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CHAMBAL FERTILISERS AND CHEMICALS
Trading gains drive profitability
Strong profit growth on account of high trading margin
Chambal Fertilisers and Chemicals (Chambal) posted standalone revenue growth
of 18.6% at INR 13,588 mn and EBIDTA growth of 21.4% Y-o-Y in Q3FY11.
EBITDA margin has expanded ~40 bps Y-o-Y to 16.9% in Q3FY11. Net profit
came at INR 1,074 mn, up 34.7% Y-o-Y. Strong growth in revenue and profit was
on account of robust trading gains, coupled with reversal of net mark-to-market
loss provision of INR 170.7 mn in the shipping division, and reversal of provision
of INR 5.2 mn in fertilisers on USD interest rate swap transactions. Adjusting for
these, adjusted profit for Q3FY11 is at INR 898 mn.
Strong performance in trading goods and textiles divisions
Chambal posted strong performance across various segments, primarily driven by
traded goods and textile segments. Revenue from traded goods grew 23.6%
Y-o-Y to INR 4,999 mn in Q3FY11, on account of enhanced volumes of trading
(driven by strong demand owing to good monsoons). Traded goods’ PBIT margin
is at 6.6%, up ~400bps Y-o-Y, due to inventory gains. Hence, PBIT for traded
goods has jumped to INR 332 mn in Q3FY11 vis-à-vis INR 105 mn in Q3FY10.
Also, the textile segment has seen strong improvement in PBIT margin, to 10.8%
in Q3FY11 vis-à-vis 3.9% in Q3FY10, driven by strong prices for yarn.
Investments in subsidiaries; software to drag profitability
Chambal has invested ~INR 69.91 mn in CFCL Overseas, Cayman Islands, its
software division, and INR 35 mn in Chambal Infrastructure Ventures, its power
projects division. We feel that investment in the software business is non-synergic
in nature and would be a drag on profitability in the next few years.
Outlook and valuations: Clarity in urea policy awaited; maintain ‘HOLD’
Since volumes and margins in trading are higher than expected, we have revised
upwards our revenue estimates for FY11 by 2.4% and EPS estimates by ~5%,
while maintaining those for FY12 and FY13. Currently, Chambal is available at
12.7x and 11.4x consolidated P/E and at 6.4x and 5.7x consolidated EV/EBITDA
of FY12E and FY13E, respectively. Uncertainty in the urea policy and significant
investments in the software division (non-synergic business) are expected to be
overhang on the stock. Based on DCF valuation, we value Chambal at INR 84 per
share and maintain ‘HOLD’ recommendation on it.
Company Description
Chambal was promoted by Zuari Industries in 1985. It is India's largest producer of urea
in the private sector. The company has three divisions, namely, agri-inputs, shipping and
textiles. It is a diversified conglomerate with interests in fertilisers, phosphoric acid, agriinputs
& seeds, biotechnology, textiles, information technology, food processing and
shipping. The company operates two nitrogenous fertiliser plants. The company markets
urea under the ‘Uttam Veer’ brand, primarily in North and West India.
Chambal has 33.33% ownership interest in Indo Maroc Phosphore S.A. IMACID, which is
engaged in manufacturing of phosphoric fertilisers. The remaining stake in IMACID is
owned equally by Tata Chemicals and OCP, Morocco.
Chambal has three subsidiaries:
Chambal Infrastructure Ventures: For development of power projects
CFCL Overseas, Cayman Islands: For consolidation of its software business
India Steamship Pte., Singapore: Engaged in shipping business
Investment Theme
Chambal is the largest manufacturer of urea in the private sector in India, with an
installed capacity of 1.73 mn MT. With the government planning to ease regulations in
the urea space and make it lucrative to urea manufacturers to boost investment,
Chambal is poised to be a key beneficiary. Moreover, the company has also announced
plans to set up a 1.2 mn MT urea manufacturing facility at Gadepan (Rajasthan), but is
awaiting more clarity on the government policy.
On account of nutrient-based subsidy (NBS) scheme (which has freed non-urea
fertilisers’ pricing) and also due to good monsoons, Chambal is expected to enhance the
trading of complex fertilisers significantly, which will add to its profitability. The company
has a vast marketing network, comprising 11 regional offices, 1,500 dealers and 20,000
village level outlets, through which it caters to farmers in ~10 states in northern, central
and western regions of India. Though Chambal is poised to be one of the biggest
beneficiaries of the expected new urea policy, its software division is expected to be a
drag on profitability for few years.
Key Risks
Poor monsoon could hit fertiliser demand
Even today, Indian agriculture is largely dependent on monsoon. Poor monsoon could,
therefore, be a demand dampener.
Regulatory risk
The fertiliser sector, especially urea, has always been subject to stringent government
policies. Any change in policies could significantly impact our earnings estimates. As part
of the policy risk, in the event of urea getting decontrolled, significant upside risk exists
for our earnings estimates.
Delay in payment of fertiliser subsidies by government
Any delay in the payment of subsidies by the government or payment of the same via
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.
Investment in unrelated businesses
With Chambal 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 �� ��
CHAMBAL FERTILISERS AND CHEMICALS
Trading gains drive profitability
Strong profit growth on account of high trading margin
Chambal Fertilisers and Chemicals (Chambal) posted standalone revenue growth
of 18.6% at INR 13,588 mn and EBIDTA growth of 21.4% Y-o-Y in Q3FY11.
EBITDA margin has expanded ~40 bps Y-o-Y to 16.9% in Q3FY11. Net profit
came at INR 1,074 mn, up 34.7% Y-o-Y. Strong growth in revenue and profit was
on account of robust trading gains, coupled with reversal of net mark-to-market
loss provision of INR 170.7 mn in the shipping division, and reversal of provision
of INR 5.2 mn in fertilisers on USD interest rate swap transactions. Adjusting for
these, adjusted profit for Q3FY11 is at INR 898 mn.
Strong performance in trading goods and textiles divisions
Chambal posted strong performance across various segments, primarily driven by
traded goods and textile segments. Revenue from traded goods grew 23.6%
Y-o-Y to INR 4,999 mn in Q3FY11, on account of enhanced volumes of trading
(driven by strong demand owing to good monsoons). Traded goods’ PBIT margin
is at 6.6%, up ~400bps Y-o-Y, due to inventory gains. Hence, PBIT for traded
goods has jumped to INR 332 mn in Q3FY11 vis-à-vis INR 105 mn in Q3FY10.
Also, the textile segment has seen strong improvement in PBIT margin, to 10.8%
in Q3FY11 vis-à-vis 3.9% in Q3FY10, driven by strong prices for yarn.
Investments in subsidiaries; software to drag profitability
Chambal has invested ~INR 69.91 mn in CFCL Overseas, Cayman Islands, its
software division, and INR 35 mn in Chambal Infrastructure Ventures, its power
projects division. We feel that investment in the software business is non-synergic
in nature and would be a drag on profitability in the next few years.
Outlook and valuations: Clarity in urea policy awaited; maintain ‘HOLD’
Since volumes and margins in trading are higher than expected, we have revised
upwards our revenue estimates for FY11 by 2.4% and EPS estimates by ~5%,
while maintaining those for FY12 and FY13. Currently, Chambal is available at
12.7x and 11.4x consolidated P/E and at 6.4x and 5.7x consolidated EV/EBITDA
of FY12E and FY13E, respectively. Uncertainty in the urea policy and significant
investments in the software division (non-synergic business) are expected to be
overhang on the stock. Based on DCF valuation, we value Chambal at INR 84 per
share and maintain ‘HOLD’ recommendation on it.
Company Description
Chambal was promoted by Zuari Industries in 1985. It is India's largest producer of urea
in the private sector. The company has three divisions, namely, agri-inputs, shipping and
textiles. It is a diversified conglomerate with interests in fertilisers, phosphoric acid, agriinputs
& seeds, biotechnology, textiles, information technology, food processing and
shipping. The company operates two nitrogenous fertiliser plants. The company markets
urea under the ‘Uttam Veer’ brand, primarily in North and West India.
Chambal has 33.33% ownership interest in Indo Maroc Phosphore S.A. IMACID, which is
engaged in manufacturing of phosphoric fertilisers. The remaining stake in IMACID is
owned equally by Tata Chemicals and OCP, Morocco.
Chambal has three subsidiaries:
Chambal Infrastructure Ventures: For development of power projects
CFCL Overseas, Cayman Islands: For consolidation of its software business
India Steamship Pte., Singapore: Engaged in shipping business
Investment Theme
Chambal is the largest manufacturer of urea in the private sector in India, with an
installed capacity of 1.73 mn MT. With the government planning to ease regulations in
the urea space and make it lucrative to urea manufacturers to boost investment,
Chambal is poised to be a key beneficiary. Moreover, the company has also announced
plans to set up a 1.2 mn MT urea manufacturing facility at Gadepan (Rajasthan), but is
awaiting more clarity on the government policy.
On account of nutrient-based subsidy (NBS) scheme (which has freed non-urea
fertilisers’ pricing) and also due to good monsoons, Chambal is expected to enhance the
trading of complex fertilisers significantly, which will add to its profitability. The company
has a vast marketing network, comprising 11 regional offices, 1,500 dealers and 20,000
village level outlets, through which it caters to farmers in ~10 states in northern, central
and western regions of India. Though Chambal is poised to be one of the biggest
beneficiaries of the expected new urea policy, its software division is expected to be a
drag on profitability for few years.
Key Risks
Poor monsoon could hit fertiliser demand
Even today, Indian agriculture is largely dependent on monsoon. Poor monsoon could,
therefore, be a demand dampener.
Regulatory risk
The fertiliser sector, especially urea, has always been subject to stringent government
policies. Any change in policies could significantly impact our earnings estimates. As part
of the policy risk, in the event of urea getting decontrolled, significant upside risk exists
for our earnings estimates.
Delay in payment of fertiliser subsidies by government
Any delay in the payment of subsidies by the government or payment of the same via
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.
Investment in unrelated businesses
With Chambal 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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