rashtriya Chemicals and Fertilizers - Buy Investment overview
Stock Data
Current Mkt Price (Rs) 52 Week High 52 Week Low Mkt Cap (Rs. in Cr) Return in last one Month (%)

22/03/13
36.05 66.95 36.55 1997.11 -30.94

RCF a government of India undertaking is a leading producer of Fertilizers in the country. report an improved operational performance.

The companys effort to de-bottleneck the Thal unit helped it The company has announced a joint venture ammonia-urea
plant at Ghana, which will be commissioned by 2016-17. based pricing mechanism for extra production

RCF will be able to reap benefits under the Import Parity Price
Business Overview
Rashtriya Chemicals and Fertilizers (RCF) a Government of India undertaking was incorporated on 6th March, 1978 and it came into being as a result of the re-organization of the erstwhile Fertilizer Corporation of India Limited. At the time of its formation, the company had one operating unit, viz. Trombay (old plants) and two major projects under implementation viz. Trombay IV expansion and Trombay V expansion, besides the West, South Marketing Zones and the Bombay Purchase and Liaison office. RCF was the first fertilizer company in India to commission a green field, mega fertilizer complex at Thal-Vaishet in the state of Maharashtra RCF is one of the leading producers of Fertilizers in India. Sujala, Suphala 15:15:15, Suphala 20:20:0, Ujjwala, Microla and Biola are its major fertilizers RCF has a total installed capacity of about 10.54 lakh tonnes of Nitrogen and 1.17 lakh tonnes of P2O5 and 0.45 lakh tonnes of K2O.Besides fertilizers, the Company also produces a number of industrial chemicals such as Methanol, Concentrated Nitric Acid, Methylamines, Ammonium Bicarbonate, Sodium Nitrate/Nitrite, DMF, DMAC, etc. RCF pioneered the manufacture of basic chemicals such as Methanol, Sodium Nitrate, Sodium Nitrite, Ammonium bicarbonate, Methylamines, Dimethyl Formamide, Dimethylacetamide in India. Today R.C.F is the only manufacture of DMF in India. Product characteristics, consumer needs, economy to the consumers and safety are the primary considerations in determining the type of packaging and modes of transportation for each of the products.

Share Holding

Performance in last one year

Y-o-Y Performance
(Rs. in Cr..)

Particulars Net Sales Other Income Total Expenditure Operating Profit Interest Profits After Tax Reserve & Surplus Reported EPS(Rs) Core EBITDA Margin (%)

Mar 2012 6433.71 166.73 6031.02 569.42 52.53 248.83 1617.86 4.51 6.16

Mar 2011 5524.43 174.91 5159.52 539.82 72.57 244.71 1458.80 4.44 6.53

Change(%) 16.46 -4.68 16.89 5.48 -27.61 1.68 10.90 1.68 -5.54

Financial Health
For the third quarter ended December 31, 2012 RCF reported a 37.13% rise in its net profit at Rs 73.98 crore for the quarter as compared to Rs 53.95 crore for the same quarter in the previous year. However, total income from the operation of the company decreased by 3.04% at Rs 1567.83 crore for the quarter under review as compared to Rs 1617.05 crore for the quarter ended December 31, 2011.

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Date : 22 March 2013
Segment wise, Trombay units revenue declined by 5.77% to Rs 612.98 crore, while Thals unit revenue improved considerably by 37.32% to Rs 688.73 crore. On the other hand the revenue from Trading segment plunged by 43.48% to Rs 260.98 crore.
Q-o-Q Performance
(Rs. in Cr..)

Particulars Net Sales Expenditure Other Income EBITDA Interest Net Profit EBITDA Margin (%) NPM (%) EPS

Dec 2012 1567.83 1438.5 15.94 145.27 14.44 73.98 9.06 4.61 1.34

Dec 2011 1595.45 1523.09 38.89 111.25 0.25 53.95 6.83 3.31 0.98

Change(%) -1.73 -5.55 -59.01 30.58 5676.00 37.13 32.60 39.25 37.13

Industry Scenario
India is primarily an agriculture based economy with around 60 percent of the population dependent on them. The Indian Fertilizer Industry is one of the allied sectors of the agricultural sphere. With the development of fertilizer industry, Indian agricultural development has been made possible. It has played a vital role in the green revolution. India has emerged as the third largest producer of nitrogenous fertilizers. The adoption of back to back Five Year plans has paved the way for self sufficiency in the production of food grains. In fact production has gone up to an extent that there is scope for the export of food grains. This surplus has been facilitated by the use of chemical fertilizers. Today, India stands as the second largest consumer of fertilizers behind China. The Indian fertilizer sector is the one of the most regulated sectors in India. It consists of two key segments - urea fertilizer and non urea fertilizers. Within these two segments, the urea fertilizer accounts for around 50% of the total fertilizer consumption, being regulated by the government as the price and the subsidy is fixed by the government. While, the non urea segment, which consists the DAP, complex NPK and MOP fertilizers, functions under a fixed subsidy and variable pricing freedom being granted by the government since April 2011. The subsidies on Indian fertilizer have been rising at a constant rate. This is due to the rise in the cost of production and the inability of the government to raise the maximum retail price of the fertilizers. Infrastructure constraints have been hindering the growth of the fertilizer sector in India. While, Most ports face severe capacity constraints in handling high volumes on a sustained basis, the Railway facilities and port-rail connectivity need to be strengthened significantly. The movement of fertilizers has so far been traditionally done through rail and road mode. To provide a supplementary and alternative mode of transport, Department of Fertilizers (DOF) is now considering use of Inland Waterways especially National Waterways for transporting fertilizers. In a recent development the Inland Waterways Authority of India (IWAI) has invited expression of interest (EOI) for multimodal transportation of fertilizers between Haldia and Patna on National Waterway1. With this, the fertilizers transportation is set to enter a new phase.

Profit & Loss

(Rs. in Cr..)

Particulars Net Sales Total Income Total Expenditure Operating Profit Profits After Tax

Mar 2012 6433.71 6600.44 6031.02 569.42 248.83

Mar 2011 5524.43 5699.34 5159.52 539.82 244.71

Change(%) 16.46 15.81 16.89 5.48 1.68

Balance Sheet
(Rs. in Cr..)

Particulars Share Capital Reserve & Surplus Total Liabilities Investments Current Liabilities Net Current Assets Total Assests

Mar 2012 551.69 1617.86 5658.88 0.00 530.37 1108.20 5658.88

Mar 2011 551.69 1458.80 3787.73 0.00 142.87 1030.67 3787.73

Change(%) 0.00 10.90 49.40 0.00 271.23 7.52 49.40

Financial Key Ratios

Particulars Reported EPS (Rs) Core EBITDA Margin (%) EBIT Margin (%) ROA (%) ROE (%) ROCE (%) Price/Book (x) Net Sales Growth (%) EBIT Growth (%) PAT Growth (%) Total Debt/Mcap (%) Mar 2012 4.51 6.16 6.53 5.27 11.91 14.27 1.44 16.46 -0.06 1.68 0.41 Mar 2011 4.44 6.53 7.63 5.81 12.73 14.93 2.18 -2.09 3.05 4.43 0.12

Latest developments:
The government has garnered about Rs 310 crore by divesting 12.5 per cent of its stake in Rashtriya Chemicals and Fertilizers Ltd through an offer for sale. The auction, in which 69 million RCF shares were sold, was subscribed 1.3 times the number of shares on offer. Most bids were at Rs 45.02, against the minimum offer price of Rs 45 a share.

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Date : 22 March 2013

Peer comparison: * EPS &group P/E latest

Company RCF Tata Chemicals Coromandel Interntl. National Fertilizers Year End 201203 201203 201203 201203 Net Sales 6433.710 7987.28 9823.27 7305.29 PBDIT 402.71 1051.99 1061.30 307.67 PAT 249.24 586.60 693.27 126.73 PATM% 3.87 7.34 7.06 1.73 EPS 4.52 23.03 24.53 2.58

(Rs in crore)

P/E* 7.20 12.08 10.03 0.00

Investment Rationale

Rashtriya Chemicals and Fertilizers, a leading urea producer, also manufactures complex fertilisers and industrial chemicals reported

37 per cent increase in its net profit for the quarter ended December 31, 2012. Total expenditure of the complex fertiliser producer also declined to Rs 1,469.36 crore from Rs 1,560.93 crore in the reviewed period. However, total sales of the company fell by almost 3 per cent. The companys effort to efforts to de-bottleneck the Thal unit helped it report an improved operational performance for the quarter. Though, poor sales impacted the profit at Trombay unit. Trading business revenue too came lower as the company substantially scaled down the trading business due to low demand for agriculture inputs and constraints at ports, though the business turned profitable for the quarter after reporting a loss of Rs 29 crore in the same quarter last year on a mark-to-market hit. and patronage. It enjoys a 10.7% market share in Urea Sector and its Urea is sold under the popular brand name Ujjwala. While it holds, 5.4% market share of Complex Fertilizers, which are sold under the brand name Suphala. RCF produces complex fertilizers under the 15:15:15 & 20:20:0 Grades. It is also into the Specialty Fertilizers, sold as Bio-Fertilizers (Biola), Micronutrients (Microla) and Water Soluble Fertilizers (Sujala). The companys industrial chemicals portfolio comprises 15 products such as methanol, ammonium nitrate, nitric acid and methylamines. The diversification gives the company an edge over its peers in case the profitability in one of the fertilizer business is at risk. been mooting setting up additional streams of ammonia and urea which will add 12.7 lakh MT per annum of urea capacity at a cost of Rs 4,112.5 crore. Through the global bidding process, the company has already selected the contractor to set up the plant on lump sum turnkey basis (LSTK). The company is also in the process of lining up other construction and project management consultancy contracts and expects to start process design and construction work on the project in May. The company has also announced a joint venture ammonia-urea plant at Ghana, which will be commissioned by 2016-17 and a 5 lakh tonne single super phosphate plant at Thal among others. The total outlay for these projects is estimated at Rs 18,700 crore. The Thal brownfield expansion is likely to be favourable, but the large debt-funded capex may stretch the capital structure of the company in the medium term. provided Rs 65,971 crore toward fertilizer subsidies, marginally lower than the Rs 65,974 crore in the current financial year. But even going by the conservative estimates the fertilizer subsidy bill comes at around Rs 90,000 crore for the year to March. The quantum of subsidy is the function of fertilizer consumption and represents the difference of the normative delivered cost of fertilizer and notifies selling price of fertilizers. In the current fiscal year, the budgeted amount for fertilizer subsidy was exhausted by the end of the second quarter. While, most companies have not received any payout from the government for last few months. RCF is borrowing from the market to finance delayed payments. Due to a rise in borrowings, RCFs finance costs have more than doubled in the nine months beginning April 2012 from a year earlier. Due to delay in payment, it is becoming increasingly difficult for the fertiliser companies to make payment for the feedstock for want of working capital. of Rs 45. Though, the price has corrected a lot since OFS but considering the companys performance of consistent profit making and dividend paying one since inception, we are hopeful of recovery soon. It holds a diversified portfolio with additional revenue streams from bulk industrial chemicals and is also engaged in trading of fertilizers. The company has recently completed a major revamp of its plants at Thal which has increased its urea capacity from 17 lakh MT per annum to 23 MT per annum. The revamped plants have been commissioned and have already achieved the day-to-day high capacity and low energy consumption targets. The company will be able to reap benefits under the IPP (Import Parity Price) based pricing mechanism for extra production beyond the cut-off capacity in the current fiscal. As it allows manufacturers to sell a portion of production at reassessed capacity to the farmers freely in any part of the country.

RCF has a diversified product portfolio and manufactures various Fertilizers and Chemicals which have a high degree of brand recall

Rashtriya Chemicals & Fertilisers has embarked on a major expansion at its Thal unit at a cost of Rs 4,112.5 crore. The company has

On the concern side the under-provisioning of subsidies is costing fertilizer companies dearly. For the next fiscal year, the budget has

At the CMP of Rs 36.05, RCF is trading at a TTM P/E of 7.21x and 4.18x respectively, we recommend BUY in the scrip with a price target

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Date : 22 March 2013

Sector Outlook : Fertilizer industry

Fertilizer industry plays the important role in making the country self-reliant in food grain production. The Indian fertilizer sector is the one of the most regulated sectors in India and also the allied sector of agriculture sphere. At present, the Indian fertilizer industry consists of two key segments - urea fertilizer and non urea fertilizers. Within these two segments, the urea fertilizer accounts for around 50% of the total fertilizer consumption, regulated by the government as the price and the subsidy is fixed by the government. While, the non urea segment, which consists the DAP, complex NPK and MOP fertilizers, functions under a fixed subsidy and variable pricing freedom being granted by the government since April 2011. Today, India stands as the second largest consumer of fertilizers behind China. urea till 2001-02, but with the rising demand and the lack of major investments, domestic demand has outpaced the production. Over the past five years (FY08-FY12), urea production growth was remained stagnant. In FY12, urea production was 22.05 million tonnes, which increased at a low average growth rate of 1.74 percent of the past five years, whereas, the consumption has increased by 4.09 percent average growth rate to 29.7 million tonnes in FY12. Stagnant production growth vis-a-vis rising consumption trend has led to the rise in the urea import. In FY06, urea import was 9 percent of the consumption, which increased to 27 percent of consumption in FY12, reflecting low investment in the urea sector. Presently, the gap between the production and consumption is around 6 to 8 million tonnes. However, the gap is expected to reduce in the future because of the implementation of new urea policy, 2012.
Urea 35 30 25

N, P, K Fertilizers
The fertilizers contain the three basic nutrients for agriculture: nitrogen (N), phosphorous (P) and potassium (K). India lacks potassium resources and has to entirely depend upon import for meeting the requirement of potassium fertilizers for agricultural usage. The country is also deficient in phosphatic (P) resources with around 90% requirement of it is being met through direct import of finished phosphatic fertilizers or phosphatic raw materials for indigenous production of phosphatic fertilizers. While, N is the only fertilizer, the requirement of which is largely (around 80%) met through the domestic production. The annual consumption of fertilizers, in nutrient terms (N, P & K ), has increased from 0.07 million MT in 1951-52 to more than 29 million MT in 201112 and per hectare consumption, has increased from less than 1 Kg in 1951-52 to the level of 135 Kg now. The consumption of nutrients (N,P,K) have been increasing sharply over the past years leading to increasing import dependence towards meeting the requirement of fertilizers in the country. On the other hand, there has been no significant investment in the fertilizer sector in the last several years, which led to stagnant domestic fertilizers production capacities. Currently, around 38 per cent of the total fertilizer consumption is fulfilled through imports.
Imports, Consumption & Production
35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 FY07 Imports FY08 FY09 FY10 FY11 FY12

M.Tonnes

20 15 10 5 0 FY06 FY07 Production FY08 FY09 FY10 FY11 Import FY12

Consumption

Di Ammonium Phosphate (DAP)

Diammonium phosphate is the worlds most widely used phosphorus fertilizer. It constitutes 20 percent phosphorus and 46 percent of its composition with oxygen. DAP constitutes the 39 percent of the total fertilizer imports. Over the past five years (FY08FY12), DAP consumption increased by 7 percent at an average growth rate and import increased by 20 percent of average growth, while production growth declined by 1.9 percent average growth of the past five years, reflecting the low indigenous capacities for DAP due to the raw material constraints and their international pricing levels. In comparison to the rising consumption, the DAP production is expected to remain stagnant due to lack of raw material, as since 2010, the rising price trend of DAP has been affecting its consumption. In FY12, DAP consumption declined by 8 percent to 10.2 M.Tonnes from 11.1 M. Tonnes in FY11.
Di Ammonium Phosphate (DAP)
12.00 10.00 1000 900 800 700 600 500 400 300 200 100 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Price

M.Tonnes

M.Tonnes

Consumption

Production

6.00 4.00 2.00 0.00

Segmental Analysis Urea

Urea is the most important fertilizer in the country because of its high content (46%N) and constitutes about 78 percent of the total nitrogen consumption in the country. In India, urea is the only fertilizer, whose 80% demand is met through the domestic production. However, this segment of the industry is facing the unfavorable demand supply situation. India was self sufficient in

Production

Consumption

Import

Muriate of Potash (MOP)

Muriate of Potash is the most common potassium source used in the agriculture with its nutrient composition of approximately

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$ /Tonne

8.00

Tracom RESEARCH
Date : 22 March 2013
potassium 50% and chloride 46%. While, the country does not have potassic (K) resources and has to entirely depend upon import for meeting the requirement of MOP. In FY12, the MOP consumption declined by 22 percent to 3 MT, from 3.89 MT recorded in the FY11. Rising prices of the MOP and declining subsidy in the non urea sector were the major reasons for the contraction in MOP consumption.
Muriate of Potash (MOP) 700 600 500 5 4

the new policy, the government will give 12-20 percent 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 this return, the government would also cover the entire cost of natural gas, which is the main feedstock of urea, and accounts for 80 per cent of the cost. In determining the cost of production of new plants to be set up after the policy comes into effect, the government has set a floor and ceiling price of urea, based on the price of natural gas plus 12-20 percent equity returns. It also proposed for covering the subsidy on gas price within the range of $6.5-14 mmBtu.

M.Tonnes

$/Tonne

400 300 200 100 0 FY06 FY07 FY08 FY09 FY10 FY11 Pric es FY12 Consumption

3 2 1 0

Issues and Concerns of the sector

Unbalanced Use of Fertilizers: In India, while, the consumption of N, P and K fertilizers have been increasing, the ratio of use of nutrients remains imbalanced. The use of nitrogen is much more as compared to other nutrients. In order to get maximum yield and maintaining the soil fertility, all essential nutrients must be supplied in required quantity and in balanced proportion. So, there is need to give more attention to the balanced use of fertilizers. Lack of Investment in Fertilizer Sector: There has been no significant investment in the fertilizer sector in the last several years, which led to stagnant domestic fertilizers production capacities in comparison to the rising consumption. Thereby, an urgent need is being felt to encourage investments in the fertilizer sector to promote domestic production of all major nutrients. Rising Fertilizer Subsidy: Due to increase in consumption of fertilizers as against the stagnant domestic fertilizer production and sharp rise in the price of fertilizer inputs and finished fertilizers the fertilizer subsidy over the past many years has been increasing. Technological and R&D issues: Indian fertilizer industry is lacking technology and R&D inputs as compared to developed countries, which reflects the need of high capital investment into the sector.

Fertilizers Subsidy
The quantum of subsidy is the function of fertilizer consumption and represents the difference of the normative delivered cost of fertilizer and notifies selling price of fertilizers. However, increase in fertilizer subsidy has become a major concern for the government due to its rising fiscal deficit. In the FY12, the government subsidy for urea was Rs. 32,398 crore, which increased by 18.45 percent average growth rate of the past five years (FY08-FY12). While, for non urea fertilizers, the subsidy amount was Rs. 28,576 crore in financial year 12, too showing the rising trend. The increase in fertilizers subsidy has been partially due to increase in consumption of fertilizers and mainly due to sharp rise in price of fertilizer inputs and finished fertilizers leading to increase in normative delivered cost of the subsidizers fertilizers at farm gate level. Over the last five years, the increase in Indian imports with the stiff demand-supply conditions of fertilizers in the international market has led to a sharp rise in international prices of finished fertilizers and fertilizer inputs. However, international prices of fertilizers and raw material creeping higher in 2008-09, led to the massive amount of subsidy in that year.
Fertilizer Subsidy
90000 80000 70000 60000 50000 40000 30000 20000 10000 0 FY07 Urea FY08 FY09 FY10 FY11 FY12

Outlook
The fertilizer industry is one of the vital industry for the Indian economy as it manufacture a very critical raw material for agriculture which is the major occupation in the country. With the improving farm economics and rising thrust on irrigation, the consumption of fertilizers has been increasing sharply leading to increasing import dependence towards meeting the requirement of fertilizers in the country, as there has been no significant investment in the fertilizer sector in the last several years. However, in the near term, the urea production is expected to improve with the implementation of the new urea policy whereas for non urea sector the stagnancy in domestic production would remain because of the constraints in the availability of raw materials. Since major demand for non-urea fertilizer is met through imports, decreasing subsidy levels and weak rupee have increased the farm gate prices of non-urea (DAP, MOP) fertilizers, thereby affecting demand. Further, in order to contain overall fertilizer subsidies, the government is likely to continue to reduce Nutrient based Subsidy (NBS) rates in FY14 and beyond, which may necessitate further increase in MRPs and is indicting a challenging time ahead for non-urea fertilizers. There is an urgent need to balance the use of urea and non-urea fertilizers, which will be helpful for the soil conditions.

M.Tonnes

Non Urea

Total Fertilizers Subsidy

New Urea Investment policy, 2012

In order to incentivise capacity creation in the urea segment, the Cabinet Committee of economic Affairs (CCEA) approved the new urea investment policy on December 13, 2012. The new urea policy, aims to attract fresh investment of about Rs.35,000 crore to increase domestic production by eight million tonnes. Under

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Date : 22 March 2013

Stock Recommendation
Deepak Fertilizers Corporation & Petrochemicals
trading at Rs 94.00 at a P/E multiple of 5.13x and EV / EBIDTA of 4.01, we would recommend a HOLD in the stock, keeping in view its expansion plans in local and global markets.

Deepak Fertilizers & Petrochemicals is one of the leading manufacturers of industrial chemicals and fertilizers in India. It is a multi-product Indian conglomerate with an annual turnover of over $300 million with a multi-product portfolio spanning industrial chemicals, bulk and specialty fertilizers, farming diagnostics and solutions, technical ammonium nitrate, mining services and consulting and value added real estate. The company has been looking at overseas opportunities, particularly, with a view to securing raw materials for its plants for which it has inked a memorandum of understanding (MoU) to participate in a bidding process for a Phosphate project in Togo, West Africa, as a part of a consortium comprising Balamara Resources, a resources company, and Minemakers, an experienced phosphate company. Both the companies are Australian ASX listed. The company has undertaken a project for FY14 and FY15 to expand its nitro phosphate capacity to 600,000 tonnes with a capital expenditure of Rs 360 crore, it has also undertaken capacity expansion for Bentonite sulfur where the capex is about Rs 56 crore. The company has registered a fall of 36.25% in its net profit at Rs 31.65 crore in Q3FY13 as compared to Rs 49.65 crore in the corresponding quarter previous year. However, the total income from the operation of the company has increased by 3.63% to Rs 623.35 crore in the third quarter ended December 31, 2012 as compared to Rs 601.49 crore in the same quarter last year. Recently, one of its subsidiaries, Deepak Mining Services (DMSPL) has entered into a strategic partnership with the Australia-based RungePincockMinarco (RPM), through its subsidiary International Mineral Asset Transactions. The JV will be called Complete Mining Services. This agreement creates a jointly owned Indian based joint venture company to provide advisory technology and professional training services to the mineral resources sectors within India and the surrounding geographies of the Indian sub-continent. The company expects softer ammonia prices in Q4 and Q1 of FY14. In the next 18 to 24 months the company expects ammonia prices should drop globally in line with new capacities coming in markets like the US and some in the Middle East. This should improve the companys margins from the current levels and also help it to improve its capacity utilization particularly of TAN. The scrip is currently

Gujarat State Fertilizers & Chemicals

Gujarat State Fertilizers & Chemicals (GSFC) is a leading manufacturer of quality products of Chemical Fertilizers and Industrial Products. The companys manufacturing units is located at Kosamba, Sikka and Nandesari. It has a marketing network spread across India in states like Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Daman and Uttar Pradesh. The company has reported 20.81% fall in its net profit at Rs 136.49 crore for third quarter ended December 31, 2012 as compared to Rs 172.35 crore for the same quarter in the previous year. However, total income of the company has increased by 33.03% at Rs 1729.43 crore for the quarter under review as compared to Rs 1300.02 crore for the quarter ended December 31, 2011. Recently GSFC acquired nearly 20 per cent stake for around $45 million or Rs 250 crore in Karnalyte Resources Inc., a Canada based potash player. Karnalyte has issued GSFC approximately 5,490,000 common shares of Karnalyte at a price of $8.15 per common share. As previously announced, Karnalyte and GSFC have agreed to a committed offtake agreement for the purchase of approximately 350,000 tonnes per year (TPY) of potash from Phase 1 of the Project, increasing to 600,000 TPY with the commencement of Phase 2. The off-take agreement will continue for approximately 20 years from the commencement of commercial production of Phase 1.With this, GSFC has secured a significant amount of high quality potash to distribute in a market that is fully dependent on imports. The company has received an Environmental Impact Statement (EIS) approval from the Saskatchewan Ministry of Environment (MOE) for its Canadian project for potash mining with Canada based Karnalyte Resources Inc. (KRN). EIS approval is essential to the advancement of the Wynyard Carnallite Project, and was a condition of the $45 million strategic investment by the company. The scrip is currently trading at Rs 59.00, at a P/E multiple of 3.43x and at EV / EBIDTA 1.81x, we would recommend Buy in the scrip, its stake acquisition in Karnalyte Resources is likely to give it a boost.

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Date : 22 March 2013

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