BUY ZUARI INDUSTRIES LTD. C.M.P: Rs Target Price: Rs Date:22 nd Jan Share Holding Pattern. 1 Year Comparative Graph

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1 ZUARI INDUSTRIES LTD Result Update: Q3 FY 11 C.M.P: Rs Target Price: Rs Date:22 nd Jan 2011 BUY Stock Data: Sector: Fertilizers Face Value Rs. Rs wk. High/Low (Rs.) / Volume (2 wk. Avg.) BSE Code Market Cap (Rs.In mn) Share Holding Pattern SYNOPSIS Zuari Industries was incorporated in 1967 as Zuari Agro Chemicals to manufacture urea and complex fertilisers. Being part of the K.K. Birla Group, the company set up a plant in Goa in partnership with US Steel Corporation. The company forayed into various business areas such as cement, furniture, hybrid seeds, engineering consultancy, financial services, and oil tanking through a route of subsidiaries and joint ventures. PAT and Operating profit of the company are expected to grow at a CAGR of 27% and 18% over 2009 to 2012E respectively. 1 Year Comparative Graph The Company has signed Gas Supply Agreement with GAIL (India) Ltd. for supply of RLNG to its fertilizer plant. The RLNG will be used as feed stock in place of Naphtha for Company's plant at Zuarinagar, Goa. The expected date of supply of RLNG is January 01, Zuari Industries Ltd BSE SENSEX During the quarter, the company has reported Net Profit increased to Rs million from Rs million in previous year same quarter. Years Net sales EBITDA Net Profit EPS P/E FY FY 11E FY 12E

2 Peer Group Comparison Name of the company CMP(Rs.) Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) Zuari Industries Coromandel International Chambal Fertilisers Gujarat State Fertilisers Investment Highlights Q3 FY11 Results Update Zuari Industries Ltd disclosed results for the quarter ended December Net sales for the quarter moved up 38% to Rs million as compared to Rs million during the corresponding quarter last year. During the quarter, the company has reported Net Profit increased to Rs million from Rs million in previous year same quarter. The Basic EPS of the company stood at Rs for the quarter ended December Quarterly Results - Standalone (Rs in mn) As At Dec-10 Dec-09 %change Net sales % PAT % Basic EPS % 2

3 Basic EPS of the company stood at Rs

4 Break up of Expenditure Expenditure for the quarter stood at Rs mn, which is around 38% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 41% of the sales of the company and stood at Rs mn from Rs mn of the corresponding period of the previous year. Purchase of Traded Goods cost increased 61%YoY to Rs mn from Rs mn and accounts for 36% of the revenue of the company for the quarter. OPM and NPM for the quarter stood at 4% and 2% respectively from 4% and 2% respectively of the same period of the last year. 4

5 Board recommends Dividend Zuari Industries Ltd has recommended an equity dividend of 45% - Rs per share. Company Profile Zuari Industries was incorporated in 1967 as Zuari Agro Chemicals to manufacture urea and complex fertilisers. Being part of the K.K. Birla Group, the company set up a plant in Goa in partnership with US Steel Corporation. As a company dedicated to partnering for prosperity with the Indian farmer, Zuari s operations are spread across five key marketing areas. The company has a manufacturing facility at Goa, with four plants, dedicated to providing these markets with urea, DAP and NPK based fertilizers. These fertilisers are both affordable and effective. Zuari deals in agricultural inputs such as seeds, speciality fertilisers, and pesticides, making it a single window agricultural solution provider. The wide variety and reach of the group s companies has enabled Zuari to diversify into several related and unrelated sectors. Zuari has established itself as a key brand in sectors such as furniture, oil tanking, seeds, and investments, apart from agricultural inputs. 5

6 Company Products Fertilisers The company manufactures a range of fertilisers such as NPK in various ratios such as 0:0:60, 10:26:26, 12:32:16, 19:19:19, 18:46:0 and 0:0:50. It also produces urea. The company markets its product under the brand name Jai Kisaan. Fungicide The company manufactures fungicides to fight diseases such as leaf spots, wilts, blights, blasts, rusts, damping off, powdery mildew, and smuts. It has developed products such as Bensaan, Copper 25, Copsaan, Hexaan, Jk Cyclo, Mancomet, and Mancosaan. Herbicides The company manufactures products that are used in the pre-emergence and post emergence stages pf crop cultivation. Zuari Industries has developed products namely Atrasaan, Benzy 700, Butasaan, Glysaan 41, Kleen 58, Kleen 80, Oxyfen 235, Parachlor 24 and Prety 50. Speciality Fertilisers The company manufactures products to improve shelf life of crops, vegetables and fruits. Under this segment, it has developed products namely Atom 61, Boon 45, Boost 52, Calnit 19, Poorna 19 and Sulpho 50. Insecticides The company is engaged in manufacturing solutions to fight against bollworms, white fly and sucking pests. It has created products such as Aphasaan, Carbosaan, Dozer, Lamda-2.5, Supreme etc. 6

7 Organic Manure The company produces organic manures and micronutrients. Plants Ammonia Zuari Industries Ltd Ammonia plant is based on the ICI Steam reforming process. Under this process, naphtha is used as feedstock. The manufacturing process for Ammonia results in Carbon dioxide (CO 2) being produced as a by-product. Both the Ammonia and the Carbon dioxide generated are essential for the manufacture of urea. Zuari s Ammonia plant has an installed capacity of 660 metric tonnes per day. Urea The Urea plant is a single stream plant and utilises a Mitsui Toatsu total recycle- C process. The plant has a capacity of 1,140 metric tonnes per day. The urea plant boasts of an upgraded water recovery system. Barometric condenser water is recycled in a close-loop cooling tower. Recycled water is used for sealing gland packing of various pumps. Water that accumulates due to the blow down from the tower is reused as process water in the manufacturing process. NPK A By adopting technology based on the slurry granulation process, the NPK A plant can manufacture complex fertilisers (NPK) such as 28:28:0 (Uramphos), 18:46:0 (Samrat), 19:19:19 (Sampurna), and 14:35:14 (Sampatti). Zuari s NPK plant incorporates the latest in pipe reactor technology, which ensures that the fertilisers produced in this plant are some of the highest fertiliser grades in the country. The NPK plant has reduced the effluent it generates by adopting numerous processes. NPK B Zuari s NPK B plant was established in The plant manufactures DAP. The plant has an installed capacity of 1,100 metric tonnes per day. 7

8 The technology adopted in the NPK B plant like the NPK A plant is based on the slurry granulation process. This process is highly efficient and produces the minimum amount of emissions. The NPK B plant utilises process condensate from the Ammonia plant once it is passed through a hydrolyser stripper, recycling and reducing wastage in the process. The high standard of safety in the plant is achieved by a variety of wellestablished processes such as air monitoring. The NPK B stack is analysed for Sulphur dioxide, Ammonia and suspended particulate matter. Subsidiary Companies Zuari Seeds Zuari Seeds was incorporated in 1995 to produce and market a range of field and vegetable crop seeds and conduct R&D activities. Later in 2003 Green Tech Seeds International was merged with Zuari Seeds. The company sells products under the brand name Jai Kisaan. Simon India Simon India (SIL) was a joint venture between Zuari Industries and Overseas Holdings in order to conduct business in area of engineering and project management expertise for group companies and outside customers. Presently this company is 100% subsidiary of ZIL and provides engineering solutions in area of chemical, metallurgical, refinery, petrochemical, fertiliser and infrastructural sectors and many more. Indian Furniture Products Incorporated in 1997 the company is engaged in business of manufacturing ready to assemble furniture. The company became 100% subsidiary in the year 2002 and has capacity to manufacture 200,000 units of particle board and MDF based furniture, annually. 8

9 Zuari Infrastructure and Developers Incorporated in 2006, the company was previously known as Zuari SEZ. The company was established to develop Special Economic Zone (SEZ) for Information Technology (IT) and Information Technology Enabled Services (ITES). Zuari Developers Formerly known as Anil Kumar M N Developer, the company became subsidiary on December The company conducts business activities such as developing the land for commercial/ residential purpose and will be entering into a suitable agreement with its holding Company and other agencies. Joint Venture Companies Zuari Maroc Phosphates Ltd. Paradeep Phosphates Limited Zuari Indian Oiltanking Ltd. Zuari Rotem Speciality Fertilisers Limited. Associate Companies Gobind Sugar Mills Ltd. Chambal Fertilisers and Chemicals Limited. 9

10 Financials Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in million) FY09A FY10A FY11E FY12E 12m 12m 12m 12m Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Reserves Face Value(Rs.) EPS *A=Actual, *E=Estimated 10

11 Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in million) 30-Jun Sep Dec Mar-11 3m(A) 3m(A) 3m(A) 3m(E) Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Face Value(Rs.) EPS *A=Actual, *E=Estimated 11

12 Key Ratio Particulars FY09 FY10 FY11E FY12E EPS (Rs.) EBITDA Margin (%) 3.33% 5.93% 5.07% 4.61% PAT Margin (%) 1.52% 3.63% 2.97% 2.67% P/E Ratio (x) ROE (%) 10.06% 14.68% 14.78% 13.27% ROCE (%) 14.92% 11.01% 12.35% 11.66% EV/EBITDA (x) Debt-Equity Ratio Book Value (Rs.) P/BV Charts: 12

13 13

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15 Outlook and Conclusion At the current market price of Rs , the stock is trading at x FY11E and 9.67 x FY12E respectively. Price to Book Value of the stock is expected to be at 1.48 x and 1.28 x respectively for FY11E and FY12E. Earning per share (EPS) of the company for the earnings for FY11E and FY12E is seen at Rs and Rs respectively. PAT and Operating profit of the company are expected to grow at a CAGR of 27% and 18% over 2009 to 2012E respectively. The Company has signed Gas Supply Agreement with GAIL (India) Ltd. for supply of RLNG to its fertilizer plant. The RLNG will be used as feed stock in place of Naphtha for Company's plant at Zuarinagar, Goa. The expected date of supply of RLNG is January 01, During the quarter, the company has reported Net Profit increased to Rs million from Rs million in previous year same quarter. On the basis of EV/EBITDA, the stock trades at 5.85 x for FY11E and 5.60 x for FY12E. 15

16 We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. Industry Overview The Indian fertilizer industry has succeeded in meeting almost fully the demand of all chemical fertilizers except for MOP. The industry had a very humble beginning in 1906, when the first manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai with an annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar were the first large sized -fertilizer plants set up in the forties and fifties with a view to establish an industrial base to achieve self-sufficiency in food grains. Subsequently, green revolution in the late sixties gave an impetus to the growth of fertilizer industry in India. The seventies and eighties then witnessed a significant addition to the fertilizer production capacity. Fertilizer sector is a very crucial for Indian economy because it provides a very important input to agriculture. The fertilizer industry in India has played a pivotal role in achieving self sufficiency in food grains as well as in rapid and sustained agriculture growth. India is the third largest producer and consumer of fertilizers in the world after China and the United States. The growth of the Indian fertilizer industry has been largely determined by the policies pursued by the government. The government exercised extensive controls on the pricing, distribution and movement of fertilizers. The industry is capital intensive and the production process energy intensive with the combined cost of feedstock and fuel accounting for anywhere between 55 and 80 per cent of cost of production, depending on the type of fertilizers. 16

17 Determinants of Fertilize Demand Rainfall and irrigation facilities Relative prices of fertilizers Cropping pattern Government policies Rising demand for fertilizers There has been significant growth in the consumption of fertilizers in last three years due to overall good monsoon. The growth in NPK consumption was 9.50% in , % in and 8.40% per cent in Against the robust growth in consumption, domestic fertilizer production has remained range bound in the last decades. The surge in fertilizers demand and stagnant to modest increase in production has widened the gap between consumption and production causing larger dependence on imports. Therefore, the rising demand for fertilizers is providing ample scope for the companies in this sector to increase their production capacity and volumes thereby, driving the growth of fertilizer sector. The installed capacity as on has reached a level of lakh MT of nitrogen (inclusive of an installed capacity of lakh MT of urea after reassessment of capacity) and lakh MT of phosphatic nutrient, making India the 3rd largest fertilizer producer in the world. The rapid build-up of fertilizer production capacity in the country has been achieved as a result of a favorable policy environment facilitating large investments in the public, co-operative and private sectors. Presently, there are 57 large sized fertilizer plants in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 29 unit produce urea, 20 units produce DAP and complex fertilizers 13 plants manufacture Ammonium Sulphate (AS), Calcium Ammonium Nitrate (CAN) and other low analysis nitrogenous fertilizers. Besides, there are about 64 medium and small-scale units in operation producing SSP. The Indian fertilizer industry has come a long way since its early days post independence. India today is one of the largest producer and consumer of Fertilizers 17

18 in the world. India s production in terms of nutrients (N & P) reached a level of 155 lakh MT in from 0.39 lakh MT in Similarly, consumption of fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in to nearly 184 lakh MT in The Indian Fertilizer industry, given its strategic importance in ensuring self sufficiency of food grain production in the country, has for decades, been under Government control. The Government has over the years, provided subsidies/ concessions through the fertilizer companies to farmers and the manufacturers have been compensated through various schemes. Though the Government control helped in meeting the objective of ensuring creation of capacities and ultimately achieving self-sufficiency in food grain production, it did not encourage improving efficiencies in the sector. With the Burgeoning subsidy bill and the need to focus on fiscal prudence, Government polices in recent times are aimed at encouraging efficiencies in the sector. Policy measures like the new pricing scheme have made the operations of less efficient players unviable. The Government polices today are oriented towards achieving the stated objective of total deregulation in the sector. However, the uncertainty over exact policy parameters and absence of a comprehensive long term policy has not augured well for the industry. The financial year began with practically no clarity on the policy parameters for both nitrogenous and phosphatic fertilizers. Another important issue confronting the sector is with respect to the feedstock. Natural gas which is the main feedstock for production of nitrogenous fertilizers is available in limited quantities and the industry competes with the power sector for its share. With the Government policy favoring conversion to gas based units, the demand for gas is only expected to go up in the future, which may in turn lead to further shortages. 18

19 Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 19

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