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Significant Step in De-risking Urea Investment-OLAM O32.SI

Significant Step in De-risking Urea Investment
report by Morgan Stanley

Quick Comment – Impact on our views: We reiterate
our OW rating on Olam and favorably view Tata
Chemical’s (TCL) investment in Olam’s Urea Project in
Gabon. Key positives of the development:
(1) De-risks Olam’s investment in a space that was new
to them by bringing in an experienced strategic
partner rather than a financial investor. TCL is a
market leader in the Urea and Phosphatic Fertilizer
segment and operates one of the world’s most
energy-efficient urea facilities in India.
(2) Significantly reduces execution risk, as TCL will be
responsible for Project Management during the
erection & commissioning of the plant as well as
Operation & Maintenance for the first three years.
(3) Stake sale at an implied equity valuation premium of
154% reduces Olam’s required equity investment in
the project by ~60% to US$146 mn and doubles
Olam’s estimated ROE to 90%. This also reduces
any immediate pressure on Olam to raise equity for
funding this project and is likely to temper down
investor concern about possible equity dilution, at
least in the near term.
What’s new: TCL will invest US$290 mn to acquire
25.1% equity stake in the Urea Project from Olam and
the Republic of Gabon (RG), which was announced in
November 2010. As a recap, this is a JV project
between Olam (80%) and RG (20%) at a project cost of
US$1.3 bn to be funded in the debt:equity ratio of 65:35.
With TCL’s 25.1% stake in this Project, Olam’s and RG’s
shareholding reduces to 62.9% and 12%, respectively.
Joint Sales and Marketing agreement: Sales &
marketing will be jointly undertaken by Olam, RG and
TCL through a JV agreement in which Olam and TCL
hold an equal stake. In addition, TCL has committed to
off-take 25% of the urea output into Indian markets,
subject to the deregulation of urea imports into India.

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