10 August 2012 Liberty Phosphate Ltd. (LPL) (FV ` 10/-) ` 71.60 (09/08/12) BUY LPL is one of the largest producer and supplier of Single Super Phosphate (SSP) - Powder & Granulated - in the country with a capacity to produce 5,62,000 MTPA. The Group as a whole caters to about 18% of the SSP fertilizer demand in the country. It also has capacity to produce NPK (Nitrogen, Phosphate & Potash) fertilizers up to 1,65,000 MTPA. SSP is a high-in-demand fertilizer mostly used at the time of preparation of land for farming. It is a straight phosphatic multinutrient fertilizer which contains 16% water soluble Phosphorus Penta Oxide (P2O5), 12% sulphur, 21% calcium and some other essential micro nutrients in small proportions. SSP accounts for ~5% of the total fertilizer consumption in the country. A CONSILIUM INFORES & ADVISORS INITIATIVE FOR BALANCE EQUITY BROKING (INDIA) PVT LTD
Highlights BSE SENSEX/S & P NIFTY 17560.87/5322.95 Sector Fertilizers Market Cap./Free Float (` Crs.) 103/46 Market Price as on 09/08/12 ` (FV `10/-) 71.60 52 Week High/Low ` 97.50/45 Equity Shares Outstanding (in Crs.) 1.44 P/E Ratio (Times) (for FY 12) 1.8 P/B (Times) (for FY '12) 0.8 EV/EBITDA (Times) (FY 12) 1.4 ROE % (FY 12) 41.6 Shareholding Pattern as on June 12 (%) Share Price Performance u SSP is considered to be poor farmer s fertilizer as it is cheaper to Di Ammonium Phosphate (DAP) in terms of nutrients and provides an option to optimize use of phosphatic fertilizers. It fulfills the higher requirements of sulphur & phosphate in several crops such as oilseeds, pulses, sugarcane, tea, fruits & vegetables etc. u Government wants to encourage use of SSP as it is entirely produced in domestic sector to reduce dependence on imports of potassic-phosphatic (P&K) fertilizers. u Nutrient Based Subsidy (NBS) policy is a long term positive for fertilizer industry with free market mechanism. u Company has comfortable debt position of 0.53 x. Net debt is negligible with ` 65 Crs. of cash & cash equivalents. Cash forms about 60% of market cap of the Company. u Prices of Rock phosphate, the main raw material, have gone up by about 50% in FY 12. This combined with lower subsidy in FY 13 and poor monsoon conditions does not augur too well for SSP manufacturers. u Delay in subsidy payment, uncertainty of monsoon, volatile international market of raw material, seasonal consumption of fertilizer (2 months per year), logistics availability and cost and high requirements of working capital shall remain the concern for the industry. u Fertilizer stocks have reacted to the drought like situation in many parts of the country. We believe that it is good time to accumulate goods stocks in the sector for decent returns over a period of one year.
Background Liberty Phosphate Ltd. is the largest producer and supplier of SSP (Powder & Granulated) in India. It plans to boost its SSP production capacity from 5,62,000 MTPA to 924000 MTPA. Apart from SSP it also manufactures NPK Mix Fertilizers & Magnesium Sulphate. It also trades in some fertilizer raw materials & finished products like Rock Phosphate, DAP, Urea, Muriate of Potash (MOP), Triple Super Phosphate (TSP), Mono Ammonium Phosphate (MAP), Water soluble specialty fertilizers and sulphate of Potash. The Company has six manufacturing units situated at Udaipur & Kota in Rajasthan, Nandesari in Gujarat, Pali in Maharashtra, Nimrani in MP and Hospet in Karnataka. Multiple locations of plants allow Company to service demand speedily. Company is planning to set up 1,32,000 MTPA SSP plant at Rae Bareilly in the State of Uttar Pradesh, where Plant & Machinery is under erection, and commercial production is likely to commence sometime in FY 13 to cater to the demand of North and East India. Company recently completed capacity expansion at its Nandesari unit from 1,00,000 MTPA to 1,98,000 MTPA. It has applied for capacity expansion at Kota from 1,32,000 MTPA to 1,98,000 MTPA. It plans to expand capacity at Pali from 66,000 MTPA to 1,32,000 MTPA. The Company s brand of Agri Inputs DOUBLE HORSE is well accepted in the market as premium quality product. It is in advanced stage of talks with other manufacturers to roll out newer products so as to have a larger basket of offerings to its customers. LPL has one 100% subsidiary called Liberty Pesticides & Fertilizers Ltd. Subsidiary has very small operations with revenues of ` 0.24 Crs. in FY 12. The raw material required for manufacturing process of SSP are Rock Phosphate & Sulphuric Acid. Indigenous rock phosphate is available in plenty from Jhamarkotra mines, Udaipur. Sulphuric Acid is supplied by Hindustan Zinc Ltd. situated at Udaipur. Presently the company purchases about 10000 MT per month of Sulphuric Acid for its various units by way of Long Term Agreement with Hindustan Zinc Ltd. It is also planning to enter in to an agreement for supply of Sulphuric Acid, for its new projects at fixed price for a minimum period of 3 years. The Company plans to set up more units in other States like Haryana, Central Madhya Pradesh and Andhra Pradesh and increase its production capacity to One Million MTPA. Existing & Proposed Capacity (in MTPA) Plant Location Existing Capaicty Additions Total Capacity Nandesari - Gujarat 100000 98000 198000 Kota - Rajastan 132000 66000 198000 Udaipur - Rajastan 264000 0 264000 Pali - Maharashtra 66000 66000 132000 Raie Bareilly - UP 0 132000 132000 Total 562000 362000 924000
Government regulations/subsidy The Ministry of Chemicals and Fertilizers approved the NBS in March 2010, in an effort to decontrol prices, moving away from regulated returns in complex fertilizers to import parity realizations. Since the announcement, fertilizer sales volumes have risen significantly. For example, in FY11, sales of complex fertilizers other than DAP rose by ~40% despite a significant increase in prices. Under the new regime, there is a fixed subsidy for nutrients and unlike in the past, when the government set the MRP, the current regime lets manufacturers determine their own selling prices. MRP is expected to fluctuate depending on price variations in fertilizers & raw materials in international markets. Finance Act, 2012 has given stimulus to the fertilizer industry. The government announced that investment linked deduction of capital expenditure incurred, is proposed to be provided at an enhanced rate of 150% as against 100% at present for fertilizers. It has exempted 5% customs duty on import of equipment for initial setting up or substantial expansion of fertilizer projects for a period of three years. This move should encourage new entrants and expansion of capacity by existing players. The focus would now be to encourage the use of SSP more, because, subsidy on SSP is easy to control and product is good for the crops as well. Basic customs duty on a few soluble fertilizers and liquid fertilizers, other than urea, has been reduced from 7.5% to 5% and from 5% to 2.5% respectively. On 29th March 12 the Government announced the revised nutrient subsidy rates applicable for FY13. Nutrient subsidies have declined substantially as compared to FY 12, with the largest decline in Phosphorus mainly to reduce subsidy outgo in line with declining raw material prices. Urea still remains the cheapest fertilizer and hence overused by Indian farmers impacting soil quality. Subsidy on SSP (0-16-0-11) has been fixed at ` 3673 per MT. In order to ensure quality of SSP, the SSP manufacturers are required to produce a certificate of quality issued by the State Governments in which the units are located. The units are required to write/print Quality Certified on each bag of the SSP. Only those SSP manufacturers are allowed to claim subsidy, which produce 50% of the annual installed capacity or 40,000 MTs per annum. The SSP units are allowed to claim 85% On Account payment of concession to be settled subsequently by Department Of Fertilizers (DOF) based on the certification of sales issued by the State Governments. In addition to subsidy per kilo of NBS for Phosphate and Sulphur in the SSP, a lumpsum freight subsidy is also allowed. As per latest reports freight subsidy is discontinued. Government is considering change in the method of computation of subsidy on P&K fertilizers grades having less than 85% water soluble P2O5 content. Nutrient based Subsidy - ` per kg. of Nutrient Nutrients/Year (`) FY '13 FY '12 % change Nitrogen 24 27.2-11.8 Phophorus 21.8 32.3-32.5 Potassium 24 26.8-10.4 Sulphur 1.677 1.7-1.4
SSP supply & demand Domestic production of SSP has been stagnant for the past 4 years at around 2.8 million MT/year. Growth in production has slowed down significantly but is expected to pick up going forward. Several leading fertilizer companies have indicated their interest in the SSP field and have already announced plans to set up plants. The total domestic capacity is expected to increase significantly over the next couple years, which could reduce the country s dependence on imports. SSP imports vary significantly as per the demand and supply in the country. For most of FY12, imports were far below their levels in 2009, however, imports increased significantly toward the end of 2011. Import prices are at all time highs because raw material prices are soaring. Import prices in December were ~ ` 29,000/tonne. Coromandel International, a Murugappa group company is setting up a green field 800 MT per day plant of SSP in Punjab at an estimated cost of ` 116 Crs. Chambal Fertilizers is setting up 5 lac MT plant at Dahej in Gujarat at a cost of ` 122 Crs., apart from 2 lacs MT plant in Kota district of Rajasthan with an outlay of ` 32.5 Crs. Rashtriya Chemicals & Fertilizers has entered SSP market with 60,000 MT plant at Udaipur, with plans to set up total capacity of 1 MT in the company. Domestic players are adding capacities but additional supplies could take over a year to reach the market. In the meanwhile, the present SSP manufacturers could be benefited from higher demand and realizations with subsidy rates fixed for the full year of FY 13. However, such an increase in capacity could also adversely affect raw material prices (which have been on the uptrend) as there are no significant phosphate rock capacities expected anytime soon across the globe. India imports majority of its raw material for SSP production and being a large player in the global market, could pressurize suppliers to maintain prices. After announcement of NBS, production of complex fertilizers have been increasing at a much higher pace than urea. As per Government estimates, complex fertilizer production (including SSP) is expected to increase by ~ 28% in FY 13.
Financials Company s profitability for FY 12 improved due to cost control & higher capacity utilization resulting in operating leverage. However, Receivables days of the Company doubled to 125 days in FY 12 from about 63 days in FY 11. During the year under review, Company achieved production of 4,83,053 MT of SSP, NPK Mixed Fertilizers and Magnesium Sulphate as against 3,86,016 MT in the previous year, recording growth of 25.14%. Out of the total raw material consumption of ` 254 Crs. for FY 12, 36% was imported. Rock Phosphate (74%) and Sulphuric acid (23.5%) constitutes 97-98% of raw material requirements. Company has 8% Red. Cum. Preference shares of ` 5 Crs. issued in FY 08. The preference shares are redeemable in five installments from sixth year from date of allotment. Revenue Distribution FY 12 (%)
Financials Period Ended (` Crs.) FY '10 FY '11 June '11 Sept. '11 Dec. '11 March '12 FY '12 Net Sales 210.11 365.14 105.37 110.39 108.56 149.57 487.75 (Inc.)/Dec. in stock & WIP -56.48 34.88 12.51 6.16-14.71-0.59 6.94 Raw Materials 159.76 177.22 49.56 59 67.71 89.61 253.53 Purchase of Traded Goods 42.76 18.44 3.81 1.19 8.75 2.57 15.55 Employee Cost 8.02 12.39 3.24 3.84 4.12 4.11 16.08 Selling & Dist. Exp. 23.8 37.31 11.35 14.4 9.27 22.16 60.45 Other Exp. 17.05 23.35 6.29 7.03 6.32 7.23 41.41 Total Expenditure 194.91 303.59 86.76 91.62 81.46 125.09 393.96 EBITDA 15.2 61.55 18.61 18.77 27.1 24.48 93.79 EBITDA Margin (%) 7.2 16.9 17.7 17.0 25.0 16.4 19.2 Depreciation 2.28 2.81 0.85 0.47 0.68 0.93 2.9 Interest 4.78 6.97 3.06 1.84 3.01 2.27 8.88 Taxation 3.64 19.24 4.75 5.13 6.04 8.03 26.49 Other Income 0 0.06 0.03 0 1.89 1.92 Non Recurring items 0.93-0.38 Forex Loss/(Gain) 0-2.45 0 0.7 4.79-1.75 3.52 Net Profit 4.5 33.52 9.95 11.36 17.37 15.14 57.06 Net Profit Margin (%) 2.1 9.2 9.4 10.3 16.0 10.1 11.7 Equity Capital (FV ` 10/-) 14.44 14.44 14.44 14.44 14.44 14.44 14.44 Equity Shares (in Crs.) 1.4 1.4 1.4 1.4 1.4 1.4 1.4 Reserves 40.98 72.28 122.65 EPS (`) 3.12 23.21 6.89 7.87 12.03 10.48 39.52 Book Value (`) 38.4 60.1 94.9 ROE (%) 8.1 38.7 41.6 Note: 1. Profits are calculated without considering prior period adjustments & forex gain/loss. 2.Dept. of Fertilisers issued two circulars in July & Oct. 11 with regard to recognition of subsidy income on opening inventories as on 1/4/11/. Industry players based on legal opinion have not considered the impact, which if considered, would reduce sales & net profit of FY 12 by ` 10.56 Crs. & ` 7.14 Crs. respectively.
Comments u In case of P&K fertilizers, use of SSP is being encouraged. SSP is manufactured entirely in the domestic sector and enhanced production can bring down India s dependence on imports in the P&K sector. u A possible decontrol in urea pricing could lead to a significant jump in its price and hence, loss of attractiveness. Presently the price of Urea is ~ ` 5.3/kg while that of SSP is ~ ` 6.0/kg and DAP ~ ` 19.0/kg. Even without decontrol SSP prices are attractive enough for the use by farmers. u As DAP consists of 46% phosphorous (compared to 16% in SSP), it is more impacted by phosphorous prices. A higher reduction in subsidy on phosphorous for FY 13, and in turn on DAP, has helped SSP become more competitive vis-à-vis DAP. This situation can reverse only in case of large fall in phosphorus & in turn DAP prices. u Prices of Sulphur and rock phosphate, the main raw materials for the SSP manufacturers have been rising for the past 1-2 years. Any further increase can put pressure on the margins. u Any change in government policy on subsidy, pricing, imports and distribution of fertilizers can impact Company. Any further depreciation in rupee can result in to forex losses for the SSP manufacturers as they are net importers of rock phosphate without any natural hedge. u With the planned addition in the capacities by existing & new players, industry might face a situation of oversupply and hence pressure on margins. u Considering the price-nutrient advantage as compared to DAP & Urea, SSP manufacturers are expected to perform well in the near to medium term. u Company is available at less than 2x its historical earnings. Although we acknowledge poor monsoon and delayed and uncertain subsidy payments as main concerns, we feel that the Company should give decent returns over medium term. Company has much better debt & cash position compared to its peers in the industry.
Industry There are about 139 fertilizer plants in the country, out of which 80 plants produce SSP with installed capacity of ~ 79 lacs MT. Consumption of SSP in the country is estimated to be about 30 lacs MT. SSP contributes to 6.6% of total phosphatic inputs in India. As per data released by International Fertilizer Association in 2007, there is high correlation between yield per hectare of cereals, paddy and pulses and use of SSP. India is the third largest producer and consumer of fertilizers in the world. Fertilizer consumption increased from 20.3 MTPA in FY 06 to ~29.2 MTPA in FY 11 led by a rise in phosphorous consumption, which rose from ~5.2 MTPA in FY 06 to ~9.4 MTPA in FY 11. The consumption growth in FY 12 was 7% as against 14% in FY 11. Fertilizer demand is expected to rise at a CAGR of ~8% to ~40-45 MTPA in FY 16. Phosphorous is expected to account for a bulk of that increase at a CAGR of ~15% to ~16-18 MTPA in FY 16,following increased availability of complex fertilizers after the Nutrient Based Scheme (NBS) came into effect. Producers are now given a subsidy on the volume of nutrient sold as opposed to that on the volume of product sold earlier. This gives the producers incentive to sell other fertilizers besides urea and DAP. Fertilizer consumption per tonne of grain production has increased over the years. SSP is a chemical Fertilizer which contains Phosphorus as a major plant nutrient. It is relatively very cheap and contains many micro nutrients like Calcium, Magnesium, Iron, Aluminum, Sulphur and Gypsum. The Gypsum works as a soil conditioner. The SSP is manufactured by the reaction of finely grounded Rock Phosphate with diluted Sulfuric Acid. Manufacturing of SSP is based on perhaps the simplest chemical reaction amongst chemical fertilizer industry. SSP is a straight phosphatic multi-nutrient fertilizer which contains 16% water soluble Phosphorus Penta Oxide (P2O5), 12% sulphur, 21% calcium and some other essential micro nutrients in small proportions. The Rock phosphate is available in Jordan, Egypt, India, China, Israel, Morocco, Syria, Senegal and many other African countries. The Sulfuric Acid is produced by using Sulphur as raw material. SSP is cost effective fertilizer, for small & marginal farmers as it provides phosphorous and sulphur at lower cost. Major portion about 40% - of agricultural land in India is Sulphur deficient, and it adversely affects the crop yield. N, P, K & S in proper ratio increases fertility of soil. SSP fertilizer contains Sulphur and Calcium besides Phosphorus, so it is an ideal manure to eliminate sulphur deficiency of soil resulting into increase in yield of pulses, groundnut etc. to a great extent. NBS policy announced in May 10 recognized SSP as key fertilizer as NBS brought the price parity to the farmers for P&K fertilizers based on nutrient content. It also enabled a level playing field for all fertilizers based on nutrient content. As the P component is also offered by both DAP & SSP, the consumption of SSP increased due to price advantage. Production of SSP was almost stagnant during last decade. Positive policy change has resulted in higher production and capacity utilization. The SSP is available in powder and granulated form. The Powder form is called as PSSP and the granulated form is called as GSSP. The PSSP and GSSP are available in two grades. Grade A and grade B. The grading is done on the basis of water soluble P2O5 present in the product. The A grade contains 16% water soluble P2O5 and the B grade contains 14% water soluble P2O5. The granulated Super phosphate is some what costlier in comparison to PSSP because of the cost of granulation. The GSSP dissolves slowly in the water present in the soil so it is available to the crops for a longer time. The free Phosphoric acid present in the SSP is very useful for alkaline soils. The PSSP & GSSP are white, cream, gray, brown or black in colour and packed in 50 kg. bags.
Under the use of new method of sowing, seeds and granular fertilizers are used at the time of sowing only. This has resulted into shifting of fertilizer demand from powder to granular fertilizers. In view of this, LPL has enhanced production capacity of Granulated SSP from 2,47,500 MT/annum to 3,30,000 MT/annum during FY 12. In various crops, which require more of sulphur and phosphate like oilseeds, pulses, sugarcane, fruits and vegetables, tea etc, SSP is an essential fertilizer. Advantages of using SSP 1. Provides 15% of total phosphate requirements of the country. 2. Lowest price per kg, preferred by small and marginal farmers. 3. Multi-nutrient fertilizer containing P2O5 as primary nutrient and Sulphur and Calcium as secondary nutrients. 4. It is the cheapest source of Sulphur for the soil. 5. Only phosphatic fertilizer which can utilize Indian rock phosphate deposits. 6. Least foreign exchange per unit of P2O5. 7. Utilizes acid effluent from other chemical industry and thus reduces nation s cost of effluent disposal.
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