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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.

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, 2013.

During the quarter, the company has reported Net Profit increased to Rs. 365.70 million from Rs.248.90 million in previous year same quarter.

Years Net sales EBITDA Net Profit EPS P/E

FY 10 43237.30 2563.60 1569.60 53.32 11.82

FY 11E 62503.49 3167.81 1853.48 62.96 10.01

FY 12E 71879.02 3314.33 1918.30 65.16 9.67

Stock Data:

Sector: Fertilizers

Face Value Rs. Rs.10.00

52 wk. High/Low (Rs.) 895.00/419.00

Volume (2 wk. Avg.) 21000

BSE Code 500780

Market Cap (Rs.In mn) 18547.20

Share Holding Pattern

1 Year Comparative Graph

Zuari Industries Ltd BSE SENSEX

C.M.P: Rs.630.00 Target Price: Rs. 712.00

Date:22nd Jan 2011 BUY

ZUARI INDUSTRIES LTD

Result Update: Q3 FY 11

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Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Zuari Industries 630.00 18547.20 53.32 11.82 1.74 45.00

Coromandel

International 244.85 68964.2 24.99 9.80 4.81 500.00

Chambal Fertilisers 76.90 32006.4 6.71 11.46 2.30 19.00

Gujarat State

Fertilisers 341.15 27188.1 58.52 5.83 1.27 45.00

Investment Highlights

Q3 FY11 Results Update

Zuari Industries Ltd disclosed results for the quarter ended December 2010. Net

sales for the quarter moved up 38% to Rs.15318.80 million as compared to

Rs.11068.00 million during the corresponding quarter last year. During the

quarter, the company has reported Net Profit increased to Rs. 365.70 million from

Rs.248.90 million in previous year same quarter. The Basic EPS of the company

stood at Rs.12.42 for the quarter ended December 2010.

Quarterly Results - Standalone (Rs in mn)

As At Dec-10 Dec-09 %change

Net sales 15318.80 11068.00 38%

PAT 365.70 248.90 47%

Basic EPS 12.42 8.45 47%

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Basic EPS of the company stood at Rs. 12.42

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Break up of Expenditure

Expenditure for the quarter stood at Rs.14708.50mn, 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.6222.30mn from Rs.5600.10mn of the corresponding period of the

previous year. Purchase of Traded Goods cost increased 61%YoY to Rs.5570.1mn

from Rs.3463.00mn 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.

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Board recommends Dividend

Zuari Industries Ltd has recommended an equity dividend of 45% - Rs. 4.50 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.

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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.

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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 (CO2) 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 1984. The plant manufactures DAP. The plant

has an installed capacity of 1,100 metric tonnes per day.

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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 well-

established 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.

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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 2007. 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.

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Financials Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in million) FY09A FY10A FY11E FY12E

12m 12m 12m 12m

Description

Net Sales 61217.60 43237.30 62503.49 71879.02

Other Income 634.80 565.30 414.31 439.17

Total Income 61852.40 43802.60 62917.80 72318.18

Expenditure -59814.10 -41239.00 -59749.99 -69003.86

Operating Profit 2038.30 2563.60 3167.81 3314.33

Interest -606.60 -172.10 -305.41 -334.18

Gross Profit 1431.70 2391.50 2862.40 2980.15

Depreciation -177.50 -195.10 -214.37 -235.81

Profit before Tax 1254.20 2196.40 2648.03 2744.34

Tax -321.40 -626.80 -794.55 -826.05

Profit after Tax 932.80 1569.60 1853.48 1918.30

Equity Capital 294.40 294.40 294.40 294.40

Reserves 8979.60 10394.20 12247.68 14165.98

Face Value(Rs.) 10.00 10.00 10.00 10.00

EPS 31.68 53.32 62.96 65.16

*A=Actual, *E=Estimated

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Jun-10 30-Sep-10 30-Dec-10 31-Mar-11

3m(A) 3m(A) 3m(A) 3m(E)

Description

Net Sales 9517.40 20969.80 15318.80 16697.49

Other Income 76.30 185.90 74.20 77.91

Total Income 9593.70 21155.70 15393.00 16775.40

Expenditure -9070.60 -19907.90 -14708.50 -16062.99

Operating Profit 523.10 1247.80 684.50 712.41

Interest -77.20 -50.40 -85.90 -91.91

Gross Profit 445.90 1197.40 598.60 620.50

Depreciation -53.10 -53.00 -53.60 -54.67

Profit before Tax 392.80 1144.40 545.00 565.83

Tax -114.70 -330.80 -179.30 -169.75

Profit after Tax 278.10 813.60 365.70 396.08

Equity Capital 294.40 294.40 294.40 294.40

Face Value(Rs.) 10.00 10.00 10.00 10.00

EPS 9.45 27.64 12.42 13.45

*A=Actual, *E=Estimated

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Key Ratio

Particulars FY09 FY10 FY11E FY12E

EPS (Rs.) 31.68 53.32 62.96 65.16

EBITDA Margin (%) 3.33% 5.93% 5.07% 4.61%

PAT Margin (%) 1.52% 3.63% 2.97% 2.67%

P/E Ratio (x) 4.37 11.82 10.01 9.67

ROE (%) 10.06% 14.68% 14.78% 13.27%

ROCE (%) 14.92% 11.01% 12.35% 11.66%

EV/EBITDA (x) 2.00 7.23 5.85 5.60

Debt-Equity Ratio 0.34 1.01 0.91 0.83

Book Value (Rs.) 315.01 363.06 426.02 491.18

P/BV 0.44 1.74 1.48 1.28

Charts:

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Outlook and Conclusion

At the current market price of Rs.630.00, the stock is trading at 10.01 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.62.96 and Rs.65.16 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, 2013.

During the quarter, the company has reported Net Profit increased to Rs. 365.70 million from Rs.248.90 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.

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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.712.00 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.

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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 2004-

05, 10.60 % in 2005-06 and 8.40% per cent in 2006-07.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 30.01.2003 has reached a level of 121.10 lakh MT of

nitrogen (inclusive of an installed capacity of 208.42 lakh MT of urea after

reassessment of capacity) and 53.60 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

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in the world. India’s production in terms of nutrients (N & P) reached a level of 155

lakh MT in 2005-06 from 0.39 lakh MT in 1951-52. Similarly, consumption of

fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in

1951-52 to nearly 184 lakh MT in 2004-05.

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 2006-07 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.

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________________ ____ _________________________ 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.

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