Saturday, March 24, 2012

>RAMA PHOSPHATES: Promoter to dilute stake through strategic investor

■ Good times for SSP manufacturers: Single super phosphate (SSP) manufacturers will benefit the most from the rising selling price of most complex fertilisers especially diammonium phosphate (DAP). After the implementation of the Nutrient-based pricing scheme (NBS) for complex fertilisers, the prices of the complex fertilisers have shot up sharply in the past couple of years due to a rising input cost. In case of DAP, the prices of the key raw materials like rock phosphate and phosphoric acid have firmed up sharply. Thus, farmers have shifted to low-grade phosphatic fertilisers like SSP, which has only 16% phosphate content as compared to 46% in case of DAP. The sales offtake of SSP has grown by 25% in the last one year and leading SSP producers like Rama Phosphate have grown exponentially on the back of the change in the business dynamics for the SSP producers.

■ Timely capacity addition to help sustain growth momentum: Rama Phosphates is the third largest player in the SSP manufacturing space with a total installed capacity of 4.78 lakh tonne. It has undertaken capacity expansion at its existing manufacturing locations of Indore and Udaipur, and would add around 3 lakh tonne of additional capacity in the next two years (1.5 lakh tonne each in FY2013 and FY2014) to around 6.8 lakh tonne. The capacity addition would help cater to the needs of the key growing markets for SSP, ie Madhya Pradesh, Rajasthan, Gujarat and Maharashtra. Moreover, the company is also looking at expanding its footprint into the well irrigated regions of Haryana and Punjab through expansion at its Udaipur plant. SSP is extensively used by farmers for cultivating sugar-cane and oilseeds.

 Subsidy cut could affect margins in FY2013: As per a Government of India notification the subsidy for phosphorus under NBS has been decreased by 32.6% to Rs21.8 per kg which will decrease the government subsidy portion on SSP by Rs1,685 per tonne. A large part of it— Rs1,000-1,250 per tonne—is likely to be passed to consumers through an increase in the selling prices. The easing of the raw material cost should also cushion some of the adverse impact of the reduction in the subsidy. However, we believe that the demand for SSP would remain firm and the SSP producers should benefit from economies of scale.

■ Promoter to dilute stake through strategic investor: The current holding of the company’s promoter stands at 81% but as per the Securities and Exchange Board of India guidelines a promoter has to bring down his holding to 75% by June 2013. The promoter is looking for a strategic investor in order to dilute his stake in the company. After the introduction of NBS for SSP in FY2011 and a gradual increase in the demand for SSP as compared with the other fertilisers, the company’s management is looking at divesting the promoter’s stake at a premium to the current price. This, we believe, is positive for the stock.

■ Valuation and outlook: Rama Phosphates, one of the three large SSP manufacturers, is benefiting from the revival in demand from SSP in India. The timely expansion of its manufacturing capacities would enable the company to tap the opportunity and grow its sales volume by around 25% over the next two years. In terms of valuations, the stock trades at around 2x FY2014 rough estimates and below its book value (on full depreciated assets). This makes it one of the cheapest stocks in the fertiliser space. Moreover, the potential reduction of the promoter’s stake at a premium to the current valuation is another trigger for the stock. We are extremely positive on the stock and see scope for substantial appreciation. However, given the extremely low market cap and float at the counter, we are not initiating active coverage on the stock.

Company background
Rama Phosphates is one of the leading fertiliser manufacturing companies in India. It is a public limited company with stocks listed on stock exchanges. Rama Phosphates has been in existence for the last 25 years. One of its units at Pune has been operating for the last 40 years. Rama Phosphates is one of the largest manufacturers of SSP in India. Its products are marketed in various states of the country under the brands of "Girnar" and "Suryaphool". Both are leading brands in the states of Maharashtra, Madhya Pradesh, Chhattisgarh, Rajasthan, Karnataka, Haryana and Gujarat. The total installed capacity of the company is 4.78 lakh metric tonne (MT) of SSP and 1.83 lakh MT of sulphuric acid. 

RPL has two business segments
1) Fertilisers 2) Edible oils

The company is engaged in manufacturing phosphatic fertilisers, viz SSP (powder as well as granules), mixed fertilisers, namely NPK, and chemicals like sulphuric acid and oleum.

Business segments

SSP division
Rama Phosphates has three manufacturing units for SSP located in Rajasthan, Maharashtra and Madhya Pradesh. The company has state-of-the-art manufacturing facilities for the production of SSP in both granule and powder forms, and sulphuric acid, which is used mainly for captive consumption.

Indore unit: The company's Indore plant has installed capacities of 165,000MT of SSP and 102,000MT of sulphuric acid. The company has a state-of-the-art solvent extraction plant which includes seed crushing, packing and distribution facilities as well as in-house captive power generation. Power is generated captively by exo-thermic heat produced in the process of manufacturing sulphuric acid. The company's sulphuric acid plant has been set up with DCDA technology and is one of the pioneers of sulphuric acid plant in Madhya Pradesh with a total capacity of 265 tonne per day including Battery Grade Acid.

Pune plant: The company's Pune plant is one of the oldest SSP plants in India having been in existence for over 40 years. It is popularly known as "Rama Krishi Rasayan". The plant is situated on the outskirts of Pune in Maharashtra and is fully integrated with all requisite facilities such as railway siding, sulphuric acid plant, oleum plant, SSP plant, granulation plant and mixed fertiliser plant. The total capacity of the plant is 132,000MT of SSP, 350TPD of GSSP, 150TPD of mixed fertilisers and 81,600MT each of sulphuric acid and oleum.

Udaipur plant: This unit is situated in Jhamar Kothra, which is on the head of rock phosphate mines. Thus the availability of the basic raw material, ie rock phosphate, has made this unit the most strategic unit of the company. The entire unit is fully integrated with in-house facilities, such as rock grinding, finished goods storage including granule storage and stand-by DG power sets. The company's installed capacity is 181,000MT of SSP. Rama Phosphates has also set up a new GSSP plant with an installed capacity of 500 tonne per day. It is one of its kind and has the largest capacity in India. The company had incurred a capital expenditure of Rs10 crore to set up this plant.

Oil division
Indore plant: The company's oil division is situated next to its fertiliser division within the same premises and has seed crushing capacity of 165,000MT at an average of 600 tonne per day. The company's plant is fully integrated with all requisite facilities for storage of seeds in silos, crushers, expanders, DT, flakers, storage godowns for deoiled cakes and tanks for storing crude oil. Parallel to the crushing plant, the company also has its own refinery plant with Alfa Laval technology for refining crude soy oil of 33,000MT at 100 tonne per day. The company's brand "Sufla" is one of the most popular brands in Madhya Pradesh and other northern parts of India.

Industry overview
The SSP fertiliser industry is the pioneering fertiliser industry in India and the first SSP plant was established by EID Parry in 1906. Today in India there are 80 SSP manufacturing plants with a total installed capacity of 79 lakh tonne. The capacity utilisation in the SSP industry was near about 25 to 30% before FY2011 due to an unfavourable working environment for the SSP manufacturers.

Manufacturing process
SSP is produced by digesting grounded rock phosphate with diluted sulphuric acid. SSP contains 16% of phosphorous (K) and 16% of sulphur (S). This is the only fertiliser that provides phosphorous and sulphur along with calcium. SSP improves root growth and chlorophyll synthesis which, in turn, improve the product quality and immunity of plants.


>PTC INDIA: PTC Financial Services to retain only 5% stake in IEX

Tariff hike and policy reforms the key to future growth
The past two quarters have been depressed for PTC India owing to the continuous delay in receiving payment from two state electricity boards (SEBs), Tamil Nadu SEB and Uttar Pradesh SEB. These two SEBs together owe over Rs1,000 crore to PTC India. While the power supply to Tamil Nadu has been completely stopped, Uttar Pradesh is being supplied on a cautious basis. However, the recent petition filed by the Tamil Nadu state utility to hike tariff with effect from April 1, 2012 amid mounting losses could see the enforcement of the tariff hike and would augur well for PTC India. Uttar Pradesh can also see some progress on the tariff hike proposal post- election; however we are not expecting any immediate action now. Also, the commissioning of its first power tolling project, the Simhapuri power plant (150MW), is expected by March end and would boost its trading volumes from FY2013 onwards. Sound policy action on tariff hike and receipt of delayed payments (which would lower its interest cost) along with a surcharge remain the key monitorables for the stock in the near term. We maintain Buy on PTC India with a revised price target of Rs75.

PTC India’s market share remains stable at 33.4% in CY2011
We analysed the CERC data for the short-term (ST) power trading market for CY2011 and found that PTC India’s market share in ST power trading market has remained stable at 33.4% as compared with 33.3% in CY2010. The volumes traded by PTC India in H1CY2011 increased by robust 44% on a year-on-year (Y-o-Y) basis while in H2CY2011, the yearly growth came lower at 24%. This was led by the loss of business from one of its major clients, the Tamil Nadu SEB, on account of the delay in its payment worth Rs750 crore since Q4FY2011. This development also led to a severe liquidity crunch for PTC India as a result of which the latter had to raise debt in H1FY2012.

Rising working capital cycle led by SEB delay
The working capital cycle of the company got further stressed in M9FY2012 as it increased to 86 days from 17 days in FY2011 owing to the continuous delay in receiving payments from the SEBs, mostly Tamil Nadu SEB and Uttar Pradesh SEB, which have been incurring operational

losses. The management has confirmed that about Rs50 crore has been received in Q4FY2012 from Tamil Nadu SEB while a payment of approximately Rs700 crore is still pending.We sense that high receivables are blocking the company’s working capital and lowering the yield on cash. The company has indicated that the dues from the Tamil Nadu SEB would be recovered in one to two months in view of the proposed tariff hike as well as the proposed fund raising plan of an associate company of the Tamil Nadu SEB.

PTC Financial Services to retain only 5% stake in IEX
PTC India Financial Services, one of the promoters of the Indian Energy Exchange (IEX), plans to sell part of its stake in the bourse, retaining a minority 5% stake, in line with regulations. As part of the exit plan, Multiples Alternate Asset Management (MAAM) is said to buy PTC India’s 14.5% stake in IEX. PTC India Financial Services had earlier sold a 5% stake to Bessemer Venture Partners and Lightspeed Venture Partners, the existing partners in the exchange.
We remain positive on its subsidiaries investment where big scope of value unlocking exists.

PTC yet to find partners after Ashmore exit
There are media reports that PTC India is in talks with at least three companies to find new partners. The fund had also started approaching potential investors such as pension funds. In May 2010, PTC India had announced the launch of this infrastructure fund in a joint venture with
Ashmore. PTC Ashmore India Energy Infrastructure Fund, which was to provide equity financing to power projects in a 40:60 ratio, did not take off due to various differences in operational issues. The company had earlier indicated that single investment below Rs100 crore in a power project would happen via PTC India Financial Services and above Rs100 crore via private equity venture. This foray would increase the exposure of PTC India to the power sector and may not be sentimentally good given the current problems faced by the power projects.

Maintain Buy, price target revised to Rs75
PTC India’s traded ST volumes posted a subdued growth in recent months due to the poor financials of the SEBs. However, the overall power traded volumes have been partially supported by the boost in the long-term volume. The commissioning of its first tolling project (the Simhapuri project) and the Karcham Wangtoo project are also likely to boost the volume in the coming quarters. In view of the recent developments in its various projects, we have fine-tuned our volume estimates. Overall, our estimates have been upgraded for FY2012 and FY2013 by 5-10% each. Accordingly, our price target has been

 upgraded to Rs75. The near-term trigger in the stock is the receipt of the payment from SEBs, a reduction in debt and interest costs, and the commissioning of various power projects under power purchase agreements. We are expecting a compounded annual growth rate of 13.4% over FY2011-14. That implies a low PEG ratio of 0.67. The stock is also trading very attractively at 0.7x FY2014E book value. Hence, we maintain our Buy rating on PTC India.


>Impact of higher Brent prices- Why Brent crude prices soaring??


The ICE Brent Crude futures contract is a deliverable contract based on Exchange of Futures for Physical (EFP) delivery with an option to cash settle. Introduced in 1988, the ICE Brent Crude futures contract is the leading benchmark for light sweet crude oil, including grades in Africa, the Middle East and Asia. Brent crude is actually a combination of crude oil from fifteen different oil fields located in the North Sea. It contains about 0.37 percent of sulfur making it slightly less "sweet" than WTI. It is primarily used in the Northwestern European market and its price is leading global price benchmark in Asia and Europe and two thirds of the worlds internationally traded crude oil supplies. The Brent crude had touched $128.40 on March 1, 2012, its highest level since July 2008.

Why Brent crude prices soaring??
■ Escalating tensionwith Iran,which have resulted in sanctions by the US and a deferred oil embargo until July 1 imposed by the European Union and shutdown of three Petroplus refineries in Belgium, France and Switzerland, leading to a loss in European capacity of around 300,000 bpd has resulted in higher Brent premium.

■ Iran has threatened to block shipments through the Strait of Hormuz in the Persian Gulf, transit route for about 20 percent of the world's globally traded oil.

■ Iran's decision to stop selling oil to Britain and France sent Brent crude prices soaring. Europe uses about 500,000 barrels a day of Iranian oil.

■ Recently the news of approval of bailout package to Greece supported Brent prices.

■ Due to increasing tension between the West and Iran the major Asian oil consumers are looking anxiously at their meagre strategic oil stocks. The world's second-largest oil importer China has a lot less emergency oil is increasing its strategic oil stockpile capacity.

■ The production of Brent crude in North Sea is declining. North Sea oil and gas output passed its peak at the start of the last decade as the larger and easier-to-tap deposits were pumped out.

Impact of higher Brent prices
•Recently high Brent prices are fast threatening the biggest danger to growth in Asia as taking a knife to exports and reigniting inflation.

•Increasing Brent prices is also a headache for central banks as it makes it harder to use easy monetary policy to cushion growth.

•And any threat to Asia is a danger to all, as world market considers that the region's growth can offset the recession in Europe and a fitful recovery in the United States.

•Asia is the largest consumer of the commodity with an account ofmore than 31% of world demand.Asia is a home to four of the world's 10 largest oil-consuming countries in China, Japan, India and South Korea. So increasing Brent prices can hamper the growth of region
and demand for commodity as well as.

•Any increase in Brent would add up more burdens on region's; higher import bill indeed. Excluding Japan, Asia spent a net USD 447 billion on imports of oil and petroleum last year, up from USD 329 billion in 2010.

•China has cut its growth target to 7.5 per cent in 2012, a third straight reduction as the world's number two economy is buffeted by ongoing troubles in the West and high oil prices. India's growth is also tottering.

•Higher oil prices are also threatening the inflation and thus process of monetary easing in developing countries. If prices stabilize at current level, the inflation would be relatively modest and should not trouble monetary policy too much. But if prices spike to USD 150 a barrel then inflation could become much more of a restraint to monetary easing in China, India, South Korea and Taiwan.



Base metals may remain on volatile path as movement of Greenback,q concerns about euro zone, easing Chinese growth and inflation figures will give keep the sentiment cautious. China's annual inflation is seen decelerating to a 1-1/2-year low of 3.4 percent in February, and coupled with expectations that factory output for January-February would be at the lowest since August 2009, should give Beijing more scope to loosen monetary policy to spur growth. Copper prices may trade in range of 410-430 in MCX while nickel may trade in range of 900-980. The world's No. 3 copper mine, Chile's Collahuasi expects output this year to beat the 453,000 tonnes produced in 2011. China's copper demand will growby at least 6 percent in 2012 given the power sector's unflagging appetite for the metal.Aluminum prices can trade in range of 108-113 in near term while lead can trade in range of 103-110. Chinese Premier Wen Jiabao cut his nation's growth target to 7.5 percent for 2012 to give the economy more room to slowdown if neededwhile the government carries out promised economic and welfare reforms ahead of a looming leadership transition. Production at the Zambian flagship copper mine of Canada's First Quantum Minerals has ground to a halt because of a strike over wages. Increasing cost of raw material is expected to support the steel long prices as it can test 35500 per tonnes in NCDEX soon.



Iran tensions coupled with hope of amicable resolution of Greece crises have given support to the crude oil prices. Oil has climbed this year amid concern that sanctions against Iran will lead to military conflict in the Middle East, where more than half of the world's crude reserves are located. Oil may get support from a reduction in OPEC supplies. The Organization of Petroleum Exporting Countries will reduce crude exports by 0.6 percent this month as seasonal refinery maintenance in Asia erodes demand, according to tanker-tracker Oil Movements. Also crude oil prices are susceptible to profit booking at higher levels as negotiations between nuclear powers and Iran can reduce tension. Iran's Supreme Leader Ayatollah Ali Khamenei welcomed the comments by President Barack Obama that there is room for diplomacy in the international community's standoff. Crude oil can trade in range of 5100-5500 in MCX. Natural gas prices continue to register fresh lows in MCX and are expected to trade in range of 110-125 in near term. Forecasts for mild March weather that was expected to limit demand and concerns over record high U.S. inventory levels continue to keep the natural gas prices on back foot. The weather forecaster added that it sees no change to a "super-warm" outlook for the next 11-to-15-days, with the entire continental U.S. except for the west coast expecting much higher than- normal temperatures.



Optimism regarding bond swap deal of Greece capped the downside in bullion counter but the events taking place in Greece and the movement of dollar index will continue to guide the movement in near term. A group of 30 banks and funds representing 40.8% of Greece's 206 billion Euros of outstanding debt said that they would take part in the deal, joining other Greek and foreign banks and pension funds which have already pledged to accept the offer. Gold can trade in range of 27500-28400 in MCX while COMEX gold can trade in range of $1610-1750 in near term. White metal silver can trade in range of 57000-61500. Next week US retail sales, US and EU industrial production data will be keenly watched, which gauge the risk sentiment in the market. Meanwhile stronger local currency Rupee will continue to support prices. The gold silver ratio continue to hover around the 50 level as it recently dipped below 48. The Greek government's deadline for the biggest sovereign restructuring in history passed with a majority of investors signaling their readiness to participate in the debt swap. While Greece would prefer a voluntary deal, the government has said it will use so called collective action clauses to force holders of Greek law bonds into the swap, if the private sector involvement falls short and it gets approval from investors to change the bonds' terms.



Domestic oilseeds may trade higher taking advantage of the gap between the global oilseeds production and consumption which is expected to remain tight in days to come.Moreover, tracking the domestic scenario, persistent wedding have led demand for edible oils which in turn has improved the oilseeds buying. Soybean futures may continue to post gains as the solvent extractors are seen keen on buying the seeds even at higher quotes to meet the improved oil demand during the period.Adding to the bullishness, the oil meal prices are seen to remain strong due to the good domestic demand from poultry feed industry. Mustard futures may show some decent upside moves due to surge in edible oil demand owing to auspicious Hindu wedding dates. Moreover, the Solvent Extractors Association of India, in its latest report, has estimated India's RM seed 2011/12 crop at 62.65 lakh tonnes as compared to 68.5 previous season, a fall of about 8.5 per cent due to lower sown area this season. On the international platform, U.S soybean futures are expected to maintain their upside moves boosted by the export demand, including China, and expectations for a smaller South American crop due to drought. Investors would be eyeing the World Agricultural Supply and Demand Estimates to be
released by USDA. CPO futures (Mar) may touch 585 levels supported by heightened Malaysian prices on the basis that slowing production growth in Indonesia and Malaysia is likely to tighten global supplies.



Pepper futures may consolidate near their all time high price levels as exchange has imposed additional margin of 10% on both sides. The April futures contract may remain above 40,000 levels supported by the bullish fundamentals.The growers are holding back the stocks & squeezing supplies at a time when the output is expected to be lower. There are estimates that the domestic production may be around 43,000-45,000 tonnes, compared with 49,000 tonnes last year. Cardamom futures (Apr) is expected to maintain its consolidation with upside being capped owing to the special margin of 10% being levied on buy side & sluggish exporters demand at higher levels. Any large downside may remain arrested as harvesting for the current season crop is nearing its end. Moreover, arrival of the next crop will be in July, four months to go. Jeera futures (Apr) may trade in range bound carrying a weak bias. The counter may touch 13260 level in days to come as new crop arrivals of 15,000-20,000 bags of 60 kg have started which is reported to be good due to favourable weather conditions. Turmeric futures (Apr) is expected to show some bounce back owing to some lower level buying & exporters demand from Europe, US, West Asia and Japan. Chilli futures (Apr) may remain below 6300 levels on account of peak arrivals, which have started in M.P.