APM Gas price hiked to $4.2 per mmbtu
Government has hiked price of APM gas from $ 1.82 per mmbtu to $4.2 per mmbtu. The current supply of natural gas is approximately 170 million metric Standard cubic meters per day (MMSCMD). OIL and ONGC sell ~64 MMSCMD gas under APM. Fertiliser sector consumes 42 MMSCND out of India’s total consumption of 170 MMSCMD. Out of 42 MMSCMD that Fertiliser sector consumes, ~23 MMSCMD comes through APM route.
Additional outgo of ~Rs.3400 crore for the Fertiliser Industry
It will result in additional outgo for fertiliser companies on account of gas to the extent of ~ $740 mn (Rs.3400 crore). However, that does not mean that fertiliser industry is going to take the hit of entire Rs.3400 crore. In fact, most (85-90%) of APM gas goes into Urea manufacturing, which is under NPS-lll policy and not NBS.
Urea manufacturers are not impacted as gas cost is pass-through
The decision does not impact Urea manufacturers such as well such as Chambal Fertilisers, National Fertilisers Limited, Nagarjuna Fertilisers. However, as all fertilisers except Urea are under Nutrient based Subsidy (NBS), where subsidy per tonne of nutrients are fixed and feedstock (gas) cost is not pass-through, will be taking hit due to higher feedstock price. Unless, they hike prices of decontrolled fertilisers or government revises fixed per tonne subsidy on nutrients (unlikely in our view), it will hit profitability for decontrolled fertiliser makers.
No impact on Coromandel International and Zuari industries
Companies like Coromandel international and Zuari Industries will not be hit at all as the earlier doesn’t get APM gas while later runs its plans on Naphtha in absence of connectivity of gas pipeline.
Development negative for RCF, GSFC and Deepak Fertilisers
In absence of details on APM gas uses between Urea and Decontrolled fertilisers, it is difficult to quantify impact on individual companies. However, we assume 85-90% of APM gas goes towards manufacturing of Urea, which is pass-through cost under NPS-lll policy that governs urea pricing. So, ~Rs.3000 crore will be the hit that government will take in form of additional subsidy burden on increased feedstock cost, while companies which use APM gas for manufacturing DAP and complex fertilisers (such as RCF, GSFC and Deepak Fertilisers) will be taking a total hit of ~Rs.400 crore.
This development is negative on GSFC, Deepak Fertilisers and RCF. GSFC and Deepak Fertilisers trade at P/E of 6.4x and 6.3x based on TTM EPS of Rs.39.6 and Rs. 16.9, which is quite cheap, where as RCF trades at P/E of 20.1x at cmp of Rs.78.2. I have negative view on the RCF owning to expensive valuations.
22 February 2010
Fertiliser Policy changes - My Views
Urea price hiked by 10%, NBS to be implemented from April’10
The government has approved to implement the Nutrient Based Subsidy (NBS) Policy on decontrolled Phosphatic & Potassic fertilizer with effect from 1st April, 2010. Under NBS, subsidy on the nutrients ‘N’ - Nitrogen, ‘P’ - Phosphorus, ‘K’ - Potash and ‘S’ – Sulphur contents will be fixed for the year 2010-11. In addition to the fixed subsidy on each of the nutrients as above mentioned nutrients, there will be an additional per tonne subsidy for subsidized fertilizer carrying other secondary nutrients and micro nutrients (such as Zinc, Boron etc) in formulations approved under FCO 1985.
Earlier, there were 19 identified products including complex fertilisers which were under fixed price regime. Any other combination of nutrients; along with micro nutrients were not covered by existing subsidy regime. With implementation of NBS, new innovative fertilizer products under various combinations would be developed to meet the vast requirements of Indian agriculture.
The intent of the Government to move towards NBS in fertilizer sector was announced in the Budget of 2009-2010. The NBS regime is expected to depict the actual demand of fertilizers in the country and promote realistic pricing of fertilizer products in the international market. With decontrol of prices, fertilizer industry is expected to attract fresh investments in complex and speciality fertilisers.
Urea price hiked by 10%, Subsidy burden to be reduced by ~ Rs. 1200 crore
Urea which has the maximum tonnage consumed nitrogenous fertilizers in the country will continue to be under the current MRP regime. However, government has decided to increase the MRP of urea by 10% from Rs.4830/- per MT to Rs.5310/- per MT with effect from 1st April, 2010. This will result in reducing of subsidy burden by ~ Rs 1200 crore for the government. The price hike does not benefit the profitability of the industry as higher price paid by the farmer will only result on lower subsidy burden to be paid by the government. However, this will result in lower dependence on subsidy to the extent of price hike, which results in lower working capital needs in case of delay in subsidy payments. However, it is very marginal compared to overall urea subsidy.
Prices will be deregulated while subsidy per nutrient will be fixed
Under the Nutrient Based Subsidy (NBS) regime, since the subsidy on the subsidised nutrients and consequently subsidized fertilizers will remain fixed, the retail prices of subsidized fertilizers at farmgate level will be decided by the Companies.
Government has decided to form an Inter-Ministerial Committee under the Chairmanship of Secretary of Fertilizers to examine various scenarios and make recommendations for finalization of per nutrient subsidy to the Government under the proposed Policy.
Prices deregulated, however will be around current levels for this year
However, there is a fine print which reads that “The Fertilizer Industry has assured that under NBS regime, the price line around the current level would be maintained during Kharif-2010”. We believe that fixed subsidy per nutrient will be decided in a manner that the farm-gate prices of non-urea fertilizers remain near the current prices (MRP fixed by government) so that the farmers are not adversely affected immediately.
Subsidy to be paid through industry
The NBS regime will be implemented with effect from 1st April, 2010. The subsidy will continue to be disbursed through the Industry during the first phase. The industry will receive subsidy based on certification of sale by the State Governments / Statutory Auditors of the Company as in the past.
Our take on policy and fertiliser stocks
We give Thumbs up to the policy decision as The NBS regime is expected to promote balanced fertilization, which is currently skewed towards ‘N’ due to higher consumption of Urea, one of the highly subsidised fertilisers. It will increase agriculture productivity by improving soil conditions and fertility in the country through higher usage of secondary and micro nutrients.
Hike in Urea price doesn’t affect urea manufacturers such as Tata Chemicals, Chambal Fertilisers, National Fertilisers Limited as price hike does not result in higher margins for the players. it will only reduce subsidy burden for the government. Implementation of NBS comes positive for all phosphatic, potassic and complex fertiliser manufacturers. Companies such as Coromandel International, Deepak Fertilisers, RCF and GNFC will benefit. Out top pick is Coromandel International due to its leadership position in complex fertilisers with strategic tie-ups to source inputs such as phosphoric acid and rock phosphate. The full impact on earnings would be possible to estimate only government decides amount of per nutrient subsidy.
The government has approved to implement the Nutrient Based Subsidy (NBS) Policy on decontrolled Phosphatic & Potassic fertilizer with effect from 1st April, 2010. Under NBS, subsidy on the nutrients ‘N’ - Nitrogen, ‘P’ - Phosphorus, ‘K’ - Potash and ‘S’ – Sulphur contents will be fixed for the year 2010-11. In addition to the fixed subsidy on each of the nutrients as above mentioned nutrients, there will be an additional per tonne subsidy for subsidized fertilizer carrying other secondary nutrients and micro nutrients (such as Zinc, Boron etc) in formulations approved under FCO 1985.
Earlier, there were 19 identified products including complex fertilisers which were under fixed price regime. Any other combination of nutrients; along with micro nutrients were not covered by existing subsidy regime. With implementation of NBS, new innovative fertilizer products under various combinations would be developed to meet the vast requirements of Indian agriculture.
The intent of the Government to move towards NBS in fertilizer sector was announced in the Budget of 2009-2010. The NBS regime is expected to depict the actual demand of fertilizers in the country and promote realistic pricing of fertilizer products in the international market. With decontrol of prices, fertilizer industry is expected to attract fresh investments in complex and speciality fertilisers.
Urea price hiked by 10%, Subsidy burden to be reduced by ~ Rs. 1200 crore
Urea which has the maximum tonnage consumed nitrogenous fertilizers in the country will continue to be under the current MRP regime. However, government has decided to increase the MRP of urea by 10% from Rs.4830/- per MT to Rs.5310/- per MT with effect from 1st April, 2010. This will result in reducing of subsidy burden by ~ Rs 1200 crore for the government. The price hike does not benefit the profitability of the industry as higher price paid by the farmer will only result on lower subsidy burden to be paid by the government. However, this will result in lower dependence on subsidy to the extent of price hike, which results in lower working capital needs in case of delay in subsidy payments. However, it is very marginal compared to overall urea subsidy.
Prices will be deregulated while subsidy per nutrient will be fixed
Under the Nutrient Based Subsidy (NBS) regime, since the subsidy on the subsidised nutrients and consequently subsidized fertilizers will remain fixed, the retail prices of subsidized fertilizers at farmgate level will be decided by the Companies.
Government has decided to form an Inter-Ministerial Committee under the Chairmanship of Secretary of Fertilizers to examine various scenarios and make recommendations for finalization of per nutrient subsidy to the Government under the proposed Policy.
Prices deregulated, however will be around current levels for this year
However, there is a fine print which reads that “The Fertilizer Industry has assured that under NBS regime, the price line around the current level would be maintained during Kharif-2010”. We believe that fixed subsidy per nutrient will be decided in a manner that the farm-gate prices of non-urea fertilizers remain near the current prices (MRP fixed by government) so that the farmers are not adversely affected immediately.
Subsidy to be paid through industry
The NBS regime will be implemented with effect from 1st April, 2010. The subsidy will continue to be disbursed through the Industry during the first phase. The industry will receive subsidy based on certification of sale by the State Governments / Statutory Auditors of the Company as in the past.
Our take on policy and fertiliser stocks
We give Thumbs up to the policy decision as The NBS regime is expected to promote balanced fertilization, which is currently skewed towards ‘N’ due to higher consumption of Urea, one of the highly subsidised fertilisers. It will increase agriculture productivity by improving soil conditions and fertility in the country through higher usage of secondary and micro nutrients.
Hike in Urea price doesn’t affect urea manufacturers such as Tata Chemicals, Chambal Fertilisers, National Fertilisers Limited as price hike does not result in higher margins for the players. it will only reduce subsidy burden for the government. Implementation of NBS comes positive for all phosphatic, potassic and complex fertiliser manufacturers. Companies such as Coromandel International, Deepak Fertilisers, RCF and GNFC will benefit. Out top pick is Coromandel International due to its leadership position in complex fertilisers with strategic tie-ups to source inputs such as phosphoric acid and rock phosphate. The full impact on earnings would be possible to estimate only government decides amount of per nutrient subsidy.
05 February 2010
China creates unique new jobs, Mumbai will follow
Let me share something unique that I read today.
This is about new jobs being created in China, and will definitely be created in Mumbai once the “Mumbai Metro” starts its operations. Click Here to know about it.
As the metro starts in Mumbai, with just 4 coaches in every train on congested Versova – Ghatkopar route, It will be interesting to see how Metro maintains its schedule in a city, where people are not used to 'doors' in trains. I didn't come across images of metro trains across the world without 'doors' till now; however Mumbai can set an example as authorities may have to think of running trains even if doors are not closed in order to make sure that trains run as per schedule. Frankly, i don't think that's going to happen. So, Mumbai too will have to employ people to push commuters in train so that door get closed and help trains in running on schedule.
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