Friday, May 25, 2012

>CHAMBAL FERTILIZERS AND CHEMICALS: Strong Q4FY12 operational performance

Chambal Fertilisers and Chemicals’ (Chambal’s) Q4FY12 net sales, EBITDA and PAT have shown strong growth of 132.6%, 83.4% and 43.5%, respectively on YoY basis. EBITDA and PAT were broadly in-line with our expectation, while sales was higherthan- expected on account of strong trading sales. We expect Chambal’s EPS to grow by FY12-14 CAGR of ~11% on account of lower depreciation and interest. Stock had corrected ~13% and ~22% in the past one and six months, respectively. We believe that stock valuation has been reasonable post correction and is providing good medium-term investment opportunity (six months). We are upgrading the stock to ‘BUY’ with a TP of Rs83 (10xFY13E EPS). Any positive policy outcome could be an upside to our TP.

 Strong Q4FY12 operational performance: Chambal’s Q4FY12 standalone net sales grew by 132.6% YoY to Rs18.8bn (PLe: Rs13.0bn), primarily on account of 8.2x YoY growth in trading sales. Better-than-expected sales were mainly on account of higher trading sales (Rs7.9bn v/s PLe: Rs6.0bn). Trading sales was higher as industry as well as company has pushed non-urea fertiliser product into the market to claim higher subsidy because government has cut down the subsidy for FY13. Urea sales volume was up by 2.0% YoY to 4.5Lac MT. Urea realization and EBIT/MT was higher by 34.4% YoY and 244.6% YoY, respectively, primarily due to accounting of import parity price (IPP) linked subsidy. Company has taken urea price of US$415/MT for IPP accounting on conservative basis v/s average of global urea price for FY12 – US$460/M). Sales of shipping and textiles businesses were as per our expectation. Chambal’s EBITDA grew by 83.4% YoY to Rs2.3bn (PLe: Rs2.3bn). EBIT/MT in urea business grew by 244.6% YoY to Rs3,733/MT (up by 84.4% QoQ, PLe: Rs3,000/MT).

 Q4FY12 PAT grew by 43.5% YoY: Chambal’s depreciation de-grew by 20.3% YoY to Rs0.5bn (lower by 29.3% QoQ) because company’s urea Gadepan-I plant got fully depreciated (operational in 1993) during the year. Interest cost has gone up by 34.9% YoY to Rs0.3bn (up 15.2% QoQ). Company PAT has shown growth of 43.5% YoY to Rs1bn (PLe: Rs1.1bn). Company has received one-time dividend from one-third joint venture IMACID of Rs0.9bn (net of tax Rs0.8bn) during the quarter. Further, company has taken exceptional deferred tax and tax reversal of Rs0.9bn and 0.1bn, respectively, during Q4FY12. We have considered dividend income and tax adjustment as exceptional item. Hence, reported PAT stood at Rs0.9bn.
􀂄 Snapshot of FY12 consolidated results: Chambal’s consolidated net sales, EBITDA and PAT grew by 32.6%, 16.4% and 41.0% YoY to Rs75.4bn, Rs9.2bn and Rs3.3bn, respectively (PLe: Rs72.3bn/Rs8.9bn/Rs3.3bn). IMACID has shown net sales growth of 51.8% to Rs6.4bn (PLe: Rs6.3bn) led by higher phosphoric acid prices globally. IMACID EBIT grew by 1.6x YoY to Rs0.9bn (PLe: Rs0.9bn). Company’s IT business has shown improvement during FY12. IT business has reported loss of Rs0.7bn during FY12 v/s Rs1.1bn in FY11 (PLe: Rs0.7bn). Chambal’s gross and net debt stood at Rs34.7bn and Rs29.9bn, respectively (v/s Rs25.8bn and Rs19.6bn in FY11) because of higher debtors led by inventory push during Q4FY12. Company’s working capital days have gone up from 42 days in FY11 to 100days in FY12.

■ Expansion Projects: Chambal has approved setting up of Single Super Phosphate (SSP) plant in Dahej, Gujarat, with an annual capacity of 5Lac MT at a project cost of Rs122cr. Company is yet to receive environmental clearance for the project which is expected to take 24 months to complete. Land has already been allotted during Q3FY12 to the company. We have considered capex as CWIP in our FY13 and FY14 estimates. Further, company is also setting up a SSP plant in its existing facility at Gadepan, Kota (Rajasthan), with a capacity of 2Lac MT at the capex of Rs32.5m. Project is likely to get operational by Q1FY13 (June 2012). We have considered production of 1Lac MT and 1.5lac MT in our FY13E and FY14E estimates, respectively.

■ We expect EPS of Rs8.3 during FY13: We believe that company’s net sales would de-grow by 13.3% YoY to Rs65.2bn mainly on account of lower trading fertiliser sales led by lower subsidy as well as volumes. We expect Chambal’s EBIT to grow by 1.9% YoY to Rs6.2bn. Company’s Gadepan–I urea plant is fully depreciated now and we expect ~Rs0.5bn savings in depreciation during FY13. Hence, it is expected to boost profitability of urea business. But, it would be set‐off by lower contribution by trading business. We believe that IMACID is likely to report lower profit during FY13 on account of lower phosphoric acid. We are assuming EBIT Rs0.5bn (v/s Rs0.9bn in FY12) in IMACID. Further, Chambal’s IT business is operating at ~US$1.5m‐2m loss/quarter at present. Hence, we are assuming EBIT loss of Rs0.3bn (v/s Rs0.7bn in FY12), considering the present run‐rate. We expect 4.2% YoY growth to Rs3.4bn during FY13.

■ Valuation and Outlook: We expect Chambal’s consolidated PAT to grow at FY12-14E CAGR of 10.9% (v/s 10.8% in FY05-12). At present, stock is trading at one-year forward P/E of 8.5x (v/s trading range of 6x-13x for the past ten years). Stock has corrected ~13% and ~22% in the past one and six months, respectively. We believe that stock valuation is reasonable post correction and it is providing good medium term investment opportunity (i.e. six months). We are upgrading the stock to ‘BUY’ with the TP of Rs83 (10xFY13E EPS). Any positive policy outcome could be an upside to our TP. Our industry interactions suggest that government is likely to modify the present urea policy by increasing fixed cost reimbursement by Rs350/MT to urea players. If it gets approved in the near term, then we expect Chambal’s FY13E earnings to upgrade by 12.2% to Rs9.3.