India Research

Relative Performance
160 140 120 100 80 60 40 Jun-06 Chambal GNFC
Source: ENAM Research, Bloomberg

Indian Fertilizer Sector

Jun-07 Coromandel Sensex

Dec-06

Relative Performance
200 150 100 50 0 Jun-06 Dec-06 Jun-07 Godavari Gujarat State Nagarjuna Zuari Indus Sensex
Source: ENAM Research, Bloomberg

Bullish in the Long Term

Sector summary
Company Chambal Fertilizers Coromandel Fertilizers Gujarat Narmada Valley Fertilizers Godavari Fertilizers Gujarat State Fertilizers Nagarjuna Fertilizers Zuari Industries
Source: Company,ENAM Research

Price (Rs.) 36 82 112 105 178 24 167

Mkt cap (USD. bn) 337 232 365 75 316 246 110

EPS (Rs.) FY06 FY07 5.4 2.8 6.9 7.9 19.7 21.0 8.2 15.4 33.2 35.2 1.4 0.7 16.8 41.3

P/E (x) FY06 FY07 6.8 12.5 11.9 9.1 5.1 5.0 11.0 6.7 5.4 4.9 NA 19.9 13.3 3.4

RoE (%) FY06 FY07 26.9 13.0 21.3 21.3 28.7 25.0 28.6 41.8 23.3 20.1 3.5 1.7 17.5 23.7

RoCE (%) FY06 FY07 20.3 16.0 18.9 20.7 32.8 32.3 13.8 19.0 20.2 18.4 5.5 5.6 9.6 12.6

DPS (Rs) FY06 FY07 2.0 2.1 1.9 2.3 4.6 4.3 2.3 4.6 5.1 5.1 2.3 2.9

Lead Analyst: Jagdishwar Toppo

jagdishwar@enam.com (+91 22 6754 7605)

Associate: Ravindra Deshpande

ravindra.deshpande@enam.com (+91 22 6754 7627)

July 3, 2007 1

Table of contents
Slide No. Investment Summary Global Scenario Indian Scenario India Poised to change Government Imperatives Changing Landscape: Re-rating in the offering? Annexures 3 9 15 20 25 28 32

Investment Summary
Indian scenario: Situation set to improve

Regulated industry with little incentives for efficiency or capacity additions Growing fertilizer consumption leading to rising imports with almost no domestic capacity addition Domestic prices not aligned with rising international prices But rising promoter stakes, inspire confidence Surmounting subsidies Additional supply of natural gas, a key feedstock for Urea Decontrolling the sector in a phased manner Incentivizing domestic capacity addition Rising fertilizer demand, driven by consumption in developing countries Tight supply with new capacities added near the market place or sources of feedstock Global stock prices/ M&A activity at premium valuations
Cost competitive Companies located near gas pipelines Dynamic entrepreneurs and shareholder orientation High ROE companies utilizing cash efficiently either in expansion or diversification

Regulatory changes: Need of the hour

Government imperatives:

Huge profit/ re-rating potential for urea companies in de-regulated scenario

How to choose companies:

` ` `

Urea: Profit Potential Scenario

15,000 12,000 9,000 6,000 3,000 0 $2.60 Cost of Feedstock
Source: FAI, ENAM Research

Urea Profit Potential

(Rs/ ton)
Current Scenario
Subsidy Component Price paid by farmer

International Urea selling price ~$305/ton

$2.60 Conversion Cost (NG)

$4.00 Conversion Cost (Electricity)

$5.00

Admin. Charges

$7.50 Profit

Urea: Profit Potential in Regulated & Unregulated Scenario

Cost of Natural Gas assumed ($/mmbtu) Cost of Feedstock (Rs/Ton) Conversion Cost (Rs/Ton) Cost of Production Selling Price (Rs/Ton) (International Prices) Profit (Rs/ Ton) ROCE (%) $2.6 2,102 2,510 4,612 7,698* 3,086 17% $2.6 2,102 2,510 4,612 12,840 8,228 46% $4.0 3,234 2,936 6,170 12,840 6,670 37% $5.0 4,043 3,240 7,283 12,840 5,557 31% $7.5 6,032 3,988 10,020 12,840 2,820 16%

Source: FAI, ENAM Research, * Selling price inclusive of subsidy component

Huge profit potential but NG availability & industry deregulation hold the key!
4

Global fertilizer stock performance

Company Country Mkt. Cap ($ bn) Yara Mosaic Potash Corp Agrium Terra CF Industries K+S AG Norway US Canada US US US Germany 9.2 17.6 24.6 6.0 2.2 3.3 6.1 1year Ret. (%) 129 162 177 103 285 318 102 2year Ret. (%) 109 169 195 105 327 288 158 ROE (%) 29.2 (3.9) 25.7 2.7 (0.2) 4.4 26.2 P/E (x) CY07E 13.0 54.2 27.0 17.2 19.0 21.0 22.5 CY08E 13.4 19.7 23.4 15.6 19.8 24.1 19.3 EV/EBIDTA(x) CY07E 9.3 22.0 15.8 8.8 7.5 7.5 10.3 CY08E 9.5 11.4 14.1 8.4 9.0 8.6 9.2

Source: Bloomberg,, ENAM Research

Global M&A Activities

Acquirer Target % Stake Acquired Mkt Cap (USD mn) ROE (%) P/E multiple (x) (12 months trailing)
Source: Bloomberg,, ENAM Research

Yara Kemira 30% 1,259 10 15.7

Yara FERTIBRAS SA 52% 182 13 10.8

Coromandel Godavari Fert 5% 109 29 18.6

Re-rating potential in the de-regulated scenario

5

Industry Actions: Signaling confidence

Steady performance by industry players Creeping promoter stakes inspire confidence in the sector
Rising Promoter Stake : Signalling Confidence
50 48 46 44 42 40 2002 2003 2004 2005 2006 2007 (%)

Urea Industry: Financial Snapshot

120 100 80 60 40 20 0 FY00 FY01 FY02 FY03 FY04 FY05 RoCE (RHS) Operating Profit Subsidy Spending (Rs bn) (%) 12 9 6 3 0

Expanding Market Cap & Multiples

160,000 120,000 80,000 40,000 0 2002 2003 2004 2005 2006 2007 Market Cap
Source: Bloomberg, ENAM Research

(Rs mn)

(x)

16 12 8 4 0

P/E (RHS)

Promoters increasing their stakes : A positive sign

6

Local regulations: Poised to change

Catalyst Catalystfor forChange Change
Rising Risingdemand: demand:Rising Risingat ataaCAGR CAGRof of14% 14%and and no nosupply supplyadds addsto tomeet meetthe thesame. same.Rising Risingdemand demand met by costly imports met by costly imports

Imperatives Imperatives

Deregulation Deregulationof ofindustry industryby byoffering offeringincentives incentivesto to domestic capacity additions domestic capacity additions

Surmounting Surmountingsubsidies: subsidies: Rapidly increasing Rapidly increasing(~20% (~20%CAGR) CAGR)and andhave havenow now reached ~15% of fiscal deficit reached ~15% of fiscal deficit Huge Hugenatural naturalgas gasavailability availabilityin infuture: future:Huge Huge supply supplypotential potential

Decontrolled Decontrolledpricing pricing Dual subsidy regime Dual subsidy regimeDirect Directsubsidies subsidiesto topoor poor farmers farmers Incentives Incentivesoffered offeredto toexport export

Assuring Assuringundisrupted undisruptedsupply supplyof ofnatural naturalgas gasfor for fertilizer units fertilizer units

How to select companies?

Criteria for Selection Proximity to gas supply (Units lying near the existing/ planned gas pipeline) Investor Friendliness (Proxy = Dividend Payout > 25%) Chambal Coromandel GNFC Godavari GSFC Nagarjuna Zuari

Entrepreneurship (Proxy = Diversification into higher RoE businesses) Earnings Expansion (Fertilizers volume growth or efficiencies) Increasing stakes of promoters

Buy a basket: High ROE companies utilizing cash efficiently either in expansion or diversification
8

Global Scenario

Rising global food grain demand

Global food grain demand expected to outpace supply

Global grain balance

2,100 2,000 1,900 1,800 1,700 1995 1996 1997 1998 1999 2000
Production
57 days inventory

(mn tonnes)

115 days inventory

40 30 20 10 0 2005 2006
Jan-06

Visible through consistently falling inventories in the past decade

Consumption

Prices of base crops are rising Limited land along with increasing population are conducive to fertilizer demand growth
1.5 1.2 0.9 0.6 0.3 0.0 1965 1980 1990 2000 2010E 2020E Arable Land
Source: Agrium,Yara, ENAM Research

2001 2002

2003

2004

Grain Inventory (RHS)

Source: Agrium,Yara, ENAM Research

Global Population & Fertile Land

(Acres/ Person) (bn)

10 8 6 4 2 0

10 8 6 4 2 0

Grain price
(US$/ Bushel)

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Population (RHS)

Wheat

Corn

Soyabean

Source: Bloomberg, ENAM Research

Food grain demand rising on the back of population growth

Jan-07

2007

10

Fertilizers: Inevitable component for grains

Fertilizer consumption: Across food products
Wheat 18% Corn 17%
400 350 300 250 200 150 100 50 0

Grains & fertilizer price movement

($/ tonnes) ($/ bushel) 4.0 3.0 2.0 1.0 0.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Rice 17% Fruit&Vege tables 6% Other cereals 7% Cotton 3%

Other 32%

Source : Yara, ENAM Research

Urea Price Source : Yara, ENAM Research

Corn Price (RHS)

Yield Improvement
1,200 1,000 800 600 400 200 0 0 50 100 150 200 250 300 Fertilizer application, Kg N/ha
Source: Winter wheat yield data; Long term trial, Broadbalk, Rothamsted (since 1856).

Breakup: Grain production costs

Cost Breakup Fertilizer Labour Sprays Seed General overhead exp. Power & Machinery Rental Value Total Total Cost 10% 19% 13% 5% 10% 26% 17% 100% Variable Cost 12% 23% 16% 6% 12% 31% 100%

(Euro/Hect)

Source: Farm Management Pocketbook John Nix 2004

Fertilizer: Integral component of grain production

11

Fertilizers: Global Demand Scenario

Global consumption on the rise

Global Fertilizer Consumption

200 160 120 80 40 0 1961 1971 1981 N 1991 P 2001 K 2006
China and India a/c for ~40% & 20% of global consumption, respectively

Growing at a CAGR of 3 5%

(mn tonnes)
CAGR: 3.7%

Developing countries, especially India & China, are witnessing rapid growth

Fertilizer Consumption:
120 100 80 60 40 20 0 1961 1971 1981 N 1991 P 2001 K 2006

Developed Countries
(mn tonnes)

120 100 80

Developing Countries
(mn tonnes)
CAGR 7.7%

V/s

60 40 20 0 1961 1971 1981 N 1991 P 2001 K 2006

Source: FAI, Capitaline, ENAM Research

India and China: The main demand drivers

12

Global Fertilizers: Supply & Capacity Additions

Fertilizer Supply Trends

Production is shifting towards regions with low cost natural gas supply and/ or growing demand Units in the North American and EU region have been forced to shut down with increased cost of feedstock

90 85 80 75 70

Global Urea Capacity Utilization

(%)

Capacity addition Mainly in demand centers and natural gas hubs

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

N. Gas Resources

Growing markets

Urea Capacity Addition Breakup

10
Germany: $7.70 USA: $6.75 Trinidad: $1.65 Brazil: $3.70 Iran: $1.25 Russia: $1.45

(mn tonnes)

8 6 4 2 0 2007 China Others 2008

(mn tonnes)

China: $5.80 China Oman: $ 1 India Saudi Arabia: $0.75

Source :Fertecon, Agrium ENAM Research

2009 NG Resources Capacities (RHS)

Market places and resource rich regions adding capacities

13

2006
180 175 170 165 160 155

China (demand driver) and the Middle East (natural gas reserves) are witnessing major capacity additions

India V/s China

India has one of the lowest levels of fertilizer consumption China enjoys better yield per hectare with greater fertilizer consumption Better yield per hectare leads to lower dependence on fertilizer imports for China
India: Low Consumption/ Hectare
300 250 200 150 100 50 0 Pakistan China Brazil France World
China

(Kg/Hectare)

14 12 10 8 6 4 2 0

India v/s China: Fertilizer Imports

(mn tonnes)

India v/s China: Yield Comparison

4 3 2 1 0 India
Source: CRIS Infac, ENAM Research

30 28 26 24 22 20

(Tons/Ha)

India China Imports % of Total Consumption (RHS)

India: Huge potential for fertilizer demand growth

14

India

USA

Indian Scenario

15

Indian Fertilizer Industry: A Snapshot

Size Size

Globally, Globally,the the3rd 3rdlargest largestconsumer consumer 12% of global consumption 12% of global consumption Size Sizeof of~20 ~20mn mntonnes, tonnes,tilted tiltedin infavor favorof ofUrea Ureadue dueto topricing pricingadvantage advantageand andraw raw material availability material availability

Structure Structure

Regulated Regulatedindustry industrywith withcontrols controlson oninput, input,output outputand andpricing pricing Subsidized with capped returns Subsidized with capped returns

Comparables Comparables

Low Lowconsumption consumptionper perhectare hectare One of the lowest food One of the lowest foodgrain grainyield yieldper perhectare hectare

Segments Segments

NN(Urea) (Urea) Feedstock Feedstocklargely largelyused usedisisNatural NaturalGas Gas(66%) (66%)and andNaphtha Naphtha(29%) (29%) PP(DAP) Largely produced with imported raw material Rock Phosphate (DAP) Largely produced with imported raw material Rock Phosphate KK(MOP) (MOP)Largely Largelyimported imported

16

Indian Fertilizer Industry: An Overview

Fertilizer Consumption - India
25 20 15 10 5 0 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2006-07 (mn tonnes)

Fertilizer Production and Imports

25 20 15 10 5 0 1980-81 1990-91 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Price/ton Rs 4,500 Price/ton >Rs7,000 Price/ton Rs 4,830

(mn tonnes)

CAGR 13.6%

Dependence on import growing due to domestic supply constraints

Import

Note: Import largely K. Urea import on a rise recently

Steady Demand Growth 3-5% in the past 20 years Nearly self sufficient in Urea (N). A large part of MOP (K) & P (DAP) demand is met through imports due to urea pricing advantage and unavailability of inputs for K&P production Consumption tilted in favor of N against an ideal ratio of 4:2:1 in turn leading to soil deterioration

Consumption Ratio
100% 80% 60% 40% 20% 0% 1951-52 1960-61 1970-71 1980-81 1990-91 2000-01 K 2006-07

17

Fertilizer Prices on an upswing

Indian companies are currently operating almost at full capacity with no significant greenfield urea capacity-adds since 99-00 Dependence on imports has been growing in the recent past. Rising demand has not been matched by capacity additions
Urea prices: Local v/s International
250 200 150 100 50 0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 ($/ ton)

Capacity Utilization: Indian Industry

12.5 12.0 11.5 11.0 10.5 10.0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 (mn tonnes) (%) 110 105 100 95 90 85 80

Total capacity

Utilisaion (RHS)

Natural Gas Price : Controlled v/s International

10 8 6 4 2 0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 ($/MMBTU)

Intl. Urea Price

Regulated Urea Price

Source: FAI, Capitaline, ENAM Research

Intl. Gas Price

APM Gas Price (India)

Regulated and international urea prices : The gap is widening

18

Urea: Regulatory framework

Selling prices fixed at Rs 4,830/ ton Assured post tax return of 12% on capital employed compensated by way of subsidies Natural gas made available to manufacturers at subsidized prices Delay in subsidy payments leading to working capital crunch
Urea Economics Feedstock Comparison
(INR/ton) Feedstock (a) Conversion Cost (b ) Other Overheads ( c ) 2,102 1,010 1,500 Energy Input mmbtu 20 9^ 51* 25 37
10,000 8,000 6,000 4,000 2,000 0 Feedstock Cost

Urea Economics: Feedstock Natural Gas

(Rs/ ton)

Company Realization

Subsidy component

MRP Rs 4,830/ton

Gas price of USD 2.6 /mmbtu

Cost of Conversion RoCE 12%

($/ton)

Naptha Based(~30%) (INR/ton) 15,582 3,000 1,500 ($/ton) 380 73 37

Total Op Cost (d = a+b+c)

Assured return ( e) Cost + Return (e - d) Subsidy

4,612
3,086 7,698 2,868

112
75 188 70

20,082
3,600 23,682 18,852

490
88 578 460

Source: FAI, ENAM Research, Note: * Gas under APM of $2.6/MMBTU, ^ Including electricity input

Focus area should be players with expansion plans & smart cash utilization
19

India: Poised to change

20

Fertilizer Demand: Expected to remain firm

Fertilizer demand likely to remain firm

India: Minimum potential farm land

Brazil Russia USA EU Argentina China Canada India 0 50 100 Used 150 (mn ha)

Rising food grain demand with an increasing population and limited acreage to translate into additional fertilizer needs There is no perfect substitute for chemical fertilizers due to limitations of organic fertilizers in terms of quality as well as availability

Potential to increase acreage: Zero

Additional land for farming is unavailable thus improving fertilizer consumption

200 Potential

250

300

Source: FAO/IBGE, MB Associates, EMBRAPA

Yield response (monetary value) to N fertilizer rate

1,200 1,000 800 600 400 200 0 0 50 100 150 200 250 300
Fertilizer application, Kg N/ha
Source: Broadbalk, Rothamsted , ENAM Research

India : Low Consumption/ Hectare

India World USA Brazil Pakistan France China 0 50 100 150 200 250 300 (Kg/Hectare)

(Euro/Hect)

Source: CRIS Infac, ENAM Research

Rising population and limited acreage fuelling fertilizer demand growth

21

Subsidy Burden: Mounting at a rapid pace

Fertilizer subsidy as a percentage of fiscal deficit is ~15% and is mounting Fertilizer subsidy burden on the rise

Subsidies increasing at a rapid pace Subsidy spending (including the concession on P &K) touched Rs 22.5 bn in FY07, growing at a CAGR of 20% in last 5 years Share of fertilizer subsidies as a percentage of total explicit subsidy spending has increased alarmingly

280 240 200 160 120 80 40 0

Urea Subsidy Spending

(Rs bn)
CAGR 12%

Indigenous Urea
Source: FAI, ENAM Research

Imported Urea

P&K

Rising fertilizer imports

Currently, costly urea being imported instead of incentivising cheaper domestic production Subsidy spending on imported urea increasing at a rapid pace A large portion of P & K is being imported due to the unavailability of raw material

70 60 50 40 30 20 10 0

Explicit Subsidy Spending

(%)

Fertilizers

Petroleum

Railways

Source: NIPFP, FAI, ENAM Research

Rising subsidy burden expected to force policy changes

22

Interest

Export

Other

Food

2007-08E

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Natural gas availability?

Increased availability of natural gas is likely to ensure undisrupted supply of natural gas for fertilizer units Increased domestic supply likely to soften natural gas prices Government intervention and private investments in the sector remain integral to pricing decisions
Comparative gas prices
10 8 6 4 2 0 APM
Source: FAI, ENAM Research

Manufacturing Process : Urea & DAP

Natural gas Air Ammonia plant NH3 Phosphoric acid plant H2PO4
Source: YARA, ENAM Research

CO2 Urea

Rock

DAP / MAP

($/mmbtu)

Profit Potential: Urea & DAP

Urea Natural Gas Cost ($/mmbtu) Natural Gas Requirement/ton Natural Gas Cost as a % of total Cost 2.6 27.1 62.7% 4,612 12,840 DAP 2.6 7.7 6.9% 13,000 17,742

R-LNG

Spot

Total Cost of Manufacturing (Rs/Ton) International Selling Price (Rs/Ton)

Source: CRIS Infac, ENAM Research

Relatively cheap pricing of gas is critical!

23

Natural Gas: Huge supplies in the offing

Domestic supply expected to increase manifold with natural gas discoveries in the Krishna Godavari basin and the Mahanadi delta Cross border pipelines expected to further increase natural gas availability in the country
Natural Gas: Current Demand Pattern
50% 40% 30% 20% 10% Fertilizers 0% Power Sponge Iron Petrochem City Gas LPG Etc Other (mmscmd)

Domestic Suppliers
300 250 200 150 100 50 0 53 FY07 49 FY08E 45 FY09E 49 FY10E 51 FY11E (mmscmd)

Domestic Gas supplies

300 250 200 150 100 50 0 FY06
Source: FAI, ENAM Research
(mmscmd)

CAGR: 21%

300 95 FY12 Gas Supply

ONGC Joint Venture Gas ONGC/GSPC KG Bas CBM

OIL Reliance KG Basin Qatar LNG

Huge supply likely with new Source:discoveries CRIS Infac, ENAM Research
24

Government Imperatives

25

Breaking the vicious subsidy cycle

Government signaling policy changes

Incentives offered to industry for operating above installed capacity levels Naphtha and LSHS units ordered to convert to natural gas within a period of two to three years

Incentivizing local supply : Decontrol in a phased manner

Vicious cycle of subsidy

Controlled ROI

Decontrol in a Phased Manner?

Direct subsidy to farmers

`

Rural India benefiting from government support (See

Disaster : Mounting subsidies

Deficit: Limited local capacity addition

annexure 1 & 2)
`

Market driven agro pricing

Dual subsidy regime Market forces

Surmounting subsidy: Growing import volumes & rising urea prices

Decontrol: Likely to break the vicious circle

26

Government Actions?
Incentivising domestic production

Steps conducive to increment in domestic production are likely to be offered Urea units operating above full capacity utilization currently allowed to retain a portion of additional profits

Urea Profit Potential

15,000 12,000 9,000 6,000 3,000 0 $3.00 Cost of Feedstock Conversion Cost (Electricity) Profit
Source: FAI, ENAM Research

(Rs/ton)

Pricing Possibilities

Dual subsidy regime

` `

Limiting subsidy only to small and medium farmers Providing cap of 120 kg of subsidized fertilizers for 2 acres or lesser farmland, expected to benefit the industry Huge room for profits in deregulated scenario with prices being determined by market forces Cheaper gas availability (compared to global spot prices) and conversion cost advantage likely to enable export of fertilizers (mainly N) to developed nations

Deregulation of industry
`

$4.00

$5.00

Conversion Cost (NG) Admin. Charges

Exports - Is it possible??
`

Greenfield 16% ROCE Capital Cost (Rs/ ton) Cost of Natural Gas assumed ($/ mmbtu) EBIT Depreciation @ 5% EBITDA Cost of Production Selling Price (Rs/ Ton) $2.6 3,200 1,000 4,200 4,612 8,812 20,000 $4.0 3,200 1,000 4,200 6,170 10,370 $5.0 3,200 1,000 4,200 7,283 11,483

Brownfield 16% ROCE 16,000 $2.6 2,560 800 3,360 4,612 7,972 $4.0 2,560 800 3,360 6,170 9,530 $5.0 2,560 800 3,360 7,283 10,643

27

How to choose companies?

28

Cos near the proposed pipeline: Set to gain

Naphtha based producers ordered to convert to gas Existing urea producers likely to get undisrupted gas supply
Iran Turkmenisthan
NFL NFL NFL CHAMBAL INDO GULF

Units located near the proposed gas pipeline set to gain

GSFC GNFC RCF RCF

Bhatinda

Location of Mfg. Facility

Co. Name Chambal Fert Coromandel Fert Gujarat Narmada Valley Fert Godavari Fert Gujarat State Fert Nagarjuna Fert Zuari Indust Near Existing Pipeline Partly No Yes No Yes No No Near Proposed Pipeline Yes Yes Yes Yes Yes Yes Yes

A1 BLOCK, Coromandel Godavari ZACL NFCL DAP/ MOP Mfg.facility Coromandel Urea Mfg. facility Existing Lines Proposed Pipelines Proposed Cross border Pipelines MYANMAR

Source: GAIL, ENAM Research

Source: GAIL, ENAM Research

Will reduction in gas cost be a pass through??

29

Fertilizer Companies: Performance Snapshot

Period Chambal Fertilizers & Chemicals Ltd Main Product: Urea & Ammonia Diversification: Fibers, Shipping Coromandel Fertilisers Main Product: Ammonia Phosphate Fertilisers Diversification: None Gujarat Narmada Valley Fertilizers Co Ltd Main Product: Urea, Ammonium Nitro Phosphate Diversification: Chemical Business Godavari Fertilisers & Chemicals Ltd Main Product: DAP & Complex Fertilizers Diversification: None Gujarat State Fertilisers Main Product: Fertilizers - Urea, DAP, NPK Diversification: Chemical Business Nagarjuna Fertilizers & Chemicals Main Product: Urea, Ammonia Diversification: None Zuari Industries Ltd Main Product: Urea, Ammonia, Compund Fert.s Diversification: None
Source: Company, ENAM Research

DPS (Rs) 2 2 2 2 2 2 4 5 4 1 2 5 2 5 5 2 2 3

Dividend Payout (%) 50 38 74 30 28 29 28 23 20 21 28 30 10 15 15 NA NA NA NA 14 7

Dividend Yield (%) 5.3 5.5 5.9 2.4 2.4 3.2 4.3 4.6 4.1 1.4 2.5 4.4 1.1 2.8 3.0 2.7 1.0 2.1

RoE (%) 44 27 13 37 21 21 26 29 25 42 29 42 27 23 20 1 4 2 (2) 17 24

Op. Profit Fert. NonFert. 80 83 75 100 100 100 4 12 16 100 100 100 34 43 38 100 100 100 47 54 84 53 46 16 66 57 62 96 88 84 20 17 25

Manufacturing Location Existing Projected Pipeline Pipeline

FY05 FY06 FY07E FY05 FY06 FY07E FY05 FY06 FY07E FY05 FY06 FY07E FY05 FY06 FY07E FY05 FY06 FY07E FY05 FY06 FY07E

Partly

Yes

No

Yes

Yes

Yes

No

Yes

Yes

Yes

No

Yes

No

Yes

Co.s with high RoEs and healthy payout are attractive opportunities
30

Fertilizer Companies: Fundamentals

Company Period Net Sales (Rs mn) 29,149 28,652 29,470 15,251 18,469 20,655 18,226 21,476 27,393 11,936 15,185 18,005 26,066 28,307 33,187 12,664 14,529 18,152 28,816 35,690 36,132 EBITDA (Rs mn) 5,448 5,783 4,601 1,491 1,807 2,181 4,035 5,027 5,763 503 683 1,169 4,385 5,520 4,869 3,027 3,042 3,079 1,027 1,450 2,456 Adj. PAT (Rs mn) 1,730 2,237 1,158 716 878 1,007 2,267 3,060 3,265 171 261 493 1,321 2,644 2,803 128 654 317 (23) 495 1,216 FDEPS (Rs) 4 5 3 6 7 8 15 20 21 5 8 15 17 33 35 0 1 1 (1) 17 41 ROCE (%) 35 20 16 35 19 21 26 33 32 26 14 19 31 20 18 11 5 6 14 10 13 RoE (%) 44 27 13 37 21 21 26 29 25 42 29 42 27 23 20 1 4 2 (2) 17 24 PE (X) 9.4 6.8 12.5 12.6 11.9 9.1 6.5 5.1 5.0 15.3 11.0 6.7 9.7 5.4 4.9 19.9 NA 13.3 3.4 EV/ EBITDA (X) 5.1 4.1 4.8 7.6 8.0 5.6 4.7 3.6 3.2 10.0 10.7 6.8 5.4 4.5 4.2 6.3 11.7 13.4 NA Chambal Fertilizers & Chemicals Ltd (CMP: 36) (MCap: USD337mn) Coromandel Fertilisers (CMP: 82) (MCap: USD232mn) FY05 FY06 FY07E FY05 FY06 FY07E

Gujarat Narmada Valley Fertilizers Co Ltd FY05 (CMP: 112) FY06 (MCap: USD365mn) FY07E Godavari Fertilisers & Chemicals Ltd (CMP: 105) (MCap: USD75mn) Gujarat State Fertilisers (CMP: 178) (MCap: USD316mn) Nagarjuna Fertilizers & Chemicals (CMP: 24) (MCap: USD246mn) Zuari Industries Ltd (CMP: 167) (MCap: USD110mn)
Source: Company, ENAM Research

FY05 FY06 FY07E FY05 FY06 FY07E FY05 FY06 FY07E FY05 FY06 FY07E

31

Annexures

32

Annex.1: Govt. spending on rural initiatives

Bharat Nirman: The most ambitious rural plan in India (~USD40bn)
Private sector participation on the rise Infrastructure spending: Bharat Nirman

Rural connectivity

Higher Productivity
Access to credit, micro finance, insurance

Scientific Know how

Roads: ~USD11bn for rural road connectivity Telephony: 67,000 villages to get phones by end-07 Irrigation & Water supply: Addl. Irrigation of 10mn ha and clean water for 56,000 habitations (~USD21bn) Rural Housing: >1.5mn houses to be constructed every year for next 4 yrs (~USD3.2bn) Electricity: For >125,000 villages (USD3.8bn)

Increased Virtuous Cycle investments of Prosperity

Higher Income

Credit: Agri credit to double in next 3 yrs. Bank lending was up 35% in the last 2 yrs

~2.2mn SHGs given credit link of ~USD2.5bn

Higher Risk Appetite

Commodity Exchanges

Higher Spending

Corporate participation: RIL, ITC, & Bharti etc. giving a fillip to contract farming Resurgence of rural India :
Regulatory changes

Job growth in rural areas was higher at 3.3% v/s 1.7% for urban enterprises Rural enterprises grew 5.5%, i.e double the growth rate during last 2 decades

Rising rural incomes!

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Annex.2: Rural tilt in government policies

Amendments by the Government to give impetus to Agriculture & encourage trade in perishable goods
Act APMC Act Status 14 States (Already Banned) Pan India Pan India Benefits

No need for farmers to sell to registered intermediaries Farmers can sell to highest bidder Move towards Information Driven markets Integrate 16 laws governing food industry into one. Remove conflicts between existing laws Allow warehouse receipts to become negotiable instruments Lead to greater banks lending due to mitigation of default risk Reduce tax evasion Increase tax/ GDP ratio Farmers will not need a license to hold commodities A free market for Essential commodities Move from highly subsidised products to market demand

Integrated Food Law Warehouse Receipt Act

VAT Essential Commodities Act Minimum Support Price (MSP)

Pan India Pan India (To Be Banned) To be phased out

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ENAM Securities Pvt. Ltd.

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CONFLICT OF INTEREST DISCLOSURE We, at ENAM, are committed to providing the most honest and transparent advice to our clients. However, given the nature of the capital markets, from time to time we are faced with situations that could give rise to potential conflict of interest. In order to provide complete transparency to our clients, before we make any recommendations, we are committed to making a disclosure of our interest and any potential conflict IN ADVANCE so that the interests of our clients are safe- guarded at all times. In light of this policy, we have instituted what we believe to be the most comprehensive disclosure policy among leading investment banks/brokerages in the world so that our clients may make an informed judgment about our recommendations. The following disclosures are intended to keep you informed before you make any decision- in addition, we will be happy to provide information in response to specific queries that our clients may seek from us. Disclosure of interest statement (As of Jun 27, 2007) 1. Analyst ownership of the stock 2. Firm ownership of the stock 3. Directors ownership of the stock 4. Investment Banking mandate 5. Broking relationship Chambal Fertilizers No No No No No Coromandel Fertilizers No No Yes No No GNFC No No Yes No No Godavari Fertilizers No No Yes No No GSFC No No No No No Nagarjuna Fertilizers No No Yes No No Zuari Industries No No No No No

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