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Industry Report

Industry : Fertiliser

Fertiliser Industry
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Manish Mahawar (ManishMahawar@PLIndia.com) +91-22-6632 2239

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Fertiliser Industry

Contents
Page No. Fertiliser Industry ................................................................................... 3 Steady demand ......................................................................................... 4 Decontrolling of fertiliser...will boost the returns ...............................................7 KG basin gas...will reduce subsidy and add profit ...............................................8 Valuation ................................................................................................ 9 COMPANIES Tata Chemicals ....................................................................................... 11 Chambal Fertilisers and Chemicals ............................................................... 27

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Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report.

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Industry Report
October 16, 2008

Fertiliser Industry
India Fertiliser Index
190 170 150 130 110 90 70 50 Oct-07 Apr-08 Feb-08 Jun-08 Dec-07 Aug-08 Oct-08

Source: Bloomberg, PL Research

Fertiliser demand is expected to grow at a CAGR of 3-4% on the back of rising demand for food-grains. Demand for fertilisers is rising worldwide. However, India's Government-regulated fertiliser industry is facing supply constraints due to non-promotion of the investment fertiliser policy. During the year, Government has partially de-controlled the sector by linking subsidy with the import parity price (IPP). It has resulted in the commencement of new capacities by way of de-bottlenecking/revamp of urea plants over a short span of time. However, the sector is facing shortage of gas and this situation will ease out only when KG basin gas will be available. Rising input cost has increased the subsidy burden of the Government from Rs360bn in FY08 to Rs1250bn (expected) in FY09; disbursement of the whole subsidy in cash is quite uncertain. Steady demand: We believe that demand for fertiliser will grow at a CAGR of 3-4% on the back of rising food demand. The increase in the demand for food was owing to the reduced land under cultivation (because of urbanization), diversion of calories from food to fuel and increasing demand due to rising income in the developing countries.

Stock Performance SENSEX Index Fertiliser Index 1M (21.7) (37.2) 6M (34.9) (42.4) 12M (44.5) (36.6)

Decontrolling of fertiliser will boost the returns: Government has Tata Chemicals (39.0) (49.5) (44.6) ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. decontrolled phosphatic (DAP) as well as partially decontrolled urea during Chambal Fert. (23.3) (17.2) (7.1) the year. Decontrolling of urea will boost the EBIT to 36% (15%-20% as earlier) assuming delivered cost of gas at US$7/mmbtu. Hence, companies will get higher than regulated PAT i.e.12%. Chambal Fertilisers and Chemicals (CFCL's) 7.7% and Tata Chemicals (TCL's) 10.1% existing production fall under IPP regime, while de-bottlenecking will add EPS of Rs4.5 and Rs0.6 in TCL and CFCL, respectively in FY10. KG basin gas will reduce the subsidy and add profit: Fertiliser industry is facing a shortage of natural gas as against the total requirement of 42.9mmscmd in FY09. Hence, KG basin gas is crucial for the fertiliser sector because Government has given priority to the sector for allocation of gas. KG basin gas is expected to be available by Q4FY09. We believe that with the availability of KG basin gas, subsidy burden of the Government will reduce substantially. Also, depending upon the gas pricing, bottom-line of the companies that are going for expansion could shoot up further. Initiating coverage: We are POSITIVE on the sector on the basis of the consumption-based growth, positives in urea policy and availability of KG basin gas. We are initiating coverage on TCL and CFCL with BUY ratings on the back of positives in the new urea policy, de-bottlenecking of urea plant and other growth avenues. Both the stocks are trading at an attractive valuation and having a dividend yield of 4-5%.

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Fertiliser Industry

Steady demand
Fertiliser sector is consumption-based growth sector and directly linked with the one of the basic necessities of life i.e. food. Global food prices have increased very sharply and the reasons for that are many. Reduced land under cultivation due to urbanization, diversion of calories from food to fuel and increasing demand due to rising income in developing countries like India and China are some of them. As per CRISIL, fertiliser demand will grow at a CAGR of 3-4% over the next three years.
Global Wheat Price
220 200 US$/Tonne 180 160 140 120 100 ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. FY00 FY01 FY02 FY03 FY04 FY06

FY07

FY08

Source: Food and Agriculture Organization (FAO), International Fertiliser Association (IFA) Global Fertilizer Consumption
200 180 160 140 (m tonnes) 120 100 80 60 40 20 0 FY00 FY01 FY02 FY03 FY04 FY06 FY07 FY08E FY09E Urea DAP MOP Total

Source: Food and Agriculture Organization (FAO), International Fertiliser Association (IFA)

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Fertiliser Industry

One of the ways to improve food availability is to improve yield by increasing the use of fertilisers. In the last few years, very few additional capacities of fertilisers have come up and as a result, the demand-supply gap is widening. Also, the prices of fertilisers too have shot up. China, India and USA are the major consumer of fertilisers. Given the fact that India consumes around 1518% of global fertiliser production, we believe that India will be the key determinant of global fertilizer prices, going forward.
Global Fertilizer Prices
2,500 2,000 US$/Tonne 1,500 1,000 500 0 2004 2005 2006 2007 Feb-08 Aug-08 Urea DAP Ammonia Phosphoric Acid

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Source: IFA and FAI

Due to non-promotion of the new investment in the fertiliser policy in India, no major capacity has come up in the last decade. The demand-supply gap is widening every year and there is an increase in the import of fertilisers. With increasing input costs as well as increased consumption, the Government's subsidy bill has been mounting.
Import of Fertilizers in India
3,000 2,500 US$/Tonne 2,000 1,500 1,000 500 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 Urea DAP MOP

Source: FAI

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Fertiliser Industry

Subsidy
1,400 1,200 1,000

(Rs bn)

800 600 400 200 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E

Source: FAI

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In 2008-09, the Government is expecting the fertiliser subsidy bill at Rs1250bn as against Rs360bn provided in the Budget 2008. Government will soon release subsidy of Rs220bn and Rs320bn in two tranches in cash and also assure that the balance subsidy of Rs710bn will be paid in cash. This move has given some relief to the fertiliser companies. However, the balance amount of subsidy disbursement of Rs710bn is quite uncertain. Government has issued bonds of Rs.75bn in FY08 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. which were en-cashed at 10-15% discount. Hence, issue of subsidy bond in the future will affect the profitability of the companies.

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Fertiliser Industry

Decontrolling of fertiliser...will boost the returns


Government has fully de-controlled phosphatic fertiliser and partially decontrolled urea by introducing the much awaited IPP-linked investment policy. There has been no change in the existing policy for urea (NPS-III), whereas additional incentives will be for higher utilization/revamp/Brownfield and Greenfield projects in the new investment policy. The policy provides for an IPP benchmark with floor and ceiling price of US$250/tonne and US$425/tonne, respectively, for additional production (beyond existing production) of urea.
Basis of Selling Price Investment Mode Revamp Conditions Any improvement in the capacity of existing plants through investment up to Rs10bn in the existing ammonia urea production and subject to the above-mentioned floor and ceiling prices. Will start production of additional capacities within four years on notification. Expansion 90% of IPP Setting-up of a new ammonia urea plant in the premises of existing plants. Capex should not exceed Rs30bn subject to above-mentioned floor and ceiling prices. Will start production of additional capacities within five years on notification. Revival/ Brownfield Projects 95% of IPP Revival of Hindustan Fertilisers Corporation (HFCL) and Fertiliser Corporation of India (FCIL) plants. No cap for investment in the Brownfield projects. Subject to abovementioned floor and ceiling prices. Will start production of additional capacities within five years on notification. Greenfield Projects Not decided Pricing would be at a discount on IPP and decided on a bidding process after firmingISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. up of locations of proposed new plants. The floor and ceiling will be decided at the time of bidding. Source: Ministry of Fertiliser Selling Price 85% of IPP

The new policy considers only non-APM gas for new investment. All APM gas will be allocated towards production in the existing plants. The floor and ceiling prices are recommended based on the feedstock price of US$4.88 per MMBTU, which is the price of RIL gas plus estimated taxes. In case of any sharp increase (more than double the current price) in the price of feedstock in the future, the floor and ceiling prices will have to be adjusted to take care of the increased cost of production. Further, the above will be reviewed after five years keeping in view the prevailing gas prices and investment costs. We believe that a departure from cost plus 12% post-tax return in new investment policy is POSITIVE for the sector, as price of expanded urea production has been partly de-controlled with the floor and ceiling price. We believe that new urea investment policy will give at-least 36% of EBIT (15%-20% as earlier) assuming delivered cost of gas at US$7/mmbtu. Companies will get higher than regulated PAT as earlier i.e.12%. CFCL's 7.7% and TCL's 10.1%. Existing production will fall under the IPP regime, while de-bottlenecking will add EPS of Rs4.5 and Rs0.6 in TCL and CFCL, respectively in FY10.

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Fertiliser Industry

KG basin gas...will reduce subsidy and add profit


The fertiliser industry is facing a shortage of natural gas as against total requirement of 42.9MMSCMD in FY09. Hence, KG basin gas is crucial for the fertiliser sector because the Government has given priority to the sector for allocation of gas. This gas is expected to be available by Q4FY09. We believe that with the availability of the KG basin gas, subsidy burden of the government will substantially reduce. Also, depending on the gas pricing, bottom-line of the companies that are going for expansion, could shoot up further. Requirement of gas for the fertilizer sector is expected to increase in the years to come. Gas is required not only for meeting the current shortfall being faced by the existing gas based urea units but also on account of conversion of Naphtha and FO/LSHS based units to NG/LNG, de-bottlenecking of existing urea units, setting up of new and expansion of existing urea units and revival of closed urea units of HFCL and FCI. As per the New Pricing Scheme (NPS) - III, all non-gas based urea units will be converted to gas till FY10. Under the above scenario, the total requirement of gas for the fertiliser sector by the end of XI Plan period is expected to be 76.3 MMSCMD. The break-up of gas requirement year wise and the corresponding production capacity of urea are given below:
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Urea Production Capacity (In Lac Tonnes) Gas Demand (MMSCMD)

FY08 226.2 41.0

FY09 226.2 42.9

FY10 259.9 55.9

FY11 329.4 76.3

FY12 329.4 76.3

Source: Ministry of Petroleum and Natural Gas

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Fertiliser Industry

Valuation
We are initiating the coverage on TCL and CFCL with BUY rating on the back of positives in the new urea policy, de-bottlenecking of urea plant and other growth avenues. Both the stocks are trading at attractive valuation and having dividend yield of 4-5%.
Peer Comparison CMP (Rs) Chambal Fertilizers 47 Tata Chemicals 167 Zuari Industries* 180 Coromandel* 123 Potash Corp*# Mosaic*# CF Industries*# Agrium Inc*# 106 44 65 43 Equity (m) 416.2 243.5 29.4 139.9 316.4 443.9 56.3 158.0 MCap (Rs m) 19,603 40,647 5,299 17,208 33,476 19,626 3,637 6,840 EPS (Rs) FY08 4.0 19.6 33.3 14.4 3.4 4.7 6.6 3.3 FY09E 9.6 34.5 46.9 19.0 12.5 11.8 16.6 9.7 PE (x) FY08 11.8 8.5 5.4 8.5 31.1 9.5 9.8 13.3 Div. EV/EBITDA (x) FY08 6.3 8.4 5.8 4.3 11.2 4.4 2.3 6.0 FY09E 3.7 3.8 5.4 9.2 5.7 2.4 1.7 3.7 P/BV (x) FY08 1.7 1.1 0.8 2.2 5.6 2.9 3.1 2.2 FY09E 1.3 0.9 0.6 1.6 4.3 1.7 1.7 1.6 FY09E Yld. (%) 4.9 3.8 4.8 5.2 3.8 1.7 6.5 2.8 8.4 3.8 3.9 4.5 0.3 0.0 0.1 0.3 # Y/e Dec

Source: Company Data, PL Research

* Bloomberg Estimates

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Fertiliser Industry

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COMPANIES

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Company Report
October 16, 2008

Tata Chemicals
Rating Price Target Price Implied Upside Sensex (Prices as on October 16, 2008) BUY Rs167 Rs242 44.7% 10,581

TCL is a key beneficiary of the new investment policy of urea. We believe that TCL's top-line and bottom-line will grow with the two years CAGR (FY08A-FY10E) of 28.2% and 24.2%, respectively on the back of the positives in the new urea policy, de-bottlenecking of the urea plant, skyrocketing phosphoric acid prices and addition in the natural soda ash capacities. Incentive to higher utilization in new policy...enhances earnings in FY09 and FY10: We believe that the company's 10.1% of FY09 and FY10 production will be eligible for IPP. We expect that a positive move in the policy will give incremental PAT of Rs413m (EPS - Rs1.7) in FY09 and FY10. De-bottlenecking...right step at the right time: TCL is going for debottlenecking of the urea plant which will add 3.4lac tonnes (39.3% of existing capacity). We believe that de-bottlenecking will boost the PAT by Rs157m (EPS - Rs0.6) in FY09 and Rs1,091m (EPS - Rs4.5) in FY10 on the back of IPP linked urea policy. IMACID JV...Its rock-eting: Spurting phosphoric acid prices will improve the profitability of Indo Maroc Phosphore SA (IMACID) substantially. We expect that IMACID will add a PAT of Rs1,935m (EPS - Rs7.9) in FY09, assuming phosphoric acid prices at US$1800/tonne

Trading Data Market Cap. (Rs bn) Shares o/s (m) Free Float 3M Avg. Daily Vol (000) 3M Avg. Daily Value (Rs m) 40.6 2,435.4 70.7% 245.1 67.5

Addition in natural soda ash capacity...a safe play: Post the acquisition of Major Shareholders ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. GCIP, TCL's natural soda ash capacity increased from 14% to 59%. We believe Promoters 29.3%
Foreign Domestic Inst. Public & Others 12.7% 28.1% 29.9%

that GCIP will add PAT of Rs1,242m (EPS - Rs5.1) in FY09, while the new soda ash plant in Kenya will run at the capacity of 50% in FY09. Valuation: At the CMP of Rs167, TCL is trading at 4.8x at its FY09E consolidated EPS of Rs34.5 and 5.5x at its FY10E consolidated EPS of Rs31.2. We recommend BUY the stock with a price target of Rs242 (potential upside - 44.7%) based on 8x of FY10E earning.
Key Financials (Y/e March) FY07 58,036 44.6 10,909 5,080 20.9 17.3 7.1 FY08 60,232 3.8 9,850 4,769 19.6 (6.1) 8.7 FY09E 100,304 66.5 18,373 8,404 34.5 76.2 12.1 FY10E 99,057 (1.2) 16,529 7,355 30.2 (12.5) 10.6

Stock Performance 1M Absolute Relative (39.0) (17.3) 6M (49.5) (14.6) 12M (44.6) (0.1)

Revenue (Rs m) Growth (%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs)

Price Performance (RIC: TTCH.BO, BB: TTCH IN)


(Rs) 450 400 350 300 250 200 150 Apr-08 Dec-07 Aug-08 Feb-08 Oct-07 Jun-08 Oct-08

Source: Company Data; PL Research

Profitability & Valuation EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%)
Source: Company Data; PL Research

FY07 18.8 19.8 24.6 1.0 5.3 8.0 1.6 4.2

FY08 16.4 12.8 11.5 1.4 8.4 8.5 1.1 5.2

FY09E 18.3 19.0 21.9 0.7 3.8 4.8 0.9 7.2

FY10E 16.7 15.1 21.1 0.6 3.6 5.5 0.8 6.3

Source: Bloomberg, PL Research

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Tata Chemicals

Investment Highlights
Incentive to higher utilization in new policy...enhances earnings in FY09 and FY10
Government has partially decontrolled urea in the new investment policy by linking the subsidy with IPP, subject to floor and ceiling price of US$250/tonne and US$425/tonne, respectively. IPP will be applicable to the production beyond the benchmark that is specified by the Government. Hence, production by way of higher utilization/revamp/Brownfield projects/Greenfield projects, but beyond the benchmark will be eligible for IPP. TCL will be eligible for 85% of IPP. We believe that the company's 10.1% of FY09 and FY10 production will be eligible for IPP based on FY08 production level (123.8%) and subject to minimum production of one million tonnes of urea (target production specified by the Government) . We expect that a positive move in the policy will give incremental PAT of Rs413m (EPS - Rs1.7) in FY09 and FY10 (Assuming delivered cost gas at US$7 per mmbtu).
Policy benefit on existing production (Rs m)

Remarks EBIT based on IPP ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. Sales (In Tonnes) 112,978 Assuming company will maintain the capacity utilization level (123.8%) of FY08 and will achieve the target production of one million tonne as per policy. Hence, 10.1% of total production fall under IPP. Sales Realization US$425@Rs42/US$(Rs/T) 17,850 Assuming IPP of urea shouldn't fall below US$500/Tonne. Sales 2,017 EBIT 38.1% Assuming delivered cost of gas at US$7/mmbtu. EBIT 768 EBIT based on Normal Pricing Sales (In Tonnes) 112,978 Sales Realization 10,048 Sales 1,135 EBIT 15.0% EBIT 170 Incremental EBIT 598 Interest TCL had total debt of Rs23,452.8m in standalone books, in which Rs19,070m taken for acquisition of GCIP. Hence, we are not considering the interest cost. PBT 598 Tax (185) PAT 413 Equity 2,435 Incremental EPS 1.7 Source: PL Research

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Tata Chemicals

Our estimates are based on the assumption that IPP of urea is at US$500 per tonne and delivered cost of gas is at US$7 per mmbtu. We have made a sensitivity analysis on IPP at different price levels and delivered cost of gas at US$8 per mmbtu.
Sensitivity analysis Higher Utilization at 123.8% 450 112,978 16,065 1,815 31.2% 15.0% 294 (91) 203 2,435 0.8 IPP at US$ 400 112,978 14,280 1,613 22.6% 15.0% 123 (38) 85 2,435 0.3 350 112,978 12,495 1,412 11.6% 15.0% (48) 15 (33) 2,435 (0.1) Gas @ US$8 Sales (In Tonnes) - Eligible for IPP 112,978 Sales Realization (85% of IPP @Rs42/US$) 17,850 Sales 2,017 EBIT % at IPP 33.2% EBIT % at normal case 15.0% Incremental EBIT due to higher utilization 367 Tax (114) PAT 253 Equity 2,435 Incremental EPS (Rs) 1.0 Source: PL Research (Rs m)

De-bottlenecking...right step at the right time


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TCL is going for de-bottlenecking of its urea plant with a capex of Rs2bn which will add 3.4lac tonnes (39.3% of the current installed capacity) and will come on stream by December 2008. Funding of capex of Rs2bn will be done through internal accruals. De-bottlenecking of urea will be benefited by the IPP-linked urea policy. We believe that de-bottlenecking will boost the PAT by Rs157m (EPS - Rs0.6) in FY09 and Rs1,091m (EPS - Rs4.5) in FY10 (Assuming delivered cost of gas is at US$7 per MMBTU).
(Rs m) 2009-2010E 250,000 Remarks Assuming that the company will achieve the target production of 1.94m tonne as per policy and 15% & 73.5% utilization in FY09 and FY10, respectively. Assuming IPP of urea shouldn't fall below US$500/Tonne Assuming delivered cost of gas at US$7/mmbtu. Total Capex - Rs2bn.Funding of the capex is through internal accruals but we are considering the opportunity cost.

Earning through de-bottlenecking Particulars Sales (In Tonnes) 2008-2009E 51,000

Sales Realization US$425 @ Rs42/US$ Sales EBIT EBIT Interest PBT Tax PAT Equity Incremental EPS Source: PL Research

17,850 910 38.1% 347 (120) 227 (70) 157 2,435 0.6

17,850 4,463 38.1% 1,700 (120) 1,580 (490) 1,091 2,435 4.5

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Tata Chemicals

Further, our estimates are based on the assumption that IPP of urea is at US$500 per tonne and delivered cost of gas is at US$7 per MMBTU. We have made a sensitivity analysis on IPP at different price levels and delivered cost of gas at US$8 per MMBTU.
Sensitivity analysis Particulars Sales EBIT (%) EBIT Interest PBT Tax PAT Equity Incremental EPS (Rs) Source: PL Research Sensitivity analysis Particulars 2008-2009E 2009-2010E 350 250,000 12,495 297.5 3,124 11.6% 362 (120) 242 (75) 167 2,435 0.7 IPP @US$ 450 400 350 450 400 Sales (In Tonnes) 51,000 51,000 51,000 250,000 250,000 ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. Sales Realization (85% of IPP @Rs.42/US$) 16,065 14,280 12,495 16,065 14,280 Sales Realization (In US$) 382.5 340 297.5 382.5 340 Sales 819 728 637 4,016 3,570 EBIT (%) 31.2% 22.6% 11.6% 31.2% 22.6% EBIT 256 165 74 1,253 807 Interest (120) (120) (120) (120) (120) PBT 136 45 (46) 1,133 687 Tax (42) (14) 14 (351) (213) PAT 94 31 (32) 782 474 Equity 2,435 2,435 2,435 2,435 2,435 Incremental EPS (Rs) 0.4 0.1 (0.1) 3.2 1.9 Source: PL Research (Rs m) 2008-2009E 910 33.2% 302 (120) 182 (56) 126 2,435 0.5 Gas @ US$8 2009-2010E 4,463 33.2% 1,482 (120) 1,362 (422) 939 2,435 3.9

IMACID JV...Its rock-eting


Spurting phosphoric acid prices will improve the profitability of IMACID substantially. We expect that IMACID will add a PAT of Rs1,935m (EPS - Rs7.9) in FY09. We assume that the phosphoric acid prices will remain at US$1800/tonne which is on a conservative basis because IMACID has contracted at US$2300/ tonne in Q2FY09. IMACID posted PAT of Rs830m (1.7x of FY08 PAT) in Q1FY09 itself. IMACID has repaid all the debt in FY08; thus, becoming a debt-free company.

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Tata Chemicals

We have made a sensitivity analysis of phosphoric acid prices for FY10 because we are confident that in FY09, IMACID will achieve the EPS of Rs7.9. Our estimates for FY10E are based on the phosphoric acid price at US$1500/tonne.
Sensitivity analysis Phosphoric Acid Price US$ per Tonne Sales EBITDA EBITDA Per Tonne (Rs) Depreciation EBIT Tax PAT Equity EPS (Rs) Source: PL Research 1,000 6,014 1,503 10,500 (287) 1,216 (243) 973 2,435 4.0 1,100 6,615 1,654 11,550 (287) 1,367 (273) 1,093 2,435 4.5 1,300 7,818 1,955 13,650 (287) 1,667 (333) 1,334 2,435 5.5 1,500 9,021 2,255 15,750 (287) 1,968 (394) 1,574 2,435 6.5 (Rs m) 1,800 10,825 2,706 18,900 (287) 2,419 (484) 1,935 2,435 7.9

Addition in natural soda ash capacity...a safe play


Post the acquisition of GCIP, TCL's natural soda ash capacity has increased from 14% to 59%. Cost of manufacturing natural soda ash is half of synthetic soda ash. We believe that GCIP will add EPS of Rs5.1 in FY09, while TCL has set up a new natural soda ash plant of 3.5lac tonnes in Kenya in FY08, This plant is 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. poised to run at a capacity of 50% and produce 2lac tonnes in FY09.
TCLs soda ash installed capacity
India - Synthetic 7.0 BMGL - Synthetic BMGL Kenya - Natural GCIP - Natural

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6.0 (m Tonnes) 5.0 4.0 3.0 2.0 1.0 0.0 FY07 FY08 FY09E FY10E

Source: Company Data, PL Research

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Tata Chemicals

We believe that TCL's inorganic chemicals' consolidated EBIT margin will improve from 9.3% in FY08 to 15.7% in FY09 due to acquisition of GCIP where the margins , are higher than other plants. Further, we have considered the consolidated EBIT margin to 10.5% in FY10 mainly on account of 15% dip in the soda ash realization in our estimate. Soda ash is an energy-intensive commodity and we believe that soda ash price could cool-off in FY10 due to a new capacity coming up in China and due to softening of the energy cost. We have made the sensitivity analysis by declining the price of soda ash by 10% and 20%, respectively in FY10.
Sensitivity Analysis EBIT % Decline PBT % Decline PAT % Decline EPS % Decline Current - 15% decline 12,269 10% decline 13,442 -9.6% 11,672 -11.2% 8,258 -12.3% 33.9 -12.3% 20% Decline 11,096 9.6% 9,326 11.2% 6,598 10.3% 27.1 10.3%

10,499

7,355

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30.2

Source: PL Research

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Tata Chemicals

Worst and best case scenario


We are showing the worst and best case scenario of TCL's FY09E and FY10E EPS, assuming the soda ash and urea prices are stable.
Worst and Best Case Worst Case Base Case Less: EPS due to higher utilization of Urea Less: EPS due to de-bottlenecking of Urea Less: EPS contribution by IMACID Add: EPS due to higher utilization of Urea Worst Case - Gas price at US$8/mmbtu Best Case - Gas price at US$7/mmbtu Add: EPS due to de-bottlenecking Worst Case - Gas price at US$8/mmbtu Best Case - Our estimate is on best case. FY09E 34.5 1.7 0.6 0.0 32.2 FY10E 30.2 1.7 4.5 6.5 17.6 Best Case FY09E 34.5 1.7 0.6 0.0 32.2 FY10E 30.2 1.7 4.5 6.5 17.6 (Rs)

1.0

1.0

1.7

1.7

0.5

3.9

0.6

4.5

Add: EPS contribution by IMACID Worst Case- Phosphoric Acid at US$1000/ tonne ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. 0.0 Best Case - Phosphoric Acid at US$1800/tonne DownloadPDF. 4.0 33.7 26.5 FY09E 33.7 34.5 34.5 Chng -2.3% 0.0%

0.0 34.5 FY10E 26.5 30.2 31.7

7.9 31.7 Chng -12.4% 4.9%

Worst Case Base Case Best Case Source: PL Research PE Band


450 400 350 300 250 200 150 100 50 0 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 4 7

10

13

Price (Rs)

Oct-04

Oct-05

Oct-06

Oct-07

Source: PL Research

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Oct-08

Apr-99

Apr-00

Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

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Tata Chemicals

Soda ash prices (ex-factory)


14,000 13,000 12,000 (Rs / Tonne) 11,000 10,000 9,000 8,000 7,000 6,000 5,000 Apr'97 Feb'98 Dec'98 Oct'99 Aug'00 Jun'01 Apr'02 Feb'03 Dec'03 Oct'04 Aug'05 Jun'06 Apr'07 Feb'08

Soda ash industry


Global soda ash demand in 2007 grew to 47.1m tonnes from 44.3m tonnes in 2006, an overall growth of 6.3%. Of this, China's share grew to 15.9m tonnes from 14.3m tonnes, representing a growth of 10.7%. Russia witnessed a growth of 4.5% over the same period. At the regional level, soda ash demand in Asia and the Middle East increased by 11.4%, from 22m tonnes in 2006 to 24.5m tonnes in 2007. These markets account for 89% of the growth in global demand. Soda ash is an important industrial chemical used in the manufacture of glass, detergents, dyes, silicates and other chemicals. Much of the global demand was driven by the emerging markets like China, India, Russia and Latin America, where growth is linked to rising income levels and growing urbanization. The latter drives infrastructure growth. While the improving quality of life, for a larger population base leads to a greater demand for automobiles, detergents and dyes, the growth in building construction has led to an increase in the global demand for glass. As the growth rate in the emerging economies of China, India, East Europe and Latin American countries is expected to be above 8% per annum, the current growth trends in soda ash demand will continue. The world capacity of both synthetic and natural soda ash is about 48m tonnes. Europe, US and Asia. During 2007, the global production of soda ash increased marginally from 42m tonnes to 43m tonnes. The soda ash industry is experiencing significant cost pressures due to the soaring prices of various commodities like oil, coal and coke. These rising costs have led to international soda ash spot prices increasing from US$215/T in April 2007 to US$ 325/T in March 2008 on a cost and freight (C&F) India basis. Given the low per capita consumption of soda ash in India (2.7 kg), when compared to countries like China (9.8 kg) and USA (22 kg) and the sustained higher economic growth in the country, there is clearly a scope for consumptiondriven growth in the soda-ash business. Soda ash demand in India in FY07 was around 2.2m tones, driven primarily by the growing demand from float glass manufacturers, who cater to the construction and auto sectors. Custom duties on soda ash imports have been gradually reduced from 15% in 2005-06 to 7.5% in 2007-08, while imports have also become cheaper. TCL continues to remain cost competitive and the acquisition of Brunner Mond Group Ltd (BMGL) and GCIP has placed TCL in a better position to face global competition because of the access to cheaper natural soda ash. Domestic demand for soda ash continues to grow at around 5%.

Source: CRISIL

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Tata Chemicals

Business Overview
Tata Chemicals is basically categorised into two segments:

Inorganic Chemicals
Inorganic chemical consists of soda ash, salt, cement, sodium bicarbonate and other chemical products. Inorganic chemical constitutes around 54% of consolidated sales, while soda ash constitutes 43%. TCL has maintained its leadership position in the domestic market with a market share of 32% in FY08. Globally, the company has a total soda ash capacity of 5.5m.

Fertilizers
TCL has its presence across all the three key agro-nutrients, namely nitrogen (N), phosphorous (P) and potassium (K). Given the nature of the Government regulations, the sale of fertilisers is localized to certain geographical regions within India. The fertilizer business is focused in the areas of North and East India. TCL's product portfolio comprises of nitrogenous fertilizers (urea) and phosphatic fertilizers (DAP and complexes) representing 37.4% and 46.4%, respectively of the total fertiliser revenues, while potassic fertilizer (MOP) which 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. is imported, accounts for 6.6%.

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Segmental breakup

Sales
120,000 100,000 80,000 (Rs m) 60,000 40,000 20,000 0 FY07 FY08 FY09E FY10E (Rs m) Inorganic Chemicals Fertilizers 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY07 FY08

EBIT
Inorganic Chemicals Fertilizers

FY09E

FY10E

Source: Company Data, PL Research

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19

Tata Chemicals

Global Operations
Brunner Mond: BMGL is wholly owned subsidiary of TCL acquired in December 2005 for Rs8bn. BMGL has plants in England, Holland and Kenya with the total capacity of 2m tones. This acquisition made TCL, the world's third largest soda ash and sodium bio-carbonate producer. Magadi, Kenya is the second largest natural soda ash producer in the world. IMACID: TCL bought one-third stake in IMACID in FY06 for Rs1.7bn. IMACID is an equal JV between Office Cherifien de Phosphates (OCP) - the world's largest producer of rock phosphate and phosphatic fertilizers, CFCL and TCL. Investment was made primarily to secure supplies of phosphoric acid for producing DAP and NPK composite fertilizers at Haldia. GCIP: TCL acquired GCIP in FY08 for US$1bn. GCIP has 75% subsidiary named General Chemical Soda Ash Partners Inc (GCSAP). GCSAP has natural soda ash plants in US with the total capacity of 2.5m tonnes. TCL has an access to 75% of GCSAP's cash flow. This acquisition made TCL, the world's second largest soda ash player after Solvay.
Capex Plan
ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 Current 05:43:38 EDT. DownloadPDF. Capex Capacity Expansions Expended

Exp. Time FY09 FY10 FY10 FY10 FY10

(Tonnes) Urea Babrala 864,600 Soda Ash - Mithpur 917,700 Salt - Mithpur 550,550 Cement - Mithapur 440,000 Sodium Biocarbonate - Mithpur 70,000 Source: Company Data

(Tonnes) 1,204,600 1,200,000 700,000 600,000 1,200,000

(Rs m) 2,000

2,000

TCL will add further 7lac tonnes soda ash (4.5 lac tonne natural + 2.5 lac synthetic) of additional capacity in all the locations by way of de-bottlenecking of plants in the next 18-30 months. TCL is investing Rs500m and Rs1250m in bio-fuel and distribution business, respectively. TCL will fund the capex through internal accruals and if required, than by sale of investment (TCL have total quoted investments of Rs1987.9m in FY08). Distribution business will be funded through both debt and equity.

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Tata Chemicals

New Initiative
Bio-fuel: TCL is setting up a fully integrated, commercial scale plant for ethanol production (from sweet sorghum) with a capacity of 30,000 kilo litres per day in Nanded, Maharashtra. Plant will be operational by Q3FY09 and total capex would be Rs50 crore. Distribution centre: TCL has entered into 50:50 JV with Total Produce Plc, Ireland for sourcing and distributing fresh fruits and vegetables. In the distribution business, TCL will acquire land and setup the storage centre. The company will purchase fruits and vegetables from farmers and after separating the scrap, will sell the same to the retailers. In the initial years, TCL is focusing on reducing the wastage and scrap. Total capex for TCL and Total Produce Plc. would be around Rs2-2.5 bn. On a pilot basis, the company had started its first centre at Ludhiana in May 2008 and the second centre will be soon coming up at Kalyan, Mumbai by March 2009. The company is planning to open around 45 centres in the coming 4-5 years throughout the country in various stages. R&D Centre: TCL has setup a R&D centre at Pune with a staff capacity of 28 scientists and aims to recruit 150 scientists over the next three years. The company will leverage its bio and nanotechnology business to change its revenue 203.115.117.194next2011-08-17 05:43:38 EDT. DownloadPDF. mix over the on five years. Tata Kisan Sanchar (TKS): TCL has setup around 613 TKS centres in the North and East of the country to supply the agri-inputs, including TCL's fertilizers that provides a variety of solutions that meets the farmer's needs. TKS' initiatives extend to farm management services, advice on crops and farming practices, information on prices of their produce, farm credit, storage, crop insurance and a variety of other things.

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Inorganic Growth
Soda ash facility at Tanzania: TCL is entering into a 50:50 JV with the Tanzania Government for setting up a natural soda ash plant with the capacity of 0.5m tonnes. But the JV is currently withheld due to environmental issues in Tanzania. Acquisition: TCL is looking for further acquisition or setting-up the urea plants in Bangladesh and the middle-east countries or another soda ash facility in China and US.

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21

Tata Chemicals

Key Risks and Concerns


Local levies
The threat of imports has increased in the recent past, with the lowering of customs duty and abolishment of anti-dumping duty (abolished in January 2005). As per international agreements, custom duty is required to be brought down to zero. Import duty of 35% in FY01 has come down to 7.5% in FY08; this has resulted in an increase in the imports, from 0.049m tonnes in FY01 to 0.25m tonnes in FY08.

Delay in the payment of subsidy


Delay in the payment of subsidy or issuance of subsidy bond of fertilizer by the Government could cause serious financial burden to TCL.

Delay in de-bottlenecking of urea plant


Any delay in the de-bottlenecking of the project could postpone the revenue and profitability of the company.
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Availability of natural gas

Natural gas is the cheapest feedstock for urea. However, due to the shortage of this gas, TCL is using naphtha to manufacture urea. Going ahead, usage of naptha instead of natural gas will adversely affect the profitability of company.

Sharp fall in commodity prices


TCL is in the commodity business and commodity prices are falling from the peak. Hence, any sharp fall in the commodity prices could lead to an adverse impact on the company.

Forex liabilities
Sharp depreciation of rupee against US dollar could affect the profitability of TCL because the company has foreign currency loans. We have not considered these losses in our estimate.

Pension Fund Liabilities


TCL has pension fund liabilities in UK and US which are mainly invested in these markets. Hence, a sharp fall in the global market could impact the profitability of TCL. We have not considered these losses in our estimate.

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Tata Chemicals

Financials
Key Assumptions Y/e March Soda Ash - India Sales (Tonnes) Sales Realization (Rs) EBIT (%) Soda Ash - BMGL Sales (Tonnes) Sales Realization (Rs) EBIT (%) Soda Ash - GCIP Sales (Tonnes) Sales Realization (Rs) EBIT (%) FY07 721,946 10,445 24.2 FY08 680,200 12,147 22.1 FY09E 728,000 12,147 21.0 FY10E 837,204 10,325 19.0

1,568,000 10,510 11.2

1,629,000 10,724 (3.4)

1,750,000 10,724 4.7

1,890,000 9,116 1.8

1,905,000 7,350 24.1

1,905,000 6,248 10.7

Salt Sales (Tonnes) 496,802 479,697 467,968 Sales Realization (Rs) 6,649 7,527 8,600 EBIT (%) 24.2 22.1 21.0 ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. Urea Sales (Tonnes) Sales Realization (Rs) EBIT (%) DAP Sales (Tonnes) Sales Realization (Rs) EBIT (%) IMACID - Phosphoric Acid Sales (Tonnes) Sales Realization (Rs) EBIT (%)

512,803 8,600 19.0

1,016,886 8,492 9.6

1,043,047 10,017 13.1

1,121,308 11,189 10.2

1,320,308 12,193 12.5

278,493 16,368 9.6

225,564 17,760 13.1

275,000 34,000 10.2

275,000 34,000 12.5

120,469 22,748 10.7

140,410 20,904 18.1

143,190 75,600 22.3

143,190 63,000 21.8

Source: Company Data, PL Research

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Tata Chemicals

Income Statement Y/e March Sales Inorganic Chemicals Fertilizers Total Growth (%) EBIT Inorganic Chemicals As % of Sales Fertilizers As % of Sales Total EBIT Margin (%) Unallocated Income Interest PBT PBT Margin (%) Tax FY07 30,534 27,503 58,036 FY08 32,330 27,901 60,232 3.8 FY09E 49,482 50,823 100,304 66.5

(Rs m) FY10E 46,486 52,571 99,057 (1.2)

5,549 18.2 2,621 9.5 8,170 14.1 255 (944) 7,481 12.9 (2,401) 32.1 5,080 8.8 5,080

3,005 9.3 3,706 13.3 6,712 11.1 633 (461) 6,884 11.4 (2,115) 30.7 4,769 7.9 4,875 9,644

7,748 15.7 6,500 12.8 14,248 14.2 (2,370) 11,879 11.8 (3,475) 29.3 8,404 8.4 8,404

4,866 10.5 7,403 14.1 12,269 12.4 (1,770) 10,499 10.6 (3,144) 29.9 7,355 7.4 7,355

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Tax Rate (%) PAT before exceptional Items PAT Margin (%) Exceptional Items PAT

Source: Company Data, PL Research

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Tata Chemicals

Balance Sheet Y/e March FY07 Source of Funds Equity Capital 2,152 Share Premium 1,819 Profit & Loss/ General Reserve 21,748 Networth 25,718 Total Debt 18,642 Deferred Tax Liability 2,337 Deferred Capital Grants 211 Total 46,908 Application of Funds Net Fixed Assets Goodwill on Consolidation Investments Inventories Sundry Debtors Cash & Bank Loans & Advances Sundry Creditors Acceptances/ Other Liabilities Provisions ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 Working Capital Miscellaneous Expenses Total FY08 2,341 6,524 28,320 37,185 48,505 2,695 148 88,532 FY09E 2,435 8,617 33,282 44,335 39,494 2,695 148 86,671

(Rs m) FY10E 2,435 8,617 37,625 48,678 29,494 2,695 148 81,014

30,561 33,712 29,727 7,632 46,492 46,492 7,753 4,174 4,174 6,352 9,302 12,095 9,665 11,999 13,195 1,545 6,767 10,383 2,582 6,215 6,215 (8,428) (15,214) (15,394) (2,654) (4,121) (6,182) (8,135) (10,800) (14,040) 05:43:38 EDT. DownloadPDF. 926 4,148 6,272 37 5 5 46,908 88,532 86,671

28,766 46,492 4,174 15,020 16,386 10,597 6,215 (19,117) (9,273) (18,252) 1,576 5 81,014

Source: Company Data, PL Research Cash Flow Y/e March Cash from operating activities Cash from investing activities Cash from financing activities (Dec)/Inc in cash Opening Cash Closing Cash FY07 12,103 (8,340) (3,382) 380 1,165 1,545 FY08 14,783 (41,572) 32,011 5,223 1,545 6,767 FY09E 14,020 (140) (10,264) 3,616 6,767 10,383 (Rs m) FY10E 16,525 (3,300) (13,012) 213 10,383 10,597

Source: Company Data, PL Research

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Tata Chemicals

Key Ratios Y/e March Growth Ratio (%) Sales EBITDA PAT EPS Asset Based Ratio (%) RoCE/RoI RoE/RoNW Gearing Debt/Equity Per Share (Rs) EPS BV DPS CEPS FY07 44.6 35.3 17.3 17.3 FY08 3.8 (9.7) (6.1) (6.1) FY09E 66.5 86.5 76.2 76.2 FY10E (1.2) (10.0) (12.5) (12.5)

24.6 19.8

11.5 12.8

21.9 19.0

21.1 15.1

0.7

1.3

0.9

0.6

20.9 105.6 7.1 56.0

19.6 152.7 8.7 53.3

34.5 182.0 12.1 92.4

30.2 199.9 10.6 85.4

Margins (%) EBIT 14.1 11.1 ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. PAT 8.8 7.9 Tax Rate 32.1 30.7 Dividend Payout 33.9 44.3 Velocity (Days) Debtors Inventories Valuations (x) P/E P/CEPS P/BV M.Cap/Sales EV/EBITDA EV/Sales Source: Company Data, PL Research

14.2 8.4 29.3 35.0

12.4 7.4 29.9 35.0

54.5 41.9

65.6 47.4

60.0 55.0

60.0 55.0

8.0 3.0 1.6 0.7 5.3 1.0

8.5 3.1 1.1 0.7 8.4 1.4

4.8 1.8 0.9 0.4 3.8 0.7

5.5 2.0 0.8 0.4 3.6 0.6

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Company Report
October 16, 2008

Chambal Fertilisers and Chemicals


Rating Price Target Price Implied Upside Sensex (Prices as on October 16, 2008) BUY Rs47 Rs70 48.6% 10,581

CFCL is the key beneficiary of the new investment policy of urea. We believe that CFCL's top-line and bottom-line will grow with the three years CAGR (FY07AFY10E) of 15.8% and 57.4%, respectively on the back of positives in the new urea policy, partial de-bottlenecking of urea plant, skyrocketing phosphoric acid prices and addition in ships portfolio. Incentive to higher utilization in the new policy...adds the bottom-line: We believe that the company's 7.7% of FY09 and FY10 production will be eligible for IPP. We expect that a positive move in the policy will give incremental PAT of Rs507m (EPS - Rs1.2) in FY09 and FY10.

Trading Data Market Cap. (Rs bn) Shares o/s (m) Free Float 3M Avg. Daily Vol (000) 3M Avg. Daily Value (Rs m) 19.6 4,162.1 50.0% 7,095.0 483.4

Partial de-bottlenecking...eligible for IPP: CFCL is going for a partial debottlenecking of the urea plant which will add 1.34lac tonnes. We believe that de-bottlenecking will boost the PAT by Rs270m (EPS - Rs0.6) in FY10 on the back of IPP linked urea policy. IMACID JV...commodity story: Spurting phosphoric acid prices will improve the profitability of IMACID substantially. We expect that IMACID will add PAT of Rs1,935m (EPS - Rs4.6) in FY09 assuming phosphoric acid prices at US$1800/tonne.

Major Shareholders Addition on 2011-08-17 05:43:38 EDT. DownloadPDF. ISIEmergingMarketsPDF in-arcil from 203.115.117.194 in ship portfolio...contribution to the PAT: CFCL has got delivery Promoters 50.0% of three new ships in 1HFY09 and will get delivery of one ship in FY10 that Foreign Domestic Inst. Public & Others 9.8% 10.0% 30.2%

will contribute the bottom-line, going forward. Valuation: At the CMP of Rs47, CFCL is trading at 4.9x at its FY09E consolidated EPS of Rs9.6 and 4.7x at its FY10E consolidated EPS of Rs10.0. We recommend BUY the stock with the price target of Rs70 (potential upside - 48.6%) based on 7x of FY10E earning.
Key Financials (Y/e March) FY07 29,806 4,910 1,072 2.6 1.8 FY08 32,850 10.2 5,811 1,648 4.0 53.8 1.8 FY09E 45,118 37.3 9,569 4,016 9.6 143.7 1.8 FY10E 46,262 2.5 10,413 4,175 10.0 4.0 1.8

Stock Performance 1M Absolute Relative (23.3) (1.6) 6M (17.2) 17.6 12M (7.1) 37.4

Revenue (Rs m) Growth (%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs)

Price Performance (RIC: CHMB.BO, BB: CHMB IN)


(Rs) 100 90 80 70 60 50 40 30 Feb-08 Apr-08 Dec-07 Aug-08 Oct-07 Jun-08 Oct-08

Source: Company Data; PL Research

Profitability & Valuation EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%)
Source: Company Data; PL Research

FY07 16.5 11.7 14.5 1.3 7.8 18.3 2.1 3.8

FY08 17.7 14.1 17.1 1.1 6.3 11.9 1.7 3.8

FY09E 21.2 27.1 25.7 0.8 3.7 4.9 1.3 3.8

FY10E 22.5 23.0 25.7 0.8 3.5 4.7 1.1 3.8

Source: Bloomberg, PL Research

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Chambal Fertilisers and Chemicals

Investment Rationale
Incentive to higher utilization in new policy...adds the bottom-line
We believe that CFCL's 7.7% of FY09 and FY10 production will be eligible for IPP, based on FY08 production level (116%) and subject to minimum production of 1.94m tonnes (target production specified by the government) of urea. We expect that positive move in the policy will give incremental PAT of Rs507m (EPS Rs1.2) in FY09 and FY10, assuming the delivered cost of gas at US$7/mmbtu. CFCL will be eligible for 85% of IPP.
Policy benefit on existing production Remarks Assuming company will maintain the capacity utilization level (119%) of FY08 and will achieve the target production of 1.94m tonne as per policy. Hence, 7.7% of total production fall under IPP. Sales Realization US$425 @ Rs42/US$ 17,850 Assuming import parity price of urea shouldn't fall below US$500/ ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. Tonne. Sales 2,755 EBIT 36.0% Assuming delivered cost of gas at US$7/mmbtu. EBIT 993 EBIT based on Normal Pricing Sales (In Tonnes) 154,348 Sales Realization (Rs) 10,180 Sales 1,571 EBIT 15.0% EBIT 236 Incremental EBIT 757 Interest Chambal has 85% of total debts in shipping business. Hence, we have not considered finance cost. PBT 757 Tax (250) PAT 507 Equity 4,162 Incremental EPS 1.2 Source: PL Research EBIT based on IPP Sales (In Tonnes) 154,348 (Rs m)

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Chambal Fertilisers and Chemicals

CFCL can increase the capacity utilization further from FY08 level i.e. 116% and add the bottom-line to that extent. We have made a sensitivity analysis at different level of capacity utilization and delivered cost of gas (assuming IPP at US$500/tonne).
Sensitivity analysis Higher Utilization at 116% 120% (Rs m) 125%

Gas@ US$8 US$7 US$8 US$7 US$8 Sales (In Tonnes) - Eligible for IPP 154,348 229,350 229,350 315,810 315,810 Sales Realization US$425 @ Rs42/US$ 17,850 17,850 17,850 17,850 17,850 Sales 2,755 4,094 4,094 5,637 5,637 EBIT % (In higher utilization) 30.9% 36.0% 30.9% 36.0% 30.9% EBIT % at normal utilization 15.0% 15.0% 15.0% 15.0% 15.0% Incremental EBIT due to higher utilization 438 861 651 1,186 896 Tax (145) (284) (215) (391) (296) PAT 294 577 436 795 601 Equity 4,162 4,162 4,162 4,162 4,162 Incremental EPS (Rs) 0.7 1.4 1.0 1.9 1.4 Source: PL Research

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Further, our estimates are based on the assumption that IPP shouldn't fall below US$500/tonne. We have made a sensitivity analysis at different levels of IPP (assuming capacity at FY08 level of 119% and delivered cost of gas at 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. US$7/mmbtu):
Sensitivity analysis Higher Utilization at Sales (In Tonnes) - Eligible for IPP Sales Realization (85% of IPP @ Rs42/US$) Sales Realization (In US$) Sales EBIT % (In higher utilization) EBIT % at normal utilization Incremental EBIT due to higher utilization Tax PAT Equity Incremental EPS (Rs) Source: PL Research 450 154,348 16,065 383 2,480 28.9% 15.0% 345 (114) 231 4,162 0.6 IPP at US$ 400 154,348 14,280 340 2,204 20.1% 15.0% 112 (37) 75 4,162 0.2 350 154,348 12,495 298 1,929 8.6% 15.0% (123) 41 (83) 4,162 (0.2) (Rs m)

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Chambal Fertilisers and Chemicals

Partial de-bottlenecking...eligible for IPP


CFCL is going for partial de-bottlenecking of its urea plant with a capex of Rs4bn which will add 1.34lac tonnes (8% of current installed capacity) and will come on stream by April 2009. Funding of capex of Rs4bn will be done through internal accruals. De-bottlenecking of urea will be benefited by IPP-linked urea policy. We believe that de-bottlenecking will boost the PAT by Rs270m (EPS Rs.0.6) in FY10 assuming the delivered cost of gas at US$7/mmbtu and capacity utilization of 70%. De-bottlenecking will also result in energy saving but we have not considered the same in our estimate.
Earning through de-bottlenecking Particulars Sales (In Tonnes) 2009-2010E 93,800 (Rs m) Remarks Assuming company will achieve the target production of 1.94m tonne as per policy and 70% capacity utilization level in new capacity. Assuming import parity price of urea shouldn't fall below US$500/ Tonne Assuming delivered cost of gas at US$7/mmbtu. Total Capex - Rs4bn.Funding of the capex is through internal accrual but we are considering the opportunity cost.

Sales Realization US$425 @ Rs42/US$

17,850

Sales EBIT% EBIT Interest

1,674 36.0% 603 (200)

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PBT Tax PAT Equity Incremental EPS (Rs) Source: PL Research

403 (133) 270 4,162 0.6

Management will take a decision for further de-bottlenecking up to 25% increase in the urea capacity only after successful implementation of 1.34lac tonnes.

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Chambal Fertilisers and Chemicals

We have made a sensitivity analysis at delivered cost of gas at US$8/mmbtu and further at different levels of IPP (assuming other factors remain constant)
Sensitivity analysis Particulars Sales EBIT EBIT Interest PBT Tax PAT Equity Incremental EPS (Rs) Source: PL Research Gas @ US$8 1,674 30.9% 517 (200) 317 (105) 213 4,162 0.5 450 1,507 28.9% 435 (200) 235 (78) 158 4,162 0.4 IPP @US$ 400 1,339 20.1% 269 (200) 69 (23) 46 4,162 0.1 350 1,172 8.6% 101 (200) (99) 33 (66) 4,162 (0.2) (Rs m)

IMACID JV ...commodity story


Spurting phosphoric acid prices will improve the profitability of IMACID substantially. We expect that IMACID will add PAT of Rs1,935m (EPS - Rs4.6) in FY09, assuming phosphoric acid prices at US$1800/tonne which is on a conservative basis. This is because IMACID has contracted at US$2300/tonne in 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. Q2FY09 and average realization was US$1717/tonne in Q1FY09. IMACID posted PAT of Rs830m (1.7x of FY08 PAT) in Q1FY09 itself. IMACID has repaid all the debt in FY08, thus becoming a debt-free company.
Dimension of phosphoric acid
Realization Per Tonne EBITDA Per Tonne PAT Per Tonne PAT (RHS)

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2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 FY06 FY07 FY08 FY09E FY10E

20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Source: Company Data, PL Research

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Chambal Fertilisers and Chemicals

We have made a sensitivity analysis of phosphoric acid prices for FY10 because we are confident that in FY09, IMACID will achieve the EPS of Rs4.6. In FY10E, our estimates are based on the phosphoric acid price at US$1500/tonne.
Sensitivity analysis Phosphoric Acid Price US$ / Tonne Sales EBITDA EBITDA Per Tonne (Rs) Depreciation EBIT Tax PAT Equity EPS (Rs) Source: PL Research 1,000 6,014 1,503 10,500 (287) 1,216 (243) 973 4,162 2.3 1,100 6,615 1,654 11,550 (287) 1,367 (273) 1,093 4,162 2.6 1,300 7,818 1,955 13,650 (287) 1,667 (333) 1,334 4,162 3.2 1,500 9,021 2,255 15,750 (287) 1,968 (394) 1,574 4,162 3.8 (Rs m) 1,800 10,825 2,706 18,900 (287) 2,419 (484) 1,935 4,162 4.6

Addition in ship portfolio...contribution to the PAT


CFCL has acquired delivery of three new ships in 1HFY09 and will get delivery of one ship in FY10 that will contribute to the bottom-line, going forward. Shipping business is an asset-based model and CFCL has five ships in their portfolio currently (there will be six ships in FY10). CFCL has sold off a 1987 built single 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. hull aframex tanker in FY08 for a profit of Rs229.1m and we believe that the company could fetch good value from the new ships in future. At present, CFCL has four double hull vessels ships. CFCL has bought the ships through debt which has been raised in FY07 at an attractive and competitive rate of LIBOR plus 90bps with the maturity of 12-13 years.

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Chambal Fertilisers and Chemicals

Worst and best case scenario


We are showing the worst and best case scenario of CFCL's FY09E and FY10E EPS, considering the IPP price of urea at US$500/tonne.
Worst and best case Worst Case Base Case Less: EPS due to Higher Utilization Less: EPS due to de-bottlenecking Less: EPS contribution by IMACID Add: EPS due to Higher Utilization Worst Case - Gas price at US$8/mmbtu and utilization at FY08 level (116%). Best Case - Gas price at US$7/mmbtu and utilization at 125% level. Add: EPS due to de-bottlenecking Worst Case - Gas price at US$8/mmbtu Best Case - Our estimate is on best case. FY09E 9.6 1.2 0.0 0.0 8.4 FY10E 10.0 1.2 0.6 3.8 4.4 Best Case FY09E 9.6 1.2 0.0 0.0 8.4 FY10E 10.0 1.2 0.6 3.8 4.4

0.7

0.7

1.9

1.9

0.0

0.5

0.0

0.5

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Worst Case- Phosphoric Acid at US$1000/ tonne Best Case - Phosphoric Acid at US$1800/tonne

0.0 9.1 FY09E 9.1 9.6 10.3

2.3 7.9 Chng -5.3% 0.0% 7.2%

0.0 10.3 FY10E 7.9 10.0 11.5

4.6 11.5 Chng -20.9% 0.0% 14.1%

Worst Case Base Case Best Case Source: PL Research PE Band


100 90 80 70 60 50 40 30 20 10 0 Oct-99 Apr-99 Apr-00 4 6 8

10

Price (Rs)

Oct-00

Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Source: PL Research

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Oct-08

Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

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Chambal Fertilisers and Chemicals

Company Background
CFCL, a company from the K K Birla group is one of the major players in the fertilizer business and largest manufacturers of urea in the private sector. The company also trades in DAP, complex fertilizers, pesticides and seeds. The company has diversified into the other businesses like software, shipping and textile.
Segmental breakup

Sales
Urea Textile & Others 50,000 40,000 (Rs m) (Rs m) 30,000 20,000 2,000 10,000 0 0 Traded Goods IMACID Shipping Software Urea Textile 10,000 8,000 6,000 4,000

EBIT
Traded Goods IMACID Shipping Software

-2,000 FY08 FY09E FY10E FY08 FY09E ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF.

FY10E

Source: Company Data, PL Research

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Chambal Fertilisers and Chemicals

Business Overview
Agri Inputs
CFCL's seed and pesticides trading business is growing faster and has entered into a new segment of commodity trading of mustard and cumin. Through CFCL's relationship program "Uttam Bandhan", the company is in direct touch with 75,000 farmers. CFCL helps in building brand equity in the market, launching of new products and educating the farmers to improve yields and productivity.

Textile
CFCL has spinning segment with the capacity of 80,208 spindles bearing the name "Birla Textile Mills". In FY07, CFCL had commissioned 39,888 spindles to seize the opportunities presented by the new economic environment in the textile industry.

Software and business process


CFCL's subsidiary, ISG Novasoft, has embarked in the third-party India BPO sector, focusing on the broad area of asset-based lending services, with an initial thrust 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. in residential mortgages. ISG Novasoft is executing a unique and innovative platform-based BPO strategy in scaling up transactional BPO services in India to capture the compelling cost advantages that an India back-end offers. Chambal's software business is incurring losses due to amortization of software development charges and will be a turnaround only when the company will get substantial order in the future.

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IMACID
IMACID is an equal JV between Office Cherifien de Phosphates (OCP) - the world's largest producer of rock phosphate and phosphatic fertilizers, CFCL and TCL for producing phosphoric acid with the annual capacity of 4.3m tonnes.

Foray into Infrastructure Sector


Chambal Infrastructure Ventures (CIVL) is a Special Purpose Vehicle (SPV) and a wholly owned subsidiary of the CFCL. This subsidiary is engaged in the development and setting up of power projects. It has, in turn, incorporated two wholly-owned subsidiaries viz. Chambal Energy (Chhattisgarh) and Chambal Energy (Orissa) for taking up power projects in the states of Chhattisgarh and Orissa, respectively. CIVL has signed a MoU with the Government of Chhattisgarh for setting up of 1100 MW thermal power plant. Application for setting up the thermal power plant of 1200 MW in the state of Orissa is pending for approval.

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Chambal Fertilisers and Chemicals

Key Risks and Concerns


Delay in the payment of subsidy
Delay in the payment of subsidy or issuance of subsidy bond of urea by the Government could cause serious financial burden to CFCL.

Delay in de-bottlenecking of urea plant


Any delay in the de-bottlenecking of the project could postpone the revenue and profitability of the company.

Availability of natural gas


Natural gas is the cheapest feedstock for urea. However, due to the shortage of this gas, CFCL is using naphtha to manufacture urea. Going ahead, usage of naphtha instead of natural gas will adversely affect the profitability of company.

Sharp fall in commodity prices


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CFCL is in the commodity business and commodity prices are falling from the peak. Hence, any sharp fall in the commodity prices could lead to an adverse impact on the company.

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Chambal Fertilisers and Chemicals

Financials
Income Statement Y/e March Sales Fertilisers Traded Goods Shipping Business IMACID - Phosphoric Acid Others Total Growth (%) FY07 20,000 2,230 1,766 2,554 3,257 29,806 FY08 19,023 3,399 3,282 3,313 3,833 32,850 10.2 FY09E 21,544 5,000 4,006 10,825 3,743 45,118 37.3 (Rs m) FY10E 23,218 5,000 5,203 9,021 3,820 46,262 2.5

EBIT Fertilisers 2,699 2,711 As % of sales 13.5 14.3 Traded Goods 91 240 As % of sales 4.1 7.1 Shipping Business 394 789 As % of sales 22.3 24.0 IMACID - Phosphoric Acid 300 704 As % of sales 11.8 21.3 Others (453) (778) ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. As % of sales (13.9) (20.3) Total 3,031 3,667 EBIT Margin (%) 10.2 11.2 Unallocated Income/(Expense) Interest PBT PBT Margin (%) Tax Tax Rate (%) PAT before exceptional Items PAT Margin (%) Exceptional Items PAT (240) (1,052) 1,739 5.8 (688) 39.6 1,050 3.5 108 1,158 (314) (960) 2,393 7.3 (756) 31.6 1,637 5.0 738 2,374

3,811 17.7 225 4.5 796 19.9 2,419 22.3 (330) (8.8) 6,921 15.3 (224) (918) 5,779 12.8 (1,763) 30.5 4,016 8.9 4,016

4,415 19.0 225 4.5 1,059 20.4 1,968 21.8 (357) (9.3) 7,310 15.8 (224) (968) 6,117 13.2 (1,942) 31.8 4,175 9.0 4,175

Source: Company Data, PL Research

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Chambal Fertilisers and Chemicals

Balance Sheet Y/e March FY07 Source of Funds Equity Capital 4,162 Share Application Share Premium 64 Profit & Loss/ General Reserve 4,902 Networth 9,129 Total Debt 20,124 Deferred Tax Liability 3,163 Other Liabilities 1,409 Total 33,825 Application of Funds Net Fixed Assets Intangible Assets Goodwill on Consolidation Investments Inventories Sundry Debtors Cash & Bank Loans & Advances Other Current Assets ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 Sundry Creditors Acceptances/ Other Liabilities Provisions Working Capital Miscellaneous Expenses Total FY08 4,162 30 1,127 6,371 11,690 18,545 2,844 978 34,058 FY09E 4,162 30 1,127 9,511 14,829 18,545 2,844 978 37,197

(Rs m) FY10E 4,162 30 1,127 12,809 18,128 18,545 2,844 978 40,495

23,361 24,439 22,921 981 1,605 1,605 736 470 470 218 223 223 3,864 3,177 4,272 6,026 2,213 5,340 1,393 1,449 2,868 1,082 861 861 66 3,849 3,849 05:43:38 EDT. DownloadPDF. (1,777) (1,880) (2,670) (743) (970) (1,164) (1,405) (1,392) (1,392) 8,505 7,307 11,964 25 14 14 33,825 34,058 37,197

26,593 1,605 470 223 5,007 6,259 1,591 861 3,849 (3,129) (1,455) (1,392) 11,591 14 40,495

Source: Company Data, PL Research Cash Flow Y/e March Cash from operating activities Cash from investing activities Cash from financing activities (Dec)/Inc in cash Opening Cash Closing Cash FY07 (1,091) (7,911) 9,433 431 962 1,393 FY08 6,086 (3,899) (2,131) 56 1,393 1,449 FY09E 3,651 (1,355) (876) 1,419 1,449 2,868 (Rs m) FY10E 6,600 (7,000) (876) (1,277) 2,868 1,591

Source: Company Data, PL Research

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Chambal Fertilisers and Chemicals

Key ratios Y/e March Growth Ratio (%) Sales EBITDA PAT EPS Asset Based Ratio (%) RoCE/RoI RoE/RoNW Gearing Debt/Equity Per Share (Rs) EPS BV DPS CEPS FY07 (4.2) (0.2) (28.8) (28.8) FY08 10.2 18.3 53.8 53.8 FY09E 37.3 64.7 143.7 143.7 FY10E 2.5 8.8 4.0 4.0

14.5 11.7

17.1 14.1

25.7 27.1

25.7 23.0

2.2

1.6

1.3

1.0

2.6 21.9 1.8 7.7

4.0 28.1 1.8 9.9

9.6 35.6 1.8 16.6

10.0 43.6 1.8 18.0

Margins (%) EBIT 10.2 11.2 ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF. PAT 3.5 5.0 Tax Rate 39.6 31.6 Dividend Payout 64.7 31.6 Velocity (Days) Debtors Inventories Valuations (x) P/E P/CEPS P/BV M.Cap/Sales EV/EBITDA EV/Sales

15.3 8.9 30.5 18.7

15.8 9.0 31.8 17.9

59.8 40.9

45.8 39.1

50.0 40.0

50.0 40.0

18.3 6.1 2.1 0.7 7.8 1.3

11.9 4.8 1.7 0.6 6.3 1.1

4.9 2.8 1.3 0.4 3.7 0.8

4.7 2.6 1.1 0.4 3.5 0.8

Source: Company Data, PL Research

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Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India. Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage ISIEmergingMarketsPDF in-arcil from 203.115.117.194 on 2011-08-17 05:43:38 EDT. DownloadPDF.
60% 50% % of Total Coverage 40% 30% 20% 10% 1.6% 0% Buy Accumulate Reduce Sell 52.8%

22.4%

23.2%

PLs Recommendation Scale


BUY Reduce Trading Buy Not Rated (NR) : Over 15% Outperformance to Sensex over 12-months : Underperformance to Sensex over 12-months : Over 10% absolute upside in 1-month : No specific call on the stock Accumulate Sell Trading Sell : : : Outperformance to Sensex over 12-months Over 15% underperformance to Sensex over 12-months Over 10% absolute decline in 1-month Rating likely to change shortly

Under Review (UR) :

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

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