National Fertilizers Ltd: Buy 
CMP: Rs.28.80
Targets: Rs.37/41

The Ramagundam Fertilisers Ltd (FCL) is a joint venture with National Fertilizers Limited (NFL) holding 26% equity, Engineers India limited 26%, Fertilizer Corporation of India Limited 11%, government of Telangana 11 %, GAIL India limited 14.3 % and HTAS Consortium holding 11.7 % equity.

NFL is reviving a closed urea plant at Ramagundam in a JV with EIL, FCIL and the state government at an estimated cost of Rs.5,920 crore.

The plant is likely to get operational by 31st March,  2020. 

Photo: Financial Express 

Against Rs.5920 crore of investment by the entities,  maket cap of the National Fertilisers Ltd is only 1415.32 crore. This throws up a lot of space for rerating of the company's shares. 

Since,  stock maket reacts in advance, we could see a sharp rise in the share price of NFL before the budget (and before the start of production I'm Ramagundam plant) which is tentative on 1 February,  2020. 

National Fertilisers Ltd (Rs.28.80) is the second largest manufacturer of urea in India with a share of over 16% of the total domestic capacity and 13% market share, stable cash flow from urea operations, increasing contribution from industrial products & traded goods, the large sovereign ownership and management strength resulting in strong financial flexibility, as reflected by the company's proven ability to raise funds at competitive rates.

Besides, almost the entire debt of the company is backed by receivables from the Government of India leads to low risks from the credit perspective.

NFL has a leading market position in markets in northern and central India due to proximity of plants to key markets and healthy operating efficiency of the plants post the feedstock conversion program undertaken in FY2013, with healthy capacity utilisation levels and energy efficiency vis-a-vis the pre- set norms.

While gas pooling has rationalised gas prices, the New Urea Policy 2015 has incentivised production beyond  re-assessed capacity thereby aiding the margins of the company. 

NFL has also scaled up its portfolio of traded fertilizer mainly di-ammonium  phosphate (DAP), Muriate of Potash (MOP), bentonite sulphur along with industrial products like nitric acid, ammonium nitrate, sodium Nitrate/ Nitrite etc.

Meanwhile,  the NDA government at the centre has launched eNAM — an online trading platform, to optimize the use of fertilizers by distribution of Soil Health Cards to farmers

It is pertinent to mention here that, fertilizer subsidy allocation has jumped from Rs.70,090 crore to Rs.79,996 crore or a rise of around Rs.10,000 crore in the last budget (FY20). This year it was expected to be around Rs.1 lakh crore. 

--- ICRA and the ET (Edited).....