Indian Fertilizer Sector Annual Report Analysis

Fertilizer Sector
September 25, 2013
Annual Report Analysis
Rohan Gupta rohan.gupta@emkayglobal.com +91-22-66121248 Chetan Thacker chetan.thacker@emkayglobal.com +91-22-66121272
INDUSTRY REPORT
Fertilizer Sector
Contents
Synopsis ...................................................................................................................................................................................................................................3 Chambal Fertilizers................................................................................................................................................................................................................ 13 Coromandel International..................................................................................................................................................................................................... 16 Deepak Fertilizers................................................................................................................................................................................................................. 19 GNFC....................................................................................................................................................................................................................................... 22 GSFC ....................................................................................................................................................................................................................................... 27 Mangalore Chemicals .......................................................................................................................................................................................................... 31 NFL .......................................................................................................................................................................................................................................... 34 RCF.......................................................................................................................................................................................................................................... 37
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September 25, 2013
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Affected by sharp rise in working capital

Performance of Indias fertiliser companies was not encouraging in FY13, due to severe pressure the industry faced. Hence, we have analyzed some key fertiliser firms and their balance sheets, and prepared the following comparative analysis for the period FY11-13.
n After benefiting from Nutrient Base Scheme (NBS) in
September 25, 2013
Chambal Fertilizers Coromandel International Deepak Fertilizers GNFC GSFC Mangalore Chemicals NFL RCF
CMP: Rs35 CMP: Rs222 CMP: Rs107 CMP: Rs60 CMP: Rs50 CMP: Rs51 CMP: Rs20 CMP: Rs31
complex fertiliser since 2010, industry players witnessed pressure on profitability due to high inventory and rising fertilizer prices in FY13 FY13 after growing at a CAGR of 16% in FY08-12
n Complex fertiliser volumes declined by 23% to 23mn mt in n Delays in fertiliser subsidy payments from the government
and a sharp rise in receivables (increased 3.8x over FY11) has spurred the working capital requirement
n The increase in working capital has been one of the biggest
challenges faced by the companies in FY13. It is also evident from the rise in the working capital cycle from 45 days in FY11 to 121 days in FY13 companies debt almost doubled from Rs202bn in FY11 to Rs360bn by FY13 those covered in our analysis. D/E also increased to 1.5x FY13 from 1x in FY11
n Burdened by the spiraling working capital requirement, the
n Higher debt also spurred the interest cost, as the companies
paid interest of Rs19.6bn in FY13 vs. Rs12.5bn in FY11. As a result, 27% of EBIDTA went in interest payment in FY13 as against 16% in FY11. The firms like NFL and Zuari Agro have been affected the most due to the rise in interest cost increase in working capital, affected ROCE of the industry sharply, which declined to 9.9% in FY13 from 18.7% in FY11 for pushing the inventory in the system. However, it has declined significantly in FY13, as it accounted for 16.2% of total sales as against 24.4% in FY12 and 19.3% in FY11 for fertiliser has been the only revival hope for the industry. The industry is also optimistic about reduction in imports and trading, which will help domestic manufacturers
n Pressure on EBIDTA and higher interest cost, along with
n Trading of complex fertiliser has been key a driving factor
n Favourable monsoon and the subsequent pick-up in demand
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Fertilizer Sector
Fertilizer Sector
A study of Management Discussion and Analysis (MDA) of various fertilizer companies has highlighted the following points:
Enthusiasm about NBS wades as lop sided policy leads to imbalance fertilizer use
Enthusiasm about NBS is cooling off now

After the introduction of the Nutrient-Based Scheme (NBS) in FY10, where the government partially decontrolled the complex fertilizer sector by introducing a fixed subsidy regime on all complex fertilizers, the excitement in the industry is slowly receding now. Though NBS was a step in the right direction, as it helped the industry in improving its efficiency, raw material contracting and product innovations , longer-than-expected delays in covering urea under NBS has taken some sheen of the policy.
Imbalanced use of fertilizer as price difference continues to widen between urea and complex
On the one hand, complex fertilizer prices have been shooting up post the introduction of NBS, as the same has increased from Rs 9350/mt in FY10 to Rs 24,000/mt by FY13 for DAP, on the other, urea prices still being controlled by the government have not witnessed any revision. This has resulted in imbalanced use of urea and complex fertilizer. As sales of urea increased by 7% FY13/FY11, complex fertilizer sales dropped by 21% over the same period.
Reduction in subsidies in line with the drop in global fertilizer prices

The financial year 2012-13 was the third year since the implementation of the NBS for P&K fertilizers. The government has announced NBS rates for P&K fertilizers for 2013- 14. Subsidy on DAP has been reduced by 14% to 12,350pmt (14,350pmt in the previous year), while MoP by 22% to 11,300pmt (14,400pmt in the previous year). These rates have been reduced by the government in line with the decline in global prices of DAP and potash. The subsidy rates for complex fertilizers have been reduced based on the nutrients. Subsidy on N is revised from 24.0/kg to 20.9/kg, P is reduced from 21.8/kg to 18.7/kg, and on K from 24.0/kg to 18.8/kg. Monsoon and rupee depreciation impact growth and profitability
Poor monsoon impacted demand; currency depreciation affected costs

Poor monsoons since the second half of FY12 and the whole of FY13 led to a drop in demand of complex fertilizers. Currency depreciation resulted in a sharp rise in prices of both end-products and input costs, particularly natural gas, ammonia, phosphoric acid and rock phosphate. The spike in international prices in FY12 worsened the situation further.
Early monsoon arrival with wide distribution positive for the sector though timely receipt of subsidy remains a concern
Management positive about monsoon; however, subsidy payment remains a key concern
A favorable monsoon has buoyed the hope of most fertilizer companies in FY13, which may help revive the flagging industry. The increase in MSP and the higher rural income are likely to support the demand, thereby addressing the supply glut situation to a large extent. Delays in government subsidy payments and mounting receivables have been the key concerns of most companies in the current year. Volatility in currency also remains a major concern for the industry.
Emkay Research
September 25, 2013
Fertilizer Sector
Our analysis of key financials

Deterioration in working capital cycle
Receivable days increase d to 113 from 34 days as industry faces inventory and subsidy issues
Working capital requirement of the industry has been affected significantly, mainly due to a sharp increase in receivables. Higher inventories in the system, largely with distributors, have affected collections . As a result, trade receivables for the companies in our analysis increased 3.8x in FY13/FY11, resulting in increase in receivable days to 113 days in FY13 from 34 days in FY11. Delays in government subsidies also affected receivables of the industry. However a large share of subsidies pending has been received in H1FY14 which is likely to improve companies balance sheet going forward.
Exhibit 1: Aggregate Receivable Days
120 Number of days 100 80 60 40 20 0 FY11
Source: Company, Emkay Research
Exhibit 2: Receivable Days by company

113
Company Name RCF
FY11 55 44 65 57 10 53 6 100 51 3
FY12 109 106 96 84 35 73 33 121 164 32
FY13 135 158 166 87 73 100 24 170 198 56
75
Chambal Fertilizers GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
34
FY12
FY13
Inventory and Payables days increased marginally

Inventory days increased marginally from 36 days in FY11 to 44 days in FY13. Inventory days have not witnessed significant changes , as companies have passed on the burden of higher inventory to distributors. Payable days of the industry rose from 26 days to 36 days . While other players have the benefit a credit period of 20-40 days, Coromandel International has been able to enjoy higher credit days of 96 days , which has helped the company to keep its working capital cycle under control.
Exhibit 3: Aggregate Inventory Days
46 44 Number of days 42 40 38 36 34 32 FY11
Exhibit 4: Inventory Days by company Company Name

44 42
FY11 35 22 42 35 72 57 25 23 51 24
FY12 65 28 43 32 70 56 21 26 47 34
FY13 63 55 39 33 59 54 32 23 43 36
RCF Chambal Fertilizers GSFC Deepak Fertilizers
36
Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL

FY12 FY13
Zuari Agro IFFCO

Emkay Research
September 25, 2013
Fertilizer Sector
Exhibit 5: Aggregate Payable Days

40 35 Number of days 30 25 20 15 10 5 0 FY11
Exhibit 6: Payable Days by company

34 36
Company Name RCF Chambal Fertilizers GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
FY11 33 19 23 15 72 34 17 27 27 11
FY12 70 23 33 32 77 44 30 22 46 9
FY13 39 28 31 28 96 19 44 18 25 26
26
FY12
FY13
Working capital goes up to 121 days from 45 days

The working capital cycle of almost all the players analyzed by us deteriorated significantly. The working capital days for the peer set analyzed by us deteriorated from 45 days in FY11 to 121 days in FY13, mainly due to a rise in receivable days. Though there has been deterioration in working capital of almost all companies, Zuari Agro, Chambal Fertiliser, RCF and GSFC have witnessed the maximum increase in working capital.
Exhibit 7: Aggregate Working Capital Cycle
140 120 Number of days 100 80 60 40 20 0 FY11
Exhibit 8: Working Capital Cycle by company Company Name

121
FY11 57 46 84 78 9 76 14 96 74 16
FY12 105 111 106 84 28 85 24 125 165 57
FY13 159 185 175 92 36 135 13 174 216 65
RCF Chambal Fertilizers GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
84
45
FY12
FY13
Emkay Research
September 25, 2013
Fertilizer Sector
Significant increase in leveraging

As fertiliser companies have witnessed a significant increase in working capital, this has adversely affected their balance sheets. Debt on the companies balance sheet has almost doubled to Rs360bn by FY13 from Rs202bn in FY11. As a result, D/E of the companies in our analysis increased from 1x in FY11 to 1.5 x by FY13. Deterioration in net debt/equity has even been sharper since it increased from 0.7x to 1.4x. A drop in cash and equivalents from Rs64bn in FY11 to Rs23bn by FY13 has affected companies balance sheets further, as surplus cash has been used in funding working capital requirement. The companies like National Fertiliser and Zuari Agro have seen sharp deterioration in their balance sheets.
Exhibit 9: Aggregate D/E
1.6 1.4 1.2 D/E x 1.0 0.8 0.6 0.4 0.2 0.0 FY11
Exhibit 10: D/E by company

1.4 1.5
Company Name RCF Chambal Fertilizers GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
FY11 0.2 1.5 0.1 0.7 0.8 0.4 0.4 0.4 1.0 2.5
FY12 0.6 2.0 0.2 0.6 1.2 0.5 2.4 1.7 3.5 2.3
FY13 0.7 2.7 0.4 0.8 1.3 1.0 2.1 3.0 4.1 1.7
1.0
FY12
FY13
Exhibit 11: Aggregate Net Debt to Equity

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 FY11
Exhibit 12: Net Debt to Equity by company Company Name

1.4
FY11 0.0 1.1 -0.1 0.4 0.3 0.3 0.3 0.3 0.6 1.9
FY12 0.3 1.8 -0.1 0.5 0.8 0.4 2.2 1.7 3.1 2.1
FY13 0.7 2.5 0.3 0.5 1.1 1.0 2.1 3.0 3.9 1.7
RCF Chambal Fertilizers GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
1.1
0.7
FY12
FY13
Emkay Research
September 25, 2013
Fertilizer Sector
Profitability under pressure

Sharp jump in interest cost has eroded a large share of profitability
Increase in debt has adversely affected the interest cost of the industry, as the interest outgo of the companies covered in our analysis increased by 57%. The interest coverage ratios deteriorated significantly for the analyzed peer set from 6.2x in FY11 to 3.7 x in FY13. The industry has paid 27% of its EBIDTA in interest payment in FY13 as against 16% in FY11. Here, too, due to hugely leveraged balance sheet, the companies like NFL and Zuari Agrochem have witnessed complete erosion in profitability due to payment of interest.
Exhibit 13: Interest as a percentage of EBITDA
75% 60% 45% 30% 15% 0%
IFFCO
RCF
GNFC
GSFC
Coromandel International
Mangalore Chemicals & Fertilizers
NFL
Chambal Fertilizers
Deepak Fertilizers
FY11
FY12
FY13
EBITDA margin contraction due to higher sales, though absolute EBIDTA down marginally
EBITDA margins of the peer group, which we have compared, have shrunk from 12% in FY11 to 9.4% in FY13. However, the aggregate EBIDTA of the companies covered dropped marginally by 6% in absolute terms. The increase in fertilizer prices boosted the top line without a proportionate increase in per mt EBIDTA, contributing to a drop in EBIDTA margins.
Exhibit 14: Aggregate EBITDA Margins (%)
12% 12% 11% 11% 10% 10% 9% 9% 8% FY11
Exhibit 15: EBITDA Margins by company Company Name RCF Chambal Fertilizers FY11 8% 14% 26% 24% 15% 17% 6% 5% 7% 11% FY12 9% 12% 24% 26% 11% 15% 6% 5% 5% 9% FY13 9% 9% 15% 14% 9% 15% 7% 1% 5% 11%
12%
10% 9%
GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
FY12
FY13
Emkay Research
September 25, 2013
Zuari Agro
Industry
Fertilizer Sector
Higher Interest cost and lower margins affected companies bottom line adversely
An increase in interest cost, coupled with a drop in margins , has led to contraction in net profit margins across the board. At the industry level, the PAT margin contracted to half from 6% in FY11 to 3% in FY13. In absolute terms, the net profit was lower by 33% between FY11and FY13. The contraction in margin has been steeper for the companies with large contributions from chemical and complex fertilizers compared to urea players. On the other hand, tax expenses have remained steady at 32% in FY13 compared with 33% and 29% in FY12 and FY11, respectively.
Exhibit 16: Aggregate PAT Margin
7% 6% 5% 4% 3% 2% 1% 0% FY11
Exhibit 17: PAT Margin by company Company Name FY11 4% 4% 15% 11% 9% 9% 3% 2% 3% 4% FY12 4% 2% 14% 9% 6% 7% 2% 2% 2% 3% FY13 4% 3% 8% 5% 5% 6% 2% -3% 1% 3% RCF Chambal Fertilizers
4% 3%
6%
GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
FY12
FY13
Trading activity declined due to huge inventory in the system

Trading activity increased sharply during FY11-12, as companies wanted to benefit from the NBS, besides non-complex fertilizer manufacturers , too, entered in market to reap the benefit of their distribution system. However, a sharp jump in inventories, delays in subsidy payments from the government and mounting receivables have discouraged trading activity in FY13, mainly in H2FY13. As a result, trading as % of sales dropped to 16% in FY13 as against 24% in FY12 and 20% in FY11. While players like Chambal Fertiliser and Zuari Agro increased their trading significantly, a few new significant players such as GSFC also emerged.
Exhibit 18: Aggregate Purchase of traded goods as a percentage of sales
30% 25% Percentage 20% 15% 10% 5% 0% FY11
Exhibit 19: Purchase of traded goods as a percentage of sales Company Name FY11 23% 25% 0% 14% 11% 2% 29% 2% 37% 27% FY12 29% 33% 0% 18% 19% 4% 40% 0% 46% 29% FY13 13% 38% 16% 23% 17% 2% 15% 0% 38% 8% RCF Chambal Fertilizers GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
24% 20% 16%
FY12
FY13
Emkay Research
September 25, 2013
Fertilizer Sector
Return ratios deteriorated as working capital goes up

ROCE down from 18% to 10%
The confluence of events highlighted above led to a sharp contraction in RoCE of the analyzed peer set. The RoCEs for the peer sets dropped from 18.7% in FY11 to 9.9% in FY13. The drop was largely on account of higher capital employed due to a sharp increase in working capital.
Exhibit 20: Aggregate RoCE (%)
20% 15% 10% 5% 0% FY11
Exhibit 21: RoCE (%) by company Company Name RCF

14% 10%
19%
FY11 15% 14% 43% 21% 43% 13% 20% 9% 19% 13%
FY12 15% 13% 36% 31% 25% 13% 10% 5% 9% 11%
FY13 12% 8% 15% 14% 17% 9% 9% -1% 7% 12%
Chambal Fertilizers GSFC Deepak Fertilizers Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL Zuari Agro IFFCO
FY12
FY13
Emkay Research
September 25, 2013
10
Fertilizer Sector
Other qualitative analysis from annual reports
Raw material availability and cost impacted profitability: The availability of raw materials impacted sales and profitability of companies to a large extent. Inadequate availability of phosphatic inputs , due to supply-side issues and higher international prices , impacted the timely availability of the same. Further, volatility on input prices , particularly in global markets impacted the performance. As far as complex fertilizer players are concerned, volatility in prices and availability of phos acid impacted growth. Further, the companies in the chemical space such as GSFC and Deepak Fertilizers were impacted by adverse spreads in raw material and output prices. As far as urea players are concerned, they were impacted by a lack of availability of natural gas in domestic markets . As a result, companies had to resort to imports. Sharp increase in traded goods portfolio in end-FY12 added to supply glut: A sharp increase in the traded goods portfolio of most of these companies in FY12 accentuated the supply glut witnessed in FY13. Most companies tried to benefit from the NBS and rising prices of complex fertilizer in global markets. Most of these imports came into the country in the second half of FY12. The rising complex fertilizer prices, along with adverse weather conditions in FY13, led to the inventory pile up with dealers and distributors. Monsoons to help revive growth: The early onset of the monsoons in FY14, coupled with healthy distribution of the same, has led to an increase in acreage in the current year. As a result, the industry participants expect the inventory situation to improve in the current year. Our analysis of the annual reports of the peer set points towards the fact that after witnessing a tough couple of years, industry participants are hopeful that supply-side issues would be addressed this year, primarily due to good monsoons. Receivable materialization to help reduce strain: On the balance sheet front, the companies expect the strain to reduce, particularly on the receivables side, primarily due to release of pending subsidies. This will help ease some amount of pressure as far as the financial performance is concerned. Further, with the government releasing a large part of last years subsidy, the strains may ease a bit; however, with the swift depreciation in the rupee, the governments subsidy budget is expected to overshoot even in the current year, which may lead to delayed payments for this year. Rupee depreciation may weigh on positive effects of a good monsoon: Rupee depreciation poses a key worry, as it may weigh negatively on input costs of these companies , while at the same time make imported fertilizers costlier. Further, as some of these companies have foreign currency loans, the translation effect will impact their financial performance. Currency depreciation may also lower the benefit of softening input prices like ammonia, phosphoric acid, urea and DAP, which will help cushion some impact of the swift rupee depreciation.
Thus, the revival in the monsoons though may provide a silver lining to the industry, the receivable situation and the impact of rupee depreciation will weigh negatively on the sector. The ability of the government to release subsidies in a timely manner needs to be watched closely. On the positive side, the increase in the MSP and the higher rural income will help revive demand, thereby addressing the supply glut situation to a large extent.
Emkay Research
September 25, 2013
11
Fertilizer Sector
Exhibit 22: Key take away Company Name RCF
Positives Early onset of monsoons leading to better sowing
Negatives Rupee depreciation likely to impact raw material costs High volatility in input prices and increased competition in the chemical segment leading to volatility in profitability
Chambal Fertilizers
Early onset of monsoons to help revive demand Drop in international prices of raw material to provide some cushion from the swift depreciation of currency
Significant increase in landed price of natural gas Expect tough conditions in shipping business to continue High inventory in the system which will take sometime to correct High cost of ammonia impacting profitability Sluggish demand from the mining sector impacting TAN business
GSFC Deepak Fertilizers Ltd.
Early onset of monsoons to help revive demand Revival in monsoons to provide some fillip
Focus on international markets of Brazil, South Africa and South East Asia for its Agrochemical business Revival in monsoons to help address the glut in the market
Rupee depreciation to impact raw material costs NBS based fertilizer subsidy for complex fertilizer players may be reduced to contain the subsidy bill Sharp increase in furnace oil cost to impact performance High amount of receivables of subsidy both on account of sales and capital expenditure ANP fertilizer sales may be impacted due to supply slut, low er international prices and government indication on selling prices Currency depreciation and increasing fuel cost could impact margins
Mangalore Chemicals & Fertilizers NFL GNFC
Conversion from naphtha to gas to be c ompleted by mid 2014 Revival in monsoons to provide some fillip Revival in monsoons to provide some fillip New TDI plant commissioning to aid in growth of chemical segment Lower raw material and fertilizer prices in the international markets to provide some cushion from depreciating currency
Source: Emkay Research, Company
Emkay Research
September 25, 2013
12
Challenges in all the segments

n Chambal Fertilisers focus remains on urea and trading of
September 25, 2013
Rating Accumulate CMP Rs35
Previous Reco Buy Target Price Rs63

NA/NA -36 5,874 19,856
complex fertilizer, it is leveraging its distribution strength. Trading of non-urea fertilizer products like specialty and water soluble fertilizer contribute higher profit margins by FY13, and its contribution to profit also increased from 17% to 36% in FY13/FY11. However, trading is likely to soften in current year due to huge inventory in the system gas, pushed production cost of urea and has affected profitability
n Trading revenues doubled from Rs14.5bn in FY11 to Rs31bn
EPS Chg FY14E/FY15E (%) Target Price change (%) Nifty Sensex
n Higher uses of spot RLNG, due to lower availability of natural
Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg
1M 4 -2
3M -1 -6
6M 12M -32 -36 -52 -55
n Worldwide shipping business continues to remain sluggish,
with pressure on freight rates. This has adversely impacted the performance of the business and the outlook for shipping industry continues to remain weak was under pressure. However, it has picked up momentum from second quarter onwards receivables and inventory days and, more importantly, delays in government subsidies
Relative price chart

80 Rs % 0 70 -12
n Performance of the textile business at the beginning of FY13
60
-24
n Working capital deteriorates on account of increase in
50
-36
40
-48
30 Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
-60 Sep-13
n The recent swift depreciation in the rupee is likely to add to
Chambal Fertilisers (LHS)
Rel to Nifty (RHS)
Source: Bloomber g
pressures on profitability, particularly on account of the higher cost of landed natural gas prices
Stock Details
Sector
Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)
Agri Input & Chemicals CHMB IB 4,162 10 416 77/ 31 14/ 230 1,671,516 0.9
n Further, the company has witnessed an increase in short-
term foreign currency loans in FY13 to finance the working capital need. Hence, the rupee depreciation would have a negative impact on the same 185 days by FY13 has increased the companys debt as D/E goes up to 2.7x from 1.5x
n Sharp jump in working capital days from 46 days in FY11 to
Shareholding Pattern (%)

Mar'13 Dec'12 Sep'12 Promoters FII/NRI Institutions Private Corp Public
Source: Bloomberg
55.7 7.5 9.9 6.1 20.9
55.1 8.3 9.9 6.3 20.4
55.1 9.6 9.2 6.1 19.9
13 Emkay Global Financial Services Ltd. 13
Emkay
Chambal Fertilisers
Chambal Fertilisers
High cost pressure and supply glut impact profitability

The lack of availability of domestic natural gas , coupled with the supply glut in the phosphatic and complex fertilizer space, led to increased pressure on profitability of the company in FY13. The natural gas cost continued to inch higher in FY13, primarily due to a lack of availability of indigenous gas supply. As a r esult, the company had t o resort to import of high cost natural gas. The average cost of gas increased 35% in FY13 yoy, which led to a significant increase in cost pressure for the manufactured fertilizer segment. The segment level EBIT margin slipped to 13.2% in FY13 as against 16.7% in FY12. The supply glut created in the second half of FY12 intensified in FY13, primarily due to poor monsoons in FY13. The phosphatic segment witnessed a significant deterioration in the profitability margins in FY13, due to the supply glut created in the market since H2FY12.
Exhibit 1: Sales and EBITDA Margin
100 80 Rs Bn 60 40 20 FY11 Sales
16% 14% 12% 10% 8% 6% 4% 2% 0% FY12 EBITDA Margin FY13
Shipping business continues to face pressures

The global shipping industry continues to remain under pressure, mainly on account of the large demand-supply mismatch that has been created in the recent past. The shipping division of the company continued to remain under pressure in FY13. The company expects the shipping division to remain under pressure in the near term , as the supply glut, though has abated a tad, continues to remain the key overhang.
Textile division witnesses some improvement

The textile division witnessed some improvement in FY13 on the back of increase in capacity utilization from 86.4% in FY12 to 93.2% in FY13. With some improvement in demand, the company expects the performance of its textile division to remain stable to negative, as the positive impact of falling input prices is expected to be offset by increasing labour, power and fuel costs.
Software division continued to remain under pressure

The software business continued to remain under pressure even as the company undertook various initiatives to turn around the performance of the software division. The drop in revenue was attributed to a loss of a big client in CY12. The recent initiatives both on rejig of top management and the cost rationalization exercise will help turn around the performance of the division.
Exhibit 2: Segment Margins
20% 10% 0% -10% -20% -30% Own manufactured urea Trading Textile
Exhibit 3: Segment Margin Contribution

17% 14% 6% 13% 7% 0% FY12-4% -6% -17% P2O5 Shipping Software & Others FY13 -7% -19% 5% 150% 100% 50% 0% FY11 -50% Own manufactured urea Trading Textile
15%
16% 11% 6% 0% 0% FY11
FY12 P2O5 Shipping
FY13
Software & Others
Emkay Research
September 25, 2013
Percentage
14
Chambal Fertilisers
Working capital deteriorates on account of increase in receivables and inventory days:
The working capital of the company continued to deteriorate in FY13, led by increased pressure on receivables , including subsidy receivables from the government. The number of debtor days increased significantly from 44 days in FY11 to 159 days in FY13. The gross debt to equity ratio deteriorated from 1.63x in FY11 to 2.7x in FY13. The days on inventory inched higher to 55.8 days in FY13 from 27.3 days in FY11. The increase is largely attributed to a significant increase in inventory of traded goods , which rose from Rs1597.7mn in FY12 to Rs6708.1mn in FY13.
Exhibit 5: Purchase of Traded Goods

Exhibit 4: Working Capital Cycle
200 150 100 50 0 FY11 Inventory Days Payable Days
30 106 44 22 19 46 111 55 28 23 28 Rs bn 25 20 15 10 FY12 Receivable Days Working Capital Cycle FY13 FY11
30% 20% 10% 0% FY12 FY13
Exhibit 6: Net Debt to Equity and Interest Coverage

Interest Coverage Ratio 3 Net Debt to Equity 3 2 2 1 1 0 FY11 FY12 FY13 Interest Coverage 8 7 6 5 4 3 2 1 0
Exhibit 7: RoCE
15% 14% 13% 12% 11% 10% 9% 8% 7% 6% FY11
14% 13%
Percentage
8%
Net Debt to Equity

FY12
FY13
Rupee depreciation to further add to pressures

The recent swift depreciation in the rupee is likely to add to pressures on profitability, particularly on account of a higher cost of landed natural gas prices. Further, the company has witnessed an increase in short-term foreign currency loans in FY13 to finance the working capital requirement. Hence, the rupee depreciation would have a negative impact on the same.
Sharp fall in receivables, repayment of working capital loans and revival in demand to act as key catalyst
Going forward, a sharp fall in receivables , particularly in the form of receipt of outstanding subsidy, coupled with the paring down of short-term debt, is likely to lead to easing of pressure on the balance sheet. Further, the benefits of a drop in international prices of urea, ammonia and DAP may not be available completely, largely due to the swift depreciation of the rupee.
Emkay Research
September 25, 2013
As percentage of sales
158
185
35
40%
15
Demand revival could counter rupee impact

n Adverse weather conditions in the second half of FY12 and
September 25, 2013
Rating Hold CMP Rs222

NA/NA -34 5,874 19,856
whole of FY13 impacted volume growth in the key markets of the company
n The company has slowed down production during the year to
align with the market requirement and also to avoid excess inventory buildup
n The timely purchase of raw materials and proactive foreign
exchange management have helped the company to improve its overall performance growth on the top line, despite adverse weather conditions, primarily due to the complete integration of the Sabero acquisition with the company partnerships to source new products, strong pipeline of offpatent products and a presence in growing geographies and segments, the crop protection segment to grow stronger and commissioned the new third granulation train (C-Train), as well as associated support facilities in 2012-13 Liberty Phosphate Ltd., leading manufacturers of Single Super Phosphate (SSP),with a presence North India, to strengthen its presence in SSP capacity of around5mn mt. Urea trading completes its product basket of fertilizer
n The crop protection unit of the company registered a 11%
Price Performance
Source: Bloomberg
1M 17 10
3M 28 21
6M 12M 14 8 -22 -26
n With its increased range of captive technicals, strategic

300 Rs % 10 270 -2
240
-14
n Coromandel completed the capacity expansion at Kakinada,
210
-26
180
-38
150 Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
-50 Sep-13
n During the year, the company acquired a 53.62% stake in
Coromandel International (LHS)
Rel to Nifty (RHS)
Source: Bloomber g
Stock Details
Sector
Agri Input & Chemicals CRIN IB 283 1 283 304/ 162 63/ 1,004 132,885 0.4
n With acquisition of Liberty, Coromandel has achieved a tal
n Efficient management of working capital has helped the
company in managing its debt. Its working capital days at 36 in FY13 is the lowest in the peer set due to delays in subsidy and capex, it still remain lower than the industry average
n Though companys D/E increased to 1.3x from 0.8x, mainly

Source: Bloomberg
63.8 6.5 7.3 5.3 17.1
63.8 7.3 7.5 4.3 17.2
63.8 7.3 7.6 4.0 17.3
Emkay
Adverse weather conditions and rupee depreciation impacts growth:

The adverse weather conditions in the second half of FY12 and whole of FY13 impacted volume growth in the key markets of the company. In absolute terms, the overall market for complex fertilizers contracted by 25-30% in FY13. Further, the rupee depreciation in FY13 led to an increase in prices of P&K fertilizers without a corresponding increase in urea. As a result of this lop sided policy, the demand for P&K fertilizers contracted in FY13. The farmer earning capability was also impacted in FY13, due to the poor monsoon. As a result, the offtake was lower. The supply glut created in the system further added to these existing pressures. On the positive side, the formulation business witnessed a growth of 16% in FY13.
110 100 Rs bn 90 80 70 60 FY11 Sales
16% 14% 12% 10% 8% 6% 4% 2% 0% FY12 EBITDA Margin FY13
Crop protection unit performs well, despite adverse weather conditions

The crop protection unit of the company registered a 11% growth on the topline, despite adverse weather conditions , primarily due to the complete integration of the Sabero acquisition with the company. The integration helped Sabero to reach newer geographies . As a result, the company was able to register topline growth. Going forward, the company management is upbeat about the prospects of this business unit. With the onset of early monsoons and given the wide distribution of rainfall, the management expects this business unit to clock in higher growth, led by leveraging Coromadels presence in the Brazilian markets, one of the largest agro-chemicals market, and its vast retail presence. Further, Sabero currently has a robust pipeline of products , which will be able to help achieve better growth going forward.
Specialty nutrient business unit: Focus on crops to drive growth

The specialty nutrient business unit witnessed weak performance, primarily on the back of adverse weather conditions and high level of sulphur product stocks in the pipeline. However, the water soluble fertilizer business and micro-nutrients performed well, registering a growth of 14% and 16%, respectively. The management remains focused on developing this particular business unit, due to its vast growth potential. As a result, the company has put in place a team to adopt a crop-based approach to identify high potential crops and drive growth.
Emkay Research
September 25, 2013
EBITDA Margin
17
Prompt inventory management helps control working capital, though receivable inch higher
Days of trade receivables continued to inch higher in FY13, moving up to 73.5 days compared with 9.8 days in FY11. The receivable days started inching higher from FY12 onwards , and the same continued in FY13. However, despite the glut in the system , the company was able to manage its inventory well. As a result, the inventory days improved in FY13 to 59.7 days as against 70.8 days in FY12. Further, this was evidenced by the increase in market share of the company, despite a difficult environment in FY13.
120 100 Days 80 60 40 20 0 FY11 Inventory Days Payable Days
Exhibit 3: Purchase of traded goods

As a percentage of sales 96 21 19 Rs bn 17 15 13 11 9 7 5 FY11 FY12 FY13 As a percentage of sales Purchase of traded goods
25% 20% 15% 10% 5% 0%
72
72
70 35
77 59 28
73 36
10
9 FY12 FY13 Receivable Days Working Capital Days
The net debt-to-equity ratio, though inched higher to 1.1x in FY13 vs . 0.3x in FY11,the same is attributable to a couple of acquisitions made by the company n these 3 years, along with a capacity expansion project at its Kakinada plant.
Exhibit 4: Net Debt to Equity
1.2 Net Debt to Equity 1.0 0.8 0.6 0.4 0.2 0.0 FY11 Net Debt to equity
Exhibit 5: RoCE (%)

14 Interest Coverage 12 10 8 6 4 2 0 FY12 FY13 Interest Coverage 50% 40% 30% 20% 10% 0% FY11
43%
25% 17%
FY12
FY13
Monsoons to help revive demand, though rupee depreciation to impact performance

The early onset of the monsoon, coupled with adequate pan-India coverage, is likely to help increase sales in FY14. Further, with the Liberty Phosphate acquisition, the company will be able to increase its presence in north Indian markets. The rupee depreciation may impact the performance negatively, since the company imports a large part of its raw materials.
Emkay Research
September 25, 2013
18
Input cost pressures visible

n Management is expecting a recovery in its agri-business
September 25, 2013
based on a favorable monsoon after 2 years of drought
Rating Buy CMP Rs107

NA -33 5,874 19,856
n Weak currency and significant delays in subsidy payments
have adversely affected the companys profitability in the current year Natural Gas, Ammonia, Phosphoric Acid and Propylene continued to pose problems in FY13
n Global supply-side constraints in key raw materials like
n Rising cost of inputs like ammonia affected margins in the
Price Performance
(%) Abs olute Rel. to Nifty
Source: Bloomberg
1M 25 17
3M 14 7
6M 12M 15 9 -21 -25
chemicals segment. Globally, ammonia shortages, driven by lower gas output in Trinidad and the delayed commissioning of new capacities in the Middle East, pushed ammonia prices succor, and the medium to long-term outlook for ammonia to turn positive like Iso Propyl Alcohol (IPA) and Technical Ammonium Nitrate (TAN), and has retained a market share in Nitric Acid market share. Expectations of a pick-up in the domestic mining sector, except for iron ore, is expected to drive its TAN business company, as it is augmenting the fertilizer capacity for a new 6,00,000mt NPK plant at Taloja and a new 30,000mt Bentonite Sulphur plant in the North the companys fertilizer sales volumes declined only by 9% capital days increased from 78 in FY11 to 92 in FY13 provide some fillip
n The company expects shale gas finds in the US to provide

150 Rs % 10 136 0
n The company has gained a market share in few chemicals
122
-10
108
-20
n In TAN, the company is targeting 70% of the domestic
94
-30
80 Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
-40 Sep-13
Deepak Fertilisers (LHS)
Rel to Nifty (RHS)
Source: Bloomber g
n Agri-business continues to remain the focus area for the Agri Input & Chemicals DFPC IB 882 10 88 144/ 81 9/ 150 75,834 0.1
Stock Details
Sector
n Despite the weak fertilizer sector environment domestically, n Working capital deterioration visible in FY13, as working n Currency depreciation poses a risk, while the monsoons to

Source: Bloomberg
43.3 13.1 7.8 7.6 28.1
43.3 13.2 8.1 7.4 28.0
43.3 13.2 8.3 7.3 27.9
Emkay
Deepak Fertilisers
Deepak Fertilisers
Adverse weather conditions and high input prices impacted performance

Averse weather conditions in FY13 largely impacted growth of the agri-business. High prices of ammonia in international markets impacted profitability of the company in FY13. The proportion of traded goods to segment sales for the chemicals segment inched higher in FY13, while that for the agri-business continued to remain elevated. The EBIT margin of the chemicals segment dropped considerably to 14.7% in FY13 vs . 22.8% in FY12. The drop was largely on account of an increase in proportion of sales of traded goods and lower methanol production and sales on account of unviable margins for the product in FY13.
30 25 Rs bn 20 15 10 5 FY11 Sales
30% 25% 20% 15% 10% 5% 0% FY12 EBITDA Margin FY13 Percentage
Chemicals segment margins come under pressure

The chemicals business segment managed to register a topline growth of 18% yoy in FY13, despite a tough regulatory environment for the mining sector. The growth was largely led by higher production and sales of TAN, which helped achieve growth along with IPA. However, the growth was negatively impacted by a significant drop in methanol sales , primarily due to lower margins available for methanol throughout the year. The margins came under pressure on the back of increasing input costs . As a result, segment margins dropped from 22.8% in FY12 to 14.8% in FY13. In the short term, the company expects the input cost pressures to continue, primarily on the back of the depreciating rupee and the lack of availability of domestically sourced natural gas.

35% 30% 25% 20% 15% 10% 5% 0% FY11 Chemicals
Exhibit 3: Segment Revenue Contribution

100% 23% 15% 12% 11% 80% 60% 40% 20% 0% FY12 Fertilizers FY13 FY11 Chemicals
30%
1% 33%
0% 40%
0% 37%
6%
66%
59%
63%
FY12 Fertilizers Realty
FY13
Emkay Research
September 25, 2013
20
Deepak Fertilisers
Working capital deterioration visible in FY13

The working capital of the company deteriorated in FY13 marginally to 92 days from 78 days in FY11. The percentage of traded goods sales to total sales steadily inched higher to 24.9% in FY13 from 16.5% in FY11, which further led to lower margins. However, the companys balance sheet remained relatively stable, as the D/E ratio increased marginally FY13 to 0.8x from 0.72x in FY11.
Exhibit 4: Working Capital Cycles

100 80 Days 57 78 84 84 87 92

As a percentage of sales 7 6 5 Rs bn 4 3 2 1 5% 0% FY11 FY12 FY13 As a percentage of sales Purchase of traded goods
25% 20% 15% 10%
60 40 20 0 35
32 15
32
33
28
FY11 Inventory Days Payable Days

FY12
FY13 Receivable Days Working Capital Cycle
Exhibit 6: Net Debt and Interest Coverage

0.6 Net Debt to Equity 0.5 0.4 0.3 0.2 0.1 0.0 FY11
Exhibit 7: RoCE
10 Interest Coverage 8 6 4 2 0 35% 30% 25% 20% 15% 10% 5% 0% FY11
31%
21% 14%
FY12
FY13
FY12
FY13
Currency depreciation poses a risk, while monsoons to provide some fillip

An early and sufficient monsoon is likely to help provide some a fillip to the company in FY14, as the supply glut situation adjusts itself in the current financial year. However, the swift depreciation of the currency may have a negative impact, primarily due to ECB exposure in the form of debt to the tune of Rs2058.1mn as at the end of FY13. Further, as the company imports around 25% of its raw material requirements, margins may be impacted, though correction in international prices of inputs may help in absorbing some of the rupee depreciation.
Emkay Research
September 25, 2013
21
Chemicals business suffer from weak environment

n Top line growth of 10.3% on the back of growth in both
September 25, 2013
Rating Buy CMP Rs60

NA/NA -19 5,874 19,856
fertilizer and chemicals segment. Despite poor monsoons in FY13, the company was able to deliver 6% yoy growth in FY13 in the fertilizer business and 6% in chemicals most plants operated at over 100% utilization. The Ammonia plant with utilization of 133%, while Urea plant at 111% (CNA) and Calcium Ammonium Nitrate (CAN) was affected due to weak demand
n Production across all categories remained encouraging, as
n However, production of Methanol, Concentrated Nitric Acid
Price Performance
Source: Bloomberg
n Ammonium Nitrate rules, 2012 were notified in July 2012, 3M -20 -25 6M 12M -16 -21 -28 -32
1M -8 -13

90 Rs % 10 82 0
and will become finally effective from Jan14. Ammonium Nitrate (AN) Melt and CAN fertilizer manufactured by GNFC are under the purview of these Rules, and it has already initiated the actions for obtaining the necessary licences to continue to market these products FY12 on the back of stable margins in both segments. The fertilizer segments EBIT margin remained stable at 5.6% in FY13 vs. 5.4% in FY12, while the chemical segments EBIT margin stood at 18.1% in FY13 vs. 19.6% in FY12 FY11 to 1x in FY13. The interest coverage ratio as a result fell from 25.8 in FY11 to 10.1 in FY13 the company along with increase in working capital requirements
n The EBITDA margins for FY13 stood at 14.8% vs. 14.9% in
74
-10
66
-20
58
-30
50 Sep-12
Nov-12
Jan-13 GNFC (LHS)
Mar-13
May-13
Jul-13
-40 Sep-13
n Net debt to equity for the company deteriorated from 0.3x in
Rel to Nifty (RHS)
Source: Bloomber g
Stock Details
Sector
Agri Input & Chemicals GNFC IB 1,554 10 155 91/ 59 9/ 149 59,409 0.1
n Increase in debt is primarily led by various capex taken by
n GNFC has completed various capex-related projects. It has
further plans for a few projects like brownfield ammonia urea project, JV project with Jordan Phosphate Mines Company Ltd. (JPMC)

Source: Bloomberg
41.2 8.9 18.9 3.5 27.6
41.2 8.9 19.3 3.3 27.3
41.2 8.9 19.4 3.1 27.6
Emkay
GNFC
GNFC
Topline growth aided by both fertilizer and chemicals segments

GNFC registered a topline growth of 10.3% on the back of growth in both fertilizer and chemicals segments. Despite poor monsoons in FY13, the company was able to deliver a 6% yoy growth in FY13 in the fertilizer business due to an increase in sale of urea. The company also registered a growth of 33.9% in ANP fertilizers. The chemicals segm ent, on the other hand, registered a growth of 16% yoy in FY13, helped by improved sales of concentrated nitric acid, anline, TDI and EA.
45 40 35 Rs bn 30 25 20 15 10 FY11 Sales
18% 17% 16% 15% 14% 13% FY12 EBITDA Margins FY13 EBITDA Margin
EBITDA margins remain stable on the back of stable margins in both segments
EBITDA margins for FY13 stood at 14.8% vs . 14.9% in FY12 on the back of stable margins in both segments. The fertilizer segments EBIT margin remained stable at 5.6% in FY13 vs. 5.4% in FY12, while the chemical segments EBIT margin stood at 18.1% in FY13 vs . 19.6% in FY12. The margins in the chemicals segment were impacted due to an increase cost of materials consumed and rupee depreciation. The purchase of traded goods was lower in FY13, primarily due to no import of MOP and lower import of SSP, as the environment remained difficult on the back of the supply glut created in the system.
Exhibit 2: Segment EBIT Margin
30% 25% EBIT Margin 20% 15% 10% 5% 0% FY11 Fertilizer
Exhibit 3: Segment EBIT Contribution

100% 18% Percentage 20% 80% 60% 40% 20% 0% FY12 Chemicals FY13 10% FY11 Fertilizer
27%
71% 90%
70%
5% 3%
6%
29% FY12 Chemicals
30% FY13
Emkay Research
September 25, 2013
23
GNFC
Working capital days deteriorate due to increase in receivables

Given the difficult environment, the working capital days increased from 76 days in FY11 to 135 days in FY13. The increase was primarily led by rise in receivable days from 53 in FY11 to 100 in FY13, while the days payable fell from 34 days in FY11 to 19 days in FY13. As a result, capital employed in the working cycle increased from Rs6.2bn in FY11 to Rs15.9bn in FY13.
160 140 120 100 80 60 40 20 0 135 100 76 57 53 34 56 73 44 85 54 19
Days
FY11 Inventory Days Receivable Days
FY12 Payable Days
FY13 Working Capital Days
Increase in net debt led by increased working capital requirement and capital expenditure
Net debt to equity for the company deteriorated from 0.32x in FY11 to 0.96x in FY13. The interest coverage ratio as a result fell from 25.8 in FY11 to 10.1 in FY13. The increase in debt can be attributed to increase in capital employed on the back of higher working capital days , while at the same time, the ongoing capital expenditure also led to increase in both long-term and short-term debt. The total gross debt in absolute terms increased from Rs9.2bn in FY11 to Rs28.3bn in FY13. On the capital expenditure front, the company expects to commission the TDI capacity of 50,000mtpa by September 2013. The project has been delayed slightly. However, the management hopes to commission the same by the end of September.
Exhibit 5: Net Debt to Equity and Interest Coverage Ratio
1.2 Net Debt to Equity 1.0 0.8 0.6 0.4 0.2 0.0 FY11 Net Debt to Equity
30 25 20 15 10 5 0 FY12 Interest Coverage Ratio FY13 Interest Coverage
Emkay Research
September 25, 2013
24
GNFC
Return ratio falls due to increase in capital employed

RoCE of the company has fallen from 13% in FY12 to 9.1% in FY13. The drop in RoCE is largely attributed to increase in net debt on t he back of a rise in both working capital employed and capex. Some improvement in RoCE can be expected if the TDI capacity is commissioned in a timely manner, leading to increased contribution both to the topline and the bottom line. Further, the improvement in days receivables would also act as a key catalyst as far as reducing debt is concerned.
Exhibit 6: RoCE
14% 13% 12% 11% 10% 9% 8% 7% 6% FY11
13%
13%
9%
FY12
FY13
Growth to be driven by both chemical and fertilizer segments

The management expects growth to continue in both fertilizer and chemicals segments, led by a good monsoon and commissioning of plants. In the fertilizer business, the management expects the environment for ANP, MOP and DAP to remain challenging in the near term due to the supply glut situation created in the industry. However, with the onset of early monsoons and given their sufficient distribution, the company expects sales to improve in the second half. Further, it aims at increasing the quantum of traded goods sales to 2mn tons in FY14 to drive growth. On the chemicals business, the company expects growth to continue with the commissioning of new TDI capacity, along with the underlying organic growth.
Rupee depreciation to take sheen from drop in raw material prices

Recently, international raw material and fertilizer prices have corrected, which is likely to benefit the company in terms of raw materials, particularly rock phosphate and import of fertilizers. However, with the swift depreciation in the rupee, some of these gains may not materialize. Further, the com pany also has foreign currency debt, which could be impacted with the swift depreciation in the currency. Further, on the margins front, with the glut in non-urea fertilizer business persisting throughout the first quarter of FY14, the management expects sales of ANP to be impacted. The impact may be further accentuated due to both drop in international prices of fertilizers and the governments recent indication of holding selling prices for fertilizers, which are already under the NBS.
Capex plans
Brown field Ammonia-Urea Project - The company is considering to set up a gas based brown field Ammonia-Urea Project (BAUP) at Bharuch, using some of its existing facilities/utilities. It has expressed its interest to the Department of Fertilizers, the Government of India, for setting up of BAUP at Bharuch. Ghana-India Fertilizer Project The Government of India and the Government of Ghana have agreed to set up a joint venture, a natural gas-based ammonia-urea project in Ghana. Rashtriya Chemicals & Fertilizers Ltd., (RCF) is acting as a nodal agency of the Government of India for implementation of the said project. The company has submitted an Expression of Interest (EoI) to RCF for participating in the equity of Indian joint venture to be formed for the proposed project in consortium
Emkay Research
September 25, 2013
25
GNFC
with Gujarat State Fertilizers & Chemicals Ltd. (GSFC) and Gujarat Alkalies & Chemicals Ltd. (GACL).
Joint Venture project with Jordan Phosphate Mines Company Ltd (JPMC) JPMC are supplying rock phosphate for the c ompanys existing nitrophosphate complex. It has a long-term business relationship with them. The company is considering setting up a phosphoric acid project in joint venture with JPMC and has signed a MoU for setting up the said project. Actions have been initiated for carrying out the pre-feasibility studies of this project. Poly Aluminium Chloride and Di-Calcium Phosphate Project - TDI Project at Dahej, when commissioned, will generate hydrochloric acid (HCl) as a by-product. Poly aluminium chloride and di-calcium phosphate project based on the HCl are under active consideration of the company.
Emkay Research
September 25, 2013
26
Affected by adverse spread in chemicals

n Despite a significant drop in demand of DAP in the
September 25, 2013
Rating Accumulate CMP Rs50

NA/NA -80 5,874 19,856
companys key regions like Gujarat (-39%), Maharashtra (-43%), AP (-36%) and Karnataka (-55%), GSFC has been able to report a 15% increase in DAP sales 15% to USD 861/mt, while DAP prices in the global market dropped 12% to $ 573/mt in April11 to USD2211pmt in December 12. This with all time-high feedstock price of Benzene has affected the spread, which dropped to USD800 from USD2400 days
n Fertilizer inputs like Phosphoric Acid witnessed a drop of
n Caprolactam prices fell from its all-time high of USD3570pmt
Price Performance
Source: Bloomberg
1M 4 -2
3M -17 -22
6M 12M -16 -20 -36 -39
n Working capital strains visible due to the increase in debtor n Fertilizer segment margins have dropped from 19% in FY11

90 Rs % 10 80 -2
to 10%, as the company faces input cost pressure
n Chemical segment margins have also dropped sharply from
70
-14
33% in FY11 to 15% by FY13. Pressure on caprolactam Benzene spread affected margins
60
-26
n Expansion plans focused on backward-integration and
50
-38
40 Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
-50 Sep-13
capacity expansion, which includes expansion of Nylon-6 and water soluble fertilizers at Vadodara unit. The company also has expansion plans for a DAP/NPK at Sikka unit
GSFC (LHS)
Rel to Nifty (RHS)
Source: Bloomber g
Stock Details
Sector
Agri Input & Chemicals GSFC IB 797 2 398 82/ 44 20/ 316 276,173 0.2

Source: Bloomberg
37.8 12.4 26.0 9.1 14.6
37.8 11.6 26.6 9.5 14.5
37.8 11.9 26.5 9.9 13.9
Emkay
GSFC
GSFC
Poor monsoons and supply glut impact demand and profitability

The lack of monsoons in FY13 led to a sharp contraction in demand for DAP and other complex fertilizers. On an all India basis, DAP sales declined by 15% to 9.13mn mt, while complex fertilizer sales fell by 32% to 7.73mn mt. DAP sales of the industry, as a whole in the state of Gujarat, dropped by 39%, while in Maharshtra, it fell by 43%, AP 36% and Karnataka by 55%. Performance of the company was impacted largely due to the sluggish performance of the fertilizer division, along with a fall in profitability of the industrial products division. Further, the traded goods segment has witness a significant increase in FY13, particularly due to higher sale of traded DAP, which while leading to a higher topline has impacted profitability due to lower margins in the traded goods business. The supply glut created in the second half of FY12 could not be addressed due to poor weather conditions in FY13. As a result, competitive pressure within the sector increased, thereby impacting profitability.
Exhibit 1: Sales and EBITDA Margins
70 65 60 55 50 45 40 35 30 FY11 Sales
30% EBITDA Margin 25% 20% 15% 10% 5% 0% FY12 EBITDA Margins FY13
Falling benzene caprolactum spread impacts profitability

The industrial products segments profitability has been impacted significantly in FY13, primarily due to falling spreads between benezene and caprolactum prices. The overall profitability was further impacted due to a slowdown witnessed in the domestic growth environment, which put additional pressure on margins. The industrial product segment margins fell from 32.9% in FY11 to 15.4% in FY13.
35% 30% 25% 20% 15% 10% 5% 0% FY11 Fertilizer Products
Rs bn
33%
30%
19% 15% 10% 15%
FY12 Industrial Products
FY13
Emkay Research
September 25, 2013
28
GSFC
Working capital strains visible due to increase in debtor days

The working capital strain on account of increasing receivables days was clearly visible in FY13. The debtor days increased from 65 days in FY11 to 166 days in FY13. Consequently, the gross debt-to-equity ratio deteriorated from 0.14x in FY11 to 0.38x in FY13.
200 150 Days 100 50 0 FY11 Inventory Days Payable Days

166 96 43 33 106 Rs mn 39 175 12,000 10,000 20% 15% 10% 5% 2,000 FY12 Receivable Days Working Capital Cycle FY13 FY11 FY12 FY13 As a percentage of sales 0% As a percentage of sales
84 65 42 23
8,000 6,000 4,000
31
Purchase of traded goods

Exhibit 5: RoCE
50% 40% 30% 20% 10% 0% FY11
43% 36%
15%
FY12
FY13
Expansion plans focused on backward-integration and capacity expansion

The company continues to focus on capital expenditure both for backward-integration and for capacity expansions. Capacity expansion projects:
Expansion of Nylon-6 capacity by additional 15,000mtpa at Vadodara unit Expansion into water soluble fertilizers to the tune of 20,000mtpa at Vadodara unit Expansion of 500,000mtpa for DAP/NPK at Sikka unit
Backward integration: Strategic investment of 19.98% in equity share capital of M/s. Karnalyte Resources Inc., Canada, totaling Rs 2380mn. This will give assured supply of 350,000mt of Potash in Phase I, and further 250,000mt in Phase II from Wynyard Potash Project of the said Company. Setting up a sulphuric acid and phosphoric acid plant at Sikka unit for assured supply of raw material
Emkay Research
September 25, 2013
29
GSFC
Outlook
The management highlighted that FY13 was a difficult year. However, going forward, with the early arrival of the monsoons, the company expects demand to pick up in FY14, thereby helping to improve the overall supply situation within the industry. Further, with the drop in international prices of key inputs, the company may be able to absorb some of the negative impact of the recent rupee depreciation.
Emkay Research
September 25, 2013
30
Leveraging its distribution strength

n Poor monsoons and high costs impact performance. Severe
September 25, 2013
CMP Rs51
EPS Chg FY14E/FY15E (%) Target Price change (%) Nifty Sensex NA/NA NA 19,856 5,874
weather conditions in the key market of Karnataka in FY13 significantly impacted the topline, as volumes from traded goods were lower in FY13 its product basket, though trading came down sharply in FY13, due to a weak demand scenario
n MCFL continues to thrust on import of fertilizes to complete
Price Performance
Source: Bloomberg
n MCFL has also finalized supply arrangements with certain 3M 6M 12M 25 25 14 11
1M
1 (16) (6) (14)
local manufacturers of fertilizers to augment total fertilizer availability in its marketing territory to leverage its distribution strength which was started in 2010-11. Given the enormous potential for growth in this segment and the companys ability to leverage its strong distribution, this will remain the companys thrust area
n MCFL will continue to focus on its plant protection business,

% 40

80 Rs 68 22
56
44
-14
n MCFL has efficiently managed its working capital, as despite
32
-32
20 Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
-50 Sep-13
the increase in receivable days from 6 days in FY11 to 24 days by FY13, its working capital days remained stable at 14 days debt has increased sharply to Rs12bn from Rs2bn in FY11. This was mainly on account of delays in subsidy from the government
Mangalore Fertlizers (LHS)
Rel to Nifty (RHS)
Source: Bloomber g
n Despite an insignificant increase in working capital, MCFLs Agri Input & Chemicals MCF.BO 1185.5 10 118.5 27/73 6/ 100 328707 0.3
Stock Details
Sector

Mar13 Dec12 Sep12 Promoters FII/NRI Institutions Private Corp Public
Source: Bloomberg
22.0 1.6 5.0 20.4 51.0
30.4 0.4 5.1 20.9 43.2
30.4 0.4 5.4 20.9 42.9
Emkay
Mangalore Chemicals and Fertilizers
Mangalore Chemicals
Poor monsoons and high costs impact performance

Severe weather conditions in the key market of Karnataka in FY13 significantly impacted the topline, as volumes from traded goods were lower in FY13. Further, increase in MRP due to the rupee depreciation and higher costs impacted demand for phosphatic fertilizers in FY13.
40 35 Rs bn 30 6% 25 20 15 FY11 Sales
7% 7% EBITDA Margin
As a percentage of sales
6% 5% FY12 EBITDA Margin FY13
Higher interest costs impacts bottomline

Interest costs impacted profitability negatively in FY12 and FY13. The interest coverage ratio deteriorated sharply from 8.6x in FY11 to 2.1x in FY13. The increased borrowings were largely on account of outstanding concessions receivable from the Government of India, which have significantly shot up between FY11 and FY13. Further, borrowings also increased on account of capital expenditure for plant and machinery, and Rs 2,000mn for investment in preference shares of Bangalore Beverages Ltd., with a coupon of 0.001% and repayment of 20 years.
50 40 Days 30 20 10 0 FY11 Inventory Days Payable Days

44 33 30 32 24 24 13 Rs bn 16 14 12 10 8 6 4 FY12 Receivable Days Working Capital Cycle FY13 FY11
25 17 6 14
21
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% FY12 FY13

3 Net Debt to Equity 2 2 1 1 0 FY11 Net Debt to Equity
Exhibit 5: RoCE
10 8 6 4 2 0 FY12 FY13 Interest Coverage ratio 0% FY11
25% Interest Coverage 20% 20% 15% 10% 10% 5% 9%
FY12
FY13
Emkay Research
September 25, 2013
32
Mangalore Chemicals
Monsoon to help revive demand, though rupee depreciation may impact negatively
The early onset of monsoons and wide distribution are likely to lead to a revival in demand, thereby helping to reduce the supply slut in the system. However, the company has guided that it plans to increase imports to meet the increased demand, which may impact the performance negatively due to the swift depreciation in the rupee. Further, the company depends on imports of certain key raw materials , which may also impact profitability.
To focus on plant nutrition and plant protection products to drive growth

The company has been a late entrant in the plant protection business, as it ventured into the same only in FY11. However, it continues to focus on this business, and with regards to the same, it has launched three products of reputed pesticide companies under the Mangala brand name. On the plant nutrition front, the company will continue focusing on the water soluble fertilizer segment and micro-nutrients to drive growth. It plans to launch three new products in FY14 in the plant protection segment, besides aim ing to achieve faster growth on the back of better-than-anticipated monsoons.
Emkay Research
September 25, 2013
33
Capex is over, Benefits yet to come

n NFL is the largest producer of urea in the country, with a
September 25, 2013
CMP Rs20
share of 14% of total urea production
n Government of India has allotted NFL and Engineers India
Ltd (EIL) for a revival of closed unit of Fertilizer Corporation of India Ltd (FCIL) at Ramagundam. This venture will provide the company an opportunity to establish itself as a market leader in urea Vijaipur-I & II has enabled the company to consolidate its position in urea production at a competitive cost Bathinda, Panipat and Nangal will improve energy efficiency and reduce the production cost in the coming years capacity of 34.9 LMT) against 34. LMT (105%) in CPLY. FY13 production was lower than the CPLY, primarily due to a shutdown taken at Nangal, Panipat and Bathinda units urea with neem oil on a large scale. Wider acceptability of neem-coated urea in the market offers an opportunity to augment production of neem-coated urea
Price Performance
Source: Bloomberg
n Completion of capacity augmentation of urea projects at 3M -45 -48 6M 12M -57 -59 -77 -78
1M -2 -8
n Switchover of feedstock from fuel oil to natural gas at

90 Rs % 0 74 -16
n NFL produced 32LMT of Urea (92% of revised installed
58
-32
42
-48
26
-64
n NFL is developing a technique for coating of normal prilled
10 Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
-80 Sep-13
National Fertilizers (LHS)
Rel to Nifty (RHS)
Source: Bloomber g
Stock Details
Sector
Agri Input & Chemicals NFL IB 4,906 10 491 88/ 18 10/ 153 207,229 0.1
n Availability and pricing of gas have been a major constraint.
Firm allocation of domestic gas is still awaited for Panipat, Bathinda and Nangal units
n The average vintage of production units of the company,
except Vijaipur II unit, is above 25 years and requires regular expenditure on renewals and replacements Rs32bn to Rs48.5bn, mainly due to capitalization of energy saving and urea capacity enhancement, along with a changeover of feedstock from fuel oil to natural Gas Rs6bn in FY13 due to capitalization
n There has been significant additions in fixed assets from

Source: Bloomberg
n NFL has witnessed a sharp run-up in its debt to Rs48bn from n With a sharp increase in the interest burden and lower
97.6 N/A 1.2 0.2 1.0
97.6 N/A 1.4 0.2 0.8
97.6 N/A 1.3 0.2 0.8
profitability due to various plant shutdowns, NFL has witnessed significant losses in FY13
Emkay
National Fertilizer
National Fertilizer
High cost, delay in subsidy payments and stretched balance sheet impact performance
FY13 was a rather difficult year for the company, both in terms of topline and bottomline. On the topline front, urea volumes were lower, largely on account of wagon-related issues at Vijaipur unit. Further, the increase in costs of both power and fuel led to a larger cost impact. As a result, EBITDA margins contracted from 5.2% in FY11 to 1.1% in FY13. The subsidy outstanding, too, increased by 96% in absolute terms between FY11 and FY13.
80 75 70 Rs bn 65 60 55 50 45 40 FY11
6% 5% 4% 3% 2% 1% 0% FY12 FY13 EBITDA Margin
As a result of the delay in payment of subsidies and increase in debt due to the on-going capex programme of switching of feedstock, interest expenses inched higher to Rs1,297mn in FY13 vs . Rs92mn in FY11. Hence, the interest coverage ratio deteriorated to 0.6x in FY13 vs . 33x in FY11.
200 Days 150 100 100 50 0 FY11 Inventory Days Payable Days
Exhibit 3: Subsidy Receivable

170 121 125 Rs bn 174 3.5 3 2.5 2 1.5 1 0.5 FY12 Receivable Days Working Capital Cycle FY13 0 FY11 FY12 Subsidy outstanding
3 2 2
96 27 26 22 23
23
18
FY13

4 Net Debt to Equity 3 3 2 2 1 1 0 FY11 Net Debt to Equity
Exhibit 5: RoCE
35 30 25 20 15 10 5 0 FY12 FY13 Interest Coverage Ratio -2% Interest Coverage Ratio 10% 8% 6% 4% 2% 0% FY11 FY12 FY13 -1% 5% 9%
Emkay Research
September 25, 2013
35
National Fertilizer
Subsidy repayment to help reduce debt burden

Given that a large sum of money is still receivable in the form of subsidies, the receipt of the same would help reduce the debt burden of the company. This will also help reduce the interest burden.
Aggressive capex plans

Revamp of fuel oil-based plants at Panipat, Bathinda and Nangal completed
The company has undertaken capital schemes for a changeover of feedstock from fuel oil to natural gas at Panipat, Bathinda and Nangal, involving a total investment of Rs40bn. All of these plans have achieved their completion in calendar FY13.
Capacity augmentation and energy saving project (ESP) at Vijaipur

The company has successfully commissioned capacity augmentation and energy savings projects of ammonia and urea plants at Vijaipur-I amd II units, including installation of carbon dioxide recovery (CDR) plant during 2012-13 at an investment of around Rs6.5bn. The total urea capacity of Vijaipur units , after commissioning of these projects , has been augmented to 20.66 lakh tonnes from 17.29 lakh tonnes per annum, an increase of 20%.
Revival of closed units of FCIL

Consequent to the nomination of NFL and EIL by the Government of India for the revival of the Ramagundam plant of Fertilizer Corporation of India, it has planned to set up a 2200mtpd ammonia and 3850mtpd urea plant. The project is envisaged to be undertaken at the existing fertilizer complex of Ramagundam unit at an estimated cost of Rs47bn, with production expected to commence in 2017. Pre-project activities towards setting up of joint venture between NFL/EIL/FCIL lining up of process licensor for ammonia/urea, finalization of concessionaire agreement and financial model are in progress.
Emkay Research
September 25, 2013
36
Lower traded volume leads to slower growth

n Poor monsoons in FY13 led to significant pressure on the
September 25, 2013
CMP Rs31
overall demand for fertilizers. The demand weakened significantly, particularly for complex fertilizers, DAP and MOP. Urea, on the other hand, witnessed some growth
n Post the revamp of the a mmonia plant at Thal, production of
Price Performance
Source: Bloomberg
Thal Urea has increased to 19.5lmt as against 17.7 lmt, and the same has crossed the qualifying production level of 18.77 LMT for entitlement IPP-based subsidy from 40.8lmt in FY12, due to lower trading. Ownmanufactured sales volumes, however, increased by 8% to 28.8lmt Karnataka and a few other markets such as Gujarat, Tamil Nadu and Rajasthan has affected fertilizer sales in FY13 on the back of increased sale of ammonia. The segment registered a top line growth of 29% yoy in FY13 focus on marketing of various fertilizers, water soluble fertilizer specialty fertilizer, etc.
1M 11 4
3M -7 -12
6M 12M -16 -20 -49 -52
n Total fertilizer sales volumes dropped to 32.2lmt in FY13

70 Rs % 0 60 -12
n Drought in the companys key markets like Maharashtra and
50
-24
n The industrial product segment continued to witness growth
40
-36
30
-48
20 Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
-60 Sep-13
n RCF targets sales of Rs75bn in the current year. It will also
Rashtriya Chemicals & Fertilizers (LHS)
Rel to Nifty (RHS)
Source: Bloomber g
Stock Details
Sector
Agri Input & Chemicals RCF IB 5,517 10 552 65/ 26 17/ 269 444,522 0.2
n RCF in its annual report has chalked out various ambitious
capex plans. Some big-budget capex includes ammonia urea project at Thal at a cost of Rs42bn, coal-based fertilizer plant at Talcher at a cost of Rs60bn, and a g as-based urea plant in Ghana at a cost of Rs60bn capital days have increased to 63 from 35 in FY11. With leveraged balance sheet, its D/E increased to 0.7x from 0.2x in FY11
n Working capital continued to deteriorate in FY13 as working
n Above normal monsoons to help revive demand, though

Source: Bloomberg
currency woes and receivables continue to remain the nearterm worry
80.0 0.0 12.3 1.7 6.0
92.5 N/A 1.5 1.3 4.7
92.5 N/A 1.5 1.3 4.8
Emkay
Rashtriya Chemicals and Fertilizers
Poor monsoons and high inventory build-up leads to subdued performance

Poor monsoons in FY13 led to significant pressure on the overall demand for fertilizers. The demand weakened significantly, particularly for complex fertilizers, DAP and MOP. Urea, on the other hand, witnessed some growth, largely due to lopsided subsidy policy, which has made urea relatively cheaper than phosphatic fertilizers. Poor monsoons in the key markets of Maharashtra, Karnataka, Gujarat and parts of Tamil Nadu and Rajasthan impacted demand for specialty fertilizers. On the supply side, the glut created due to high imports and tepid demand offtake impacted sales for the full year. Urea sales , as a result, were lower yoy, largely due to very low quantum of bought urea sales in FY13. On the fuel supply front, availability of natural gas at competitive prices also impacted profitability.
Stable performance of industrial products segment helps maintain growth

The industrial product segment continued to witness growth in FY13 on the back of increased sale of ammonia. The segment registered a topline growth of 29% yoy in FY13. Further, profitability of the segment remained intact at 19.5%, thereby helping to achieve stable margins for the company.
Exhibit 1: Sales Growth and EBITDA margins
75 70 Percentage Rs bn Rs bn 70 65 60 55 50 FY11 Sales

10% 25 20 15 10 5 FY11 FY12 Purchase of traded goods
Source: Company , Emkay Research
66
8% 6%
19 13 9
57
4% 2% 0% FY12 EBITDA Margin FY13
FY13
Exhibit 3: Segment EBIT contribution

100% 80% 60% 40% 20% 0% -20% FY11 Fertilizer -1.2% FY12 Industrial Products Trading FY13 74.7% 65.1% 60.4% 7.1% 18.3% 4.5% 36.2% 35.1%
Exhibit 4: Segment EBIT margin

25.0% 20% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% FY11 Fertilizer FY12 Industrial Products Trading FY13 7.7% 9% 1.5% 7.4% -0.3% 7.3% 2.1% 20%
Emkay Research
September 25, 2013
38
Working capital continued to deteriorate in FY13

The past couple of years have been particularly tough for the fertilizer industry, largely due to poor monsoons in FY13, large supply in the system due to non-liquidation of high imports , which were undertaken in the second half of FY12, and the negative impact on farmer profitability in FY13. As a result, RCFs working capital witnessed significant deterioration in both FY12 and FY13. The average debtor days for FY13 inched higher to 136.5 days vs . 112.2 days in FY12 and 56.8 days in FY11. Inventory days , on the other hand, remained more or less unchanged after witnessing a significant deterioration in FY12.
180 160 140 120 100 80 60 40 20 159 135 105 57 35 55 33 65 109 70 63 39
FY11 Working Capital Cycle

FY12 Inventory Days Receivables Days
FY13 Payable Days
The overall debt-to-equity ratio deteriorated significantly from 0.21x in FY11 to 0.71x in FY13. Further, the delay in payment of subsidies by the government also led to increased pressure on the working capital and cash flow generation of the company.
Exhibit 6: Net Debt to Equity and Interest Coverage
0.7 Net Debt to Equity 0.6 0.5 0.4 0.3 0.2 0.1 FY11 Net Debt to Equity
Exhibit 7: RoCE
14 12 10 8 6 4 2 0 Interest Coverage 16% 15% Percentage 14% 13% 12% 12% 11% 10% FY11
15%
15%
FY12
FY13 Interest coverage ratio
FY12
FY13
RCFs Aggressive Capex plan
Additional Ammonia Urea project at Thal plans to expand the capacity of urea at Thal by setting up one single-stream ammonia plant of capacity 2200mtpd and one single-stream urea plant of capacity 3850mtpd at the existing site at a cost of Rs42bn. Single Super Phosphate (SSP) project at Thal - Contemplating setting up SSP manufacturing facility of 1,700tpd at Thal based on imported sulphur and rock phosphate. The project cost is estimated at Rs3 bn. Coal-based fertilizer plant at Talcher, along with Coal India Ltd (CIL) and Fertilizer Corporation of India Ltd (FCIL), It is contemplating to set up a fertilizer complex, comprising a 2700mtpd ammonia plant, a 3850mtpd urea plant, a 850mtpd nitric acid plant, and a1000mtpd ammonium nitrate plant at Talcher, Odisha, through coal gasification route as feedstock. The project capital cost is estimated to be around Rs 0bn (excluding coal gasification). A MoU among the proposed promoters has been signed. 39
Emkay Research
September 25, 2013
Gas based urea plant in Ghana - Governments of Ghana and India have signed a Memorandum of Understanding for setting up the fertilizer project to produce about 1 million metric tons of Urea fertilizer. RCF to take a lead role in this project. It is proposed to set up an ammonia plant of 2200 MTPD capacity and a urea plant of 3850mtpd capacity at a cost of Rs 60bn. The pre-feasibility report submitted to the respective Governments is under consideration. Sewage Treatment Plant (STP) at Trombay The company intends to set up a new Sewage Treatment Plant (STP) adjacent to the existing STP plant of same 5 mgd capacity. The project cost for the same is estimated at around Rs1.60bn. Bids have been invited and are under evaluation.
Subsidiary and other Joint Venture Companies
FACT-RCF Building Products Ltd., Kochi RCF has formed a JV company with Fertilizers and Chemicals Travancore Ltd (FACT) by incorporating FACT-RCF Building Products Ltd to set up a Rapidwall project at Kochi. Both RCF and FACT have 50:50 equity holding in the company. The plant has been commissioned during the year and is in operation. Urvarak Videsh Limited - The JV company, formed RCF with National Fertilizers Ltd and KRIBHCO, with equal equity participation, is exploring various opportunities abroad in the field of fertilizers. The company has not started any business so far.
Above-normal monsoons to help revive demand, though currency woes and receivables continue to remain the near-term worry
The timely monsoons this time around with its wide spread have revived hopes of increase in demand in FY14. The company expects to clock turnover of Rs7,485 crore primarily led by means of importing and marketing complex water soluble fertilizers, SOP, ammonium sulphate and zinc sulphate. However, the recent swift depreciation of the rupee will have a negative impact both on the cost and sales front. On the cost front, the rapid depreciation of the rupee will lead to an increase in feedstock cost, along with higher outflow for imports, particularly for the traded goods portfolio. Overall, total imports (including raw material and purchase of traded goods) constituted around 43% of the total material consumed cost in both FY12 and FY13 and with the swift depreciation of the rupee, the margins could be under pressure if the company is unable to pass on the increase is in costs.
Emkay Research
September 25, 2013
40
Fertilizer Sector
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Emkay Research
September 25, 2013
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Indian Fertilizer Sector Annual Report Analysis

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Indian Fertilizer Sector Annual Report Analysis

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Fertilizer Sector

September 25, 2013

Annual Report Analysis

Rohan Gupta rohan.gupta@emkayglobal.com +91-22-66121248 Chetan Thacker chetan.thacker@emkayglobal.com +91-22-66121272

Annual Report Analysis

September 25, 2013

Your success is our success

Affected by sharp rise in working capital

September 25, 2013

n The increase in working capital has been one of the biggest

n Burdened by the spiraling working capital requirement, the

n Higher debt also spurred the interest cost, as the companies

n Pressure on EBIDTA and higher interest cost, along with

n Trading of complex fertiliser has been key a driving factor

n Favourable monsoon and the subsequent pick-up in demand

Emkay Global Financial Services Ltd.

Annual Report Analysis

Annual Report Analysis

Enthusiasm about NBS is cooling off now

Reduction in subsidies in line with the drop in global fertilizer prices

Poor monsoon impacted demand; currency depreciation affected costs

September 25, 2013

Annual Report Analysis

Our analysis of key financials

Exhibit 2: Receivable Days by company

Company Name RCF

FY12 109 106 96 84 35 73 33 121 164 32

FY13 135 158 166 87 73 100 24 170 198 56

Inventory and Payables days increased marginally

Exhibit 4: Inventory Days by company Company Name

RCF Chambal Fertilizers GSFC Deepak Fertilizers

Coromandel International GNFC Mangalore Chemicals & Fertilizers NFL

Zuari Agro IFFCO

September 25, 2013

Annual Report Analysis

Exhibit 5: Aggregate Payable Days

Exhibit 6: Payable Days by company

Working capital goes up to 121 days from 45 days

Exhibit 8: Working Capital Cycle by company Company Name

FY12 105 111 106 84 28 85 24 125 165 57

FY13 159 185 175 92 36 135 13 174 216 65

September 25, 2013

Annual Report Analysis

Significant increase in leveraging

Exhibit 10: D/E by company

Exhibit 11: Aggregate Net Debt to Equity

Exhibit 12: Net Debt to Equity by company Company Name

September 25, 2013

Annual Report Analysis

Profitability under pressure

Mangalore Chemicals & Fertilizers

September 25, 2013

Annual Report Analysis

Trading activity declined due to huge inventory in the system

24% 20% 16%

September 25, 2013

Annual Report Analysis

Return ratios deteriorated as working capital goes up

Exhibit 21: RoCE (%) by company Company Name RCF

FY12 15% 13% 36% 31% 25% 13% 10% 5% 9% 11%

FY13 12% 8% 15% 14% 17% 9% 9% -1% 7% 12%

September 25, 2013

Annual Report Analysis

Other qualitative analysis from annual reports