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.
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