>TATA CHEMICALS (KARVY)

Fertiliser companies demand for lowering KG basin gas price….

After lots of hue and cry from RNRL (Reliance Natural Resources Ltd) and NTPC LTD over KG basin gas pricing, fertiliser companies too have joined the party and raised the issue of higher marketing margin and transportation cost being charged by Reliance Industries Ltd (RIL) on gas from its D6 block in KG (Krishna Godawari) basin. RIL is charging US$ 0.14 per mmBtu as marketing margin and US$1.58 per mmBtu as transportation cost on the US$4.2 per mmBtu base price fixed by the government. This takes the landed cost of gas in the range of US$ 6.25-7 per mmBtu (depending on the location) for the companies. The delivered gas price to Tata Chemicals' Babrala plant is US$ 6.99 per mmBtu. The Fertiliser Association of India (FAI) has already sought lower price through a petition filed in the Supreme Court against the high freight fixed by RIL and the marketing margin. The FAI has raised the issue that if NTPC gets gas from RIL at US$ 2.4 per mmBtu, then fertiliser companies should also get it at that price. According to industry sources, the manufacturing cost of Indian fertiliser companies is higher than the Gulf countries and the gas price of US$ 6.25-7 per mmBtu is affecting the bottomline and competitiveness of Indian fertiliser companies visà- vis their international peers.

Views: Undoubtedly, the availability of KG basin gas is benefiting Tata Chemicals in terms of better capacity utilisation and savings on raw material costs in comparison to other feedstock like LNG (Liquefied Natural Gas) and Naphtha. However, as per industry sources, KG (Krishna Godawari) basin delivered gas price to Tata Chemicals' Babrala plant (which is at US$ 6.99 per mmBtu) is still high and landed cost can be reduced by lowering the transportation cost and marketing margin. We believe that any reduction in KG basin gas price for Tata Chemicals
will be a positive for the company.

Valuation: The stock is currently trading at a P/E of 14.5x FY10E EPS of Rs 19.3 and 9.7 x FY11E EPS of Rs 28.8. We maintain our Underperformer rating on the stock with price target of Rs 230 on 8x FY11E estimated earnings.

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