Rashtriya Chemicals & Fertilisers’ (RCF) Q4FY11 results were better than our expectations as net sales increased by 15.6% YoY to Rs16.2bn. OPM expanded by 493bps to 6.5%, resulting in operating profit of Rs1.1bn. Consequently net profit increased by 38.4% to Rs961mn (PINCe Rs515mn).

Other gains boosted profitability: RCF has sold 50% of its outstanding fertiliser bonds worth Rs3.5bn and has recognised other income of Rs214mn received from GOI (50% of loss incurred on sales of bonds). The company also has forex gain of Rs63mn in Q4FY11.

De-bottlenecking in progress: RCF is increasing its Urea capacity at Thal through de-bottlenecking by 0.26mn MT (linked to IPP) and reducing energy consumption by ~0.4Gcal/MT of Urea for the whole unit (completely retained by RCF for five years as per current policy). Additional capacity is expected to become on-stream in H2FY12.

Group-based NBS for Urea players: Unlike complex fertiliser, NBS implementation is difficult in Urea space due to heterogeneity of the sector. However, we expect group based NBS for Urea players
(excluding Naphtha and LSHS based companies) with ~10% price hike at farm-gate.

New investment policy on the card: We expect Govt. to modify the current Urea investment policy to bring new investment into the sector. One major change that we are expecting in the new policy is the increase in floor price for Urea realisation to ~USD275/ MT and will be linked with natural gas prices. RCF is also looking out for opportunities to put up Urea facility in gas rich African nation and is also a front runner for opportunities regarding revival of sick units.