Wednesday, March 14, 2012

>LIBERTY PHOSPHATE: Subsidy payout on fertilizers i.e. Single Sulphur Phosphate(SSP), Murite of Potash (MOP) & Dai ammonium phosphate (DAP)

We have interacted with the management of Liberty Phosphate to understand the impact of reduction in subsidy payout rates on non urea fertilisers and its fallout on the demand environment.

 Subsidy cut may lead to increase in price of SSP: The government has decided to reduce subsidy payout on nutrients in complex fertilisers on the back of a decrease in the prices of raw materials in international markets. The government has decreased the subsidy on phosphorous by 32.6% to Rs21.8 while that on sulphur remains unchanged. Single Sulphur Phosphate (SSP) contains 16% phosphorous and 12% sulphur. So a decline in the subsidy on phosphorous will reduce the subsidy payout on SSP by 31.4% to Rs3,690 per tonne. A decrease in subsidy on SSP will restrict the company from decreasing the maximum retail price (MRP) from the current level of Rs5,000 per tonne. As per our interaction with the management, the price of SSP can be increased by Rs1,000 per tonne to Rs6,000 per tonne if the government reduces subsidy in the forthcoming budget.

Demand to remain intact for SSP even if price increases: We expect the demand for SSP to remain strong in spite of a likely price hike as it will find preference as a substitute to diammonium phosphate (DAP). The price of DAP has run up sharply in the last one year from Rs9,400 to Rs19,000 per tonne. Farmers, as a result, have been forced to look for a substitute. A special initiative taken by the government to use more of indigenously manufactured fertilisers in order to restrict subsidy will provide support to SSP manufacturing as a substitute to DAP in the long term. As stated earlier, the use of SSP in place of DAP may provide an additional growth opportunity to the company.

Margin may remain at current levels in spite of decrease in raw material prices: The prices of key raw materials have seen a declining trend on the back of lower demand in the international markets. The price of rock phosphate, after reaching a peak level of Rs10,000 per tonne during the current fiscal, has corrected to Rs8,000 per tonne. The same may further decline to Rs7,000 per tonne. In addition to this, the price of sulphuric acid has also corrected down and is presently quoting at Rs2,500 per tonne. The same may stabilise at the current levels. However the positive impact of decrease in the prices of raw materials will be offset by a decrease in subsidies and hence the margin is likely to remain at the current level.

 ■ Outlook and valuation: Liberty Phosphate is one of the largest SSP manufacturers which can grow by capitalising on its brand name and distribution network. Given the aggressive expansion of its manufacturing capacities the company can potentially grow at a compounded annual growth rate (CAGR) of around 28.6% over the next two years. In terms of valuation, the stock trades at around 1.7x FY2013 rough estimates. This makes it one of the cheapest stocks in the complex fertiliser space. Liberty Phosphate has appreciated by over 22% since we introduced the stock with a positive bias in the “viewpoint” section of our daily online publication “Investor’s Eye” on September 7, 2011. We maintain our positive bias on the stock.