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Net revenue and profit in line with estimates
Zuari Industries (Zuari) posted strong revenue growth of 38.4% (at INR 15,319
mn) and EBIDTA growth of 54.3% Y-o-Y in Q3FY11. Net revenue and PAT came in
line with estimates on account of strong growth in volumes of traded and
manufactured fertilisers, driven by strong demand (owing to good monsoons).
EBIDTA margin expanded 40bps to 4% in Q3FY11 vis-à-vis Q3FY10. PAT was at
INR 366 mn, up 46.9% over Q3FY10.
Revenue growth driven by strong growth in sales volume of fertilisers
Zuari’s fertiliser sales volume jumped ~38% on account of strong growth in
traded fertiliser volumes. Its own manufactured fertilisers sales volume has been
flat in Q3FY11 at 283,000 MT vis-à-vis 293,000 MT in Q3FY10, while the traded
fertiliser volume increased strongly by 119% Y-o-Y to 326,000 MT in Q3FY11.
Own manufactured urea volumes sales has been at 117,000 MT in Q3FY11 vis-àvis
105,000 MT in Q3FY10 (growth of 11.4%). Sales of own manufactured
NPK/DAP is at 166,000 MT in Q3FY11 vis-à-vis 188,000 MT, Y-o-Y (down 11.7%).
Key highlights
Investment of INR 12 bn being planned by Zuari in the cement subsidiary
along with Italcementi (JV partner), is not yet committed by Zuari and is still
in the land acquisition and environmental clearance stage. We expect that
Zuari may revisit the plan in the context of current weak outlook for cement.
Management reiterated that the capacity expansion of NPK/DAP from 0.7 mn
MT to 1 mn MT and also the urea feedstock conversion are on track.
Outlook and valuations: Steady; maintain ‘BUY’
With capacity expansion plans on track and efforts at enhancing trading of fertilisers
significantly, we expect Zuari to post strong volume growth in fertilisers over the
next two years. Post this, Zuari is planning to shift traded volumes with
manufactured fertilisers, which could result in strong margin expansion. For the
purpose of enhancing the manufacturing capacity, Zuari is actively pursuing various
opportunities; including debottlenecking, setting up greenfield plants and adopting
tolling model. Currently, Zuari is available at 6.1x and 5.0x consolidated P/E and at
2.7x and 1.6x consolidated EV/EBITDA of FY12E and FY13E, respectively. Based on
DCF valuation, we value Zuari at INR 892 per share (including Zuari’s 14.2%
holding in Chambal Fertilisers considered at 30% discount to the current market
price), and maintain ‘BUY’ recommendation on the stock.
Other highlights
Subsidy receivable for Zuari is at ~INR 10 bn as on December 31, 2010, on
account of ~INR 1.2 bn from urea and the rest from non-urea fertilisers.
Management guided for pricing pressure from raw materials in Q4FY11 and
Q1FY12, which it expects to counter by taking some hike on the farm gate price.
To counter the increasing raw material costs, Zuari has taken a price hike of ~INR
300 per MT of NPK fertilisers in December 2010 and is contemplating another price
hike shortly. The price hike in December is the second one, following the one taken
in April 2010; the total hike totals to ~15%.
Despite the hike in farm gate price, we expect some pressure on the margin front
for Zuari over the short term on account of the raw material price pressures and
lower subsidy in FY12. However, over the long term, we expect reduction of
subsidy to be positive for Zuari, which would help it improve working capital cycle.
Company Description
Incorporated in 1967 as Zuari Agro Chemicals, a joint venture between the K K Birla
Group and the US Steel Corporation, it was renamed Zuari Industries in 1998. The
company has a fertiliser manufacturing facility at Goa with four plants dedicated to
manufacture urea, DAP, SSP and NPK-based fertilisers. Jai kisan (urea), Samraat,
Sampurna are amongst Zuari’s popular brands. The company also deals in agricultural
inputs such as seeds, specialty fertilisers, and pesticides. the company has diversified
into several related and unrelated sectors through its subsidiaries, and has presence in
seeds, cement, furniture, pesticides, etc. Zuari has marketing offices spread over Goa,
Maharashtra, Karnataka, Andhra Pradesh, and Tamil Nadu.
Zuari promoted Chambal Fertilisers and Chemicals acquired 80.45% stake in Paradeep
Phosphates (PPL) through Zuari Moroc Phosphates, a 50:50 JV between Zuari and Moroc
Phosphore (Morocco). PPL owns the second largest integrated DAP plant in India (after
IFFCO) with a total installed capacity of 720,000 MTPA.
Investment Theme
With a capex outlay of ~INR 800 mn, Zuari is likely to expand its complex fertiliser
capacity by ~300,000 MT by FY13. Also, it has plans for a greenfield urea capacity of 1.2
mn MT, to benefit from the anticipated industry friendly urea policy. Zuari targets 2 mn
MT of fertiliser sales for FY11E and plans to increase it to over 3.5 mn MT over next three
years. Zuari is also expected to benefit from its holding in PPL, that manufactures ~1.2
mn MT per annum DAP and other complex fertilisers and is one of the largest integrated
DAP plants in India, and manufactures ~50% of its phosphoric acid requirement. With
implementation of NBS, the company’s complex fertiliser segment is expected to benefit
due to margin expansion and lower subsidy receivables.
Zuari expects to convert the urea feedstock from naphtha to natural gas from January
2013, and is expected to benefit from: (a) Production of additional 50,000 MT urea p.a.
from the existing plant; (b) improvement in EBITDA margin; and (c) lower subsidy
receivable, resulting in better working capital cycle.
Key Risks
Poor monsoon could hit fertiliser demand
Indian agriculture is largely dependent on monsoon. Poor monsoon could, therefore, be a
demand dampener.
Delay in payment of fertiliser subsidies by government
Any delay in the payment of subsidies by the government or payment of the same by
means of fertiliser bonds, could strain the company’s working capital cycle. The Indian
finance minister has, however, assured that the entire subsidy amount will be paid in
cash and not bonds.
Delay in change of feedstock or in delivery of gas
Any execution delay in the change of feedstock from naphtha to natural gas or in
obtaining gas feedstock delivery will put downward pressure on the company’s earnings.
Investment in unrelated businesses
With Zuari investing in a variety of businesses – both related and unrelated, there is a
risk of misallocation of capital resulting in sub-optimal value realisation.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Net revenue and profit in line with estimates
Zuari Industries (Zuari) posted strong revenue growth of 38.4% (at INR 15,319
mn) and EBIDTA growth of 54.3% Y-o-Y in Q3FY11. Net revenue and PAT came in
line with estimates on account of strong growth in volumes of traded and
manufactured fertilisers, driven by strong demand (owing to good monsoons).
EBIDTA margin expanded 40bps to 4% in Q3FY11 vis-à-vis Q3FY10. PAT was at
INR 366 mn, up 46.9% over Q3FY10.
Revenue growth driven by strong growth in sales volume of fertilisers
Zuari’s fertiliser sales volume jumped ~38% on account of strong growth in
traded fertiliser volumes. Its own manufactured fertilisers sales volume has been
flat in Q3FY11 at 283,000 MT vis-à-vis 293,000 MT in Q3FY10, while the traded
fertiliser volume increased strongly by 119% Y-o-Y to 326,000 MT in Q3FY11.
Own manufactured urea volumes sales has been at 117,000 MT in Q3FY11 vis-àvis
105,000 MT in Q3FY10 (growth of 11.4%). Sales of own manufactured
NPK/DAP is at 166,000 MT in Q3FY11 vis-à-vis 188,000 MT, Y-o-Y (down 11.7%).
Key highlights
Investment of INR 12 bn being planned by Zuari in the cement subsidiary
along with Italcementi (JV partner), is not yet committed by Zuari and is still
in the land acquisition and environmental clearance stage. We expect that
Zuari may revisit the plan in the context of current weak outlook for cement.
Management reiterated that the capacity expansion of NPK/DAP from 0.7 mn
MT to 1 mn MT and also the urea feedstock conversion are on track.
Outlook and valuations: Steady; maintain ‘BUY’
With capacity expansion plans on track and efforts at enhancing trading of fertilisers
significantly, we expect Zuari to post strong volume growth in fertilisers over the
next two years. Post this, Zuari is planning to shift traded volumes with
manufactured fertilisers, which could result in strong margin expansion. For the
purpose of enhancing the manufacturing capacity, Zuari is actively pursuing various
opportunities; including debottlenecking, setting up greenfield plants and adopting
tolling model. Currently, Zuari is available at 6.1x and 5.0x consolidated P/E and at
2.7x and 1.6x consolidated EV/EBITDA of FY12E and FY13E, respectively. Based on
DCF valuation, we value Zuari at INR 892 per share (including Zuari’s 14.2%
holding in Chambal Fertilisers considered at 30% discount to the current market
price), and maintain ‘BUY’ recommendation on the stock.
Other highlights
Subsidy receivable for Zuari is at ~INR 10 bn as on December 31, 2010, on
account of ~INR 1.2 bn from urea and the rest from non-urea fertilisers.
Management guided for pricing pressure from raw materials in Q4FY11 and
Q1FY12, which it expects to counter by taking some hike on the farm gate price.
To counter the increasing raw material costs, Zuari has taken a price hike of ~INR
300 per MT of NPK fertilisers in December 2010 and is contemplating another price
hike shortly. The price hike in December is the second one, following the one taken
in April 2010; the total hike totals to ~15%.
Despite the hike in farm gate price, we expect some pressure on the margin front
for Zuari over the short term on account of the raw material price pressures and
lower subsidy in FY12. However, over the long term, we expect reduction of
subsidy to be positive for Zuari, which would help it improve working capital cycle.
Company Description
Incorporated in 1967 as Zuari Agro Chemicals, a joint venture between the K K Birla
Group and the US Steel Corporation, it was renamed Zuari Industries in 1998. The
company has a fertiliser manufacturing facility at Goa with four plants dedicated to
manufacture urea, DAP, SSP and NPK-based fertilisers. Jai kisan (urea), Samraat,
Sampurna are amongst Zuari’s popular brands. The company also deals in agricultural
inputs such as seeds, specialty fertilisers, and pesticides. the company has diversified
into several related and unrelated sectors through its subsidiaries, and has presence in
seeds, cement, furniture, pesticides, etc. Zuari has marketing offices spread over Goa,
Maharashtra, Karnataka, Andhra Pradesh, and Tamil Nadu.
Zuari promoted Chambal Fertilisers and Chemicals acquired 80.45% stake in Paradeep
Phosphates (PPL) through Zuari Moroc Phosphates, a 50:50 JV between Zuari and Moroc
Phosphore (Morocco). PPL owns the second largest integrated DAP plant in India (after
IFFCO) with a total installed capacity of 720,000 MTPA.
Investment Theme
With a capex outlay of ~INR 800 mn, Zuari is likely to expand its complex fertiliser
capacity by ~300,000 MT by FY13. Also, it has plans for a greenfield urea capacity of 1.2
mn MT, to benefit from the anticipated industry friendly urea policy. Zuari targets 2 mn
MT of fertiliser sales for FY11E and plans to increase it to over 3.5 mn MT over next three
years. Zuari is also expected to benefit from its holding in PPL, that manufactures ~1.2
mn MT per annum DAP and other complex fertilisers and is one of the largest integrated
DAP plants in India, and manufactures ~50% of its phosphoric acid requirement. With
implementation of NBS, the company’s complex fertiliser segment is expected to benefit
due to margin expansion and lower subsidy receivables.
Zuari expects to convert the urea feedstock from naphtha to natural gas from January
2013, and is expected to benefit from: (a) Production of additional 50,000 MT urea p.a.
from the existing plant; (b) improvement in EBITDA margin; and (c) lower subsidy
receivable, resulting in better working capital cycle.
Key Risks
Poor monsoon could hit fertiliser demand
Indian agriculture is largely dependent on monsoon. Poor monsoon could, therefore, be a
demand dampener.
Delay in payment of fertiliser subsidies by government
Any delay in the payment of subsidies by the government or payment of the same by
means of fertiliser bonds, could strain the company’s working capital cycle. The Indian
finance minister has, however, assured that the entire subsidy amount will be paid in
cash and not bonds.
Delay in change of feedstock or in delivery of gas
Any execution delay in the change of feedstock from naphtha to natural gas or in
obtaining gas feedstock delivery will put downward pressure on the company’s earnings.
Investment in unrelated businesses
With Zuari investing in a variety of businesses – both related and unrelated, there is a
risk of misallocation of capital resulting in sub-optimal value realisation.
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