>FERTILIZER SECTOR: Sowing the seeds of Change (DOLAT CAPITAL)

We expect the sector to continue to gradually re-rate with pro active and favorable policy initiatives. With the step forward on complex fertilizer already in place, we hope that the government would follow through with similar steps on the urea segment.

We believe companies with strong raw-material tie-ups, plans for expansion and offering customized products would lead to higher volume growth. We therefore prefer stock specific approach .We are positive on Coromandel International (CIL) due to its strong business model and GSFC- beneficiary of NBS policy and high earnings visibility.

Relooking the Fertilizer Sector:
The latest Government Policy on Fertilizer Pricing and Subsidy is encouraging and a welcome step in the direction of deregulation of the industry.
We have identified the following drivers for industry that would act as a game changer and would make the sector attractive for the future growth potential which till now witnessed restricted growth due to its controlled regime.

■ Nutrient Based Subsidy (NBS)
■ Raw-Material Sourcing
■ New Investment Policy-4 (NPS-4)

Positive on Complex Fertilizer
The shift in policy regime from product based subsidy to nutrient based subsidy opens a plethora of opportunities for complex players. This change would encourage use of right nutrients as per requirement of soil, thus limiting the excess use of highly subsidized nutrient which has resulted in soil degradation and effected productivity (annexure). With this new policy, players with established raw-material linkages and offering customized products would enjoy an edge over the other players. This in turn shall benefit players like Coromandel International as they have build up strategic tie-ups and strong marketing and distribution networks.

The Nutrient Based Subsidy has also introduced a fixed subsidy regime and has left the market price floating in accordance with the demand and supply situation with a possibility of intervention by Government if the prices rise unreasonably. This has already led to an increase in prices of DAP (Di-Ammonium Phosphate) and MOP (Muriate of Potash) by Rs. 600 per
tonne i.e. 6.4% and 13.5% respectively. This would result in efficient players being rewarded over their counterparts.

The sourcing of raw material is the key to enjoy the fruit of efficiency as it is the most critical factor determining sustainability of business. We believe that this is the key area where Coromandel shall perform better than its peers. Its tie-up with Foskor and Tunisian Joint Venture with GSFC would lead to additional flow of phosphoric acid which would in turn lead
to production growth of 18% and 11% in FY11 and FY12. GSFC will also get access to the additional raw-material and would lead to production of customized complex fertilizers.

We remain positive on the complex fertilizer space and we recommend an accumulate on Coromandel International Fertilizer and a buy on GSFC.

Urea opportunities ahead
Similar to the policy pronouncements for the complex fertilizers, we expect the New Investment Policy IV to address the key issues for the urea segment as well. The key focus shall be to reduce the dependency on imports and encourage capacity expansion in India. The current urea capacity at 20 Mn MT has been stagnant for over a decade now.

We also observe that the expected policy is part of the ongoing series of steps that the government has been taking to move towards deregulation of the sector. The first leg of this has been witnessed with gas replacing all other high cost and unviable feedstocks. Further, the linking of additional production through Greenfield/Brownfield /Revamping to International Parity Pricing (IPP) has brought in the much needed impetus required to attract investments. NPS-III was in effect till 31st March, 2010.We believe ,the NPS-IV which is just around the corner shall continue with the pro active mode and attract capacity expansion. One of the provisions that would be looked into keenly would be revising the floor price which currently is fixed at US $ 250 per tonne.

With the above backdrop, we believe Chambal will stand to benefit as it has recently commenced its brownfield expansion which will make any additional production over and above the cut-off limit qualify for IPP. We assume the volumes to increase from 1.9 MT to 2.1 in FY10 and 2.4MT in FY11E.However,we recommend a reduce on the stock as it is fairly priced and trades at 10.8x FY11E EPS.

To read the full report: FERTILIZER SECTOR