>FERTILISER SECTOR (ICICI SECURITIES)

We expect PAT for I-Sec Fertiliser universe to decline 29% owing to high base – P&K business base was high on account of companies having benefited from rising P&K prices. Nagarjuna Fertilizers & Chemicals (Nagarjuna) is likely to witness a strong quarter on the back of increased capacity and higher trading volume; Chambal Fertilisers & Chemicals (Chambal) would see muted profitability. Improving international urea prices and expectation of a new policy has created a buzz around fertiliser stocks. We believe international urea prices, which have improved with demand pick up, would remain rangebound owing to significant capacity addition over the next three years. Ukrainian companies’ proposals for medium-term contract with government of India (GoI), at US$270/te for 3-5mnte further supports our belief about urea prices remaining rangebound. We believe there would not be any significant positive surprise on the policy front, post NPS- 3 expiry in April ’10. Tata Chemicals is seeing steady progress in brownfield urea project – However, gas availability and long-term gas contract would remain critical.

High base effect continues…

■ High base effect continues to impact GSFC and RCF. Owing to impact of inventory gains in the P&K business in base year’s profit, Gujarat State Fertilizers & Chemicals (GSFC) and Rashtriya Chemicals & Fertilizers (RCF) are likely to post significant profitability decline YoY.

■ Nagarjuna to post strong results on low base. Nagarjuna is expected to report 24% jump in EBITDA owing to increased production capacity and higher trading volumes. PAT is expected to rise 2.9x YoY to Rs179mn versus Rs46mn in Q3FY09.

■ International urea prices have crossed the US$300/te mark. Companies such as Tata Chemicals, Chambal and Nagarjuna are the key gainers as they have completed the debottlenecking exercise.

■ Urea prices unlikely to see sharp rally. We expect urea capacity addition of ~18% globally over the next three years and demand to rise 3.5-4.5% YoY. This implies that demand-supply mismatch is unlikely (in ’08, the mismatch had sharply driven up urea prices). That countries such as Ukraine are willing to sell urea to the GoI at US$270/te for a 3-5 year period, further proves that suppliers too are not expecting a rally, thereby attempting to lock in for the medium term.

To read the full report: FERTILISER SECTOR