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Tuesday, July 21, 2009

Nagarjuna Fertilizers & Chemicals Ltd:Future growth prospects and outlook

Scripscan:Nagarjuna Fertilizers & Chemicals Ltd

Story:Almost every sector has participated in the last bull run.One sector, that is the core of Indian economy has, however, remained in the background - the agricultural sector. India is a predominantly agrarian economy and agriculture is the largest private sector activity in the country with close to 60% of the population depending on it and allied activities for livelihood.Fertiliser and chemical companies thrive on booming agriculture and one company that can reap the rich benefits of an upswing in this sector, due to its strategic location, is Nagarjuna Fertilisers and Chemicals Ltd. (NFCL). NFCL, a leading manufacturer and supplier of plant nutrients such as urea, has a market dominance in the geographical segments in which it operates - Andhra Pradesh, Orissa and parts of West Bengal. But it has no pricing power because the farm sector is burdened by subsidies and uncompetitive practices. With a poor growth record, NFCL’s valuations has always remained moderate.But NFCL is emerging from a stagnating past. The company has got over its earlier losses by putting through a financial restructuring scheme. It is being seen as the best naphtha-based fertiliser plant with the locational advantage of being close to the prosperous southern India. There are market rumours that Reliance is looking to buy NFCL because of its obvious linkage with the gas fields of Krishna-Godavari Basin. One of the significant developments for NFCL is the financial closure of its refinery project (through its 51% subsidiary Nagarjuna Oil Corporation Ltd.).The six million tonne refinery to come up in Cuddalore, Tamil Nadu, is likely to bring down its operational cost, as NFCL will pay only for the gas and not for transportation. Nagarjuna Power (NPCL) is a 2 X 507.5 MW power project proposed near Mangalore in Karnataka with a capital outlay of around Rs4,400 crore. With a debt-equity ratio of 30:70 the equity works out to Rs1,320 crore, of which NFCL holds 25% (Rs330 crore). NFCL has been successful in roping in partners for its languishing projects in the power and refinery areas. It has the Lanco Group investing in its power project while Tata Sons has acquired a 26% stake in its refinery project, putting both the projects on track. These projects will yield fruit in the next three to five years; but NFCL will probably exit from them earlier to the advantage of its shareholders.Investors with a bit of risk apetite may buy the scrip at declines.

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