will government's massive surge in investment ... - Myiris.com

Apr-Jun 2013 Earnings Preview
! MSPs increased by 5% for kharif season (lower than average of 12% for last
three years): Recently, the Cabinet Committee of Economic Affairs (CCEA)
announced the MSPs for kharif season 2013-14. On an average, MSPs have been
increased by 5% which is sharply lower than the average hike of 12% effected
during the last three years. The largest increase in MSP was seen in tur and
soyabean where MSPs were hiked in excess of 11% so as to encourage domestic
production and replace imports.
! Agrochemicals companies have increased prices by 5‐6% in May’13; further
increase might be taken to offset impact of rupee depreciation: Our channel
checks suggests that companies have already taken 5-6% price hikes to account
for raw material costs increases during May’13. However, further increase is
likely because of rupee depreciation provided monsoons remain supportive.
! Raw materials prices have softened; however, rupee depreciation is a concern:
Though raw materials prices of ammonia (quoting at $525/mt currently
compared to $625/mt in Mar’13) have softened and phosphoric acid prices have
remained stable, recent rupee depreciation by 8-9% has emerged as a new
problem for the industry. Our recent interactions with companies/channel
checks suggests that companies might increase prices in the near future to pass
on the impact of rupee depreciation provided monsoons remain supportive and
offtake improves.
! Huge inventory of complex fertilizer to limit company level sales growth:
Though we have started witnessing improved offtake by farmers with the timely
arrival of monsoons, huge inventory of complex fertilizers is likely to limit
company level sales growth in FY14E.
! Expect companies to account for price reduction on inventory: Though
companies have made adequate provisioning in Q4FY13 related to higher
marketing costs and rebates on fertilizers, our channel checks suggests that
there may be some impact due to reduction in retail price which companies
might account for in Q1FY14E.
! Gas price revision to further inflate subsidy receivables: Recently, the govt.
hiked the gas prices from $4.2/mmbtu to $8.4/mmbtu effective April 2014.
Because of this gas price increase, urea cost of production will go up which will
be reimbursed by the govt. in the form of higher subsidy. Increase in gas prices
by 1$/mmbtu increases urea subsidy by Rs26bn (assuming exchange rate at 55).
So, total urea subsidy will increase by Rs105bn annually. Companies will be
impacted to the extent of working capital increase. Further, increase in gas
prices is likely to impact profitability for companies producing urea above cut-off
quantity since gas cost is not a pass-through for production above cut-off.
! Dhanuka Agritech and UPL our top picks: Dhanuka (asset-light model, higher
profitability & return ratios, strong revenue visibility, valuation discount to
domestic peers) & United Phos (earnings growth combined with improvement in
return ratios, gradual improvement in balance sheet, attractive valuation
upside) are our top picks.
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