Chambal Fertilisers Upgrade in target price to Rs 86; Emkay research

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Chambal Fertilisers

Upgrade in target price

ACCUMULATE

CMP: Rs 78                                       Target Price: Rs 86

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n     Q3FY11 results were in line with estimates with APAT of Rs 903 mn (adjusted for Rs 171 mn EO item), +13% yoy

n     Shipping business disappoints with EBIT margins of 9% vs 37% due to softening charter rates and lower asset utilization. Fertiliser trading margins remain healthy at 6.6%

n     EBITDA margins contraction of 80 bps to 15.7% (vs estimated 18.9%) is on account of higher fertiliser trading and disappointing results of shipping business

n     Upgrade price target to Rs 86, based on 10x FY12 eps (as against 15x to complex fertiliser players), maintain ACCUMULATE

Q3FY11 revenue growth of 19% driven by higher trading

Chambal’s revenues increased by 18.6% to Rs 13.6 bn (ahead of estimates of Rs 11.6

bn) mainly on account of higher fertiliser trading. Trading revenues increased by 24% to

Rs 5 bn and accounted for 37% to sales. Textiles division also reported healthy growth

with 29% increase in revenues to Rs 1 bn. Fertiliser revenues under own manufacturing

at Rs 6.8 bn and shipping revenues of Rs 702 mn was in line with estimates.

Margins contraction in shipping division affected EBITDA margins

EBITDA margins declined by 80 bps yoy to 15.7% (below our expectation of 18.9%)

mainly on account of contraction in margins in shipping business (declined from 37% to

9%). As a result, EBIT from shipping crashed by 71% to Rs 65 mn (adjusted for Rs 170

mn provision write back in current quarter). Shipping business has witnessed

challenging environment due to softer charter rates and lower utilization. EBIT margins

in the fertiliser segment remained healthy at 16.3% and textiles at 11%. Margins in

trading segment at 6.6% was ahead of our estimates since company has entered into

price contract at the beginning of the year and benefited in subsequent quarters from

higher realisations.

APAT Rs 903 mn in line with estimates adjusted for Rs 170 mn EO

Adjusting for Rs 170 mn on account reversal of provision write back in shipping

business, APAT at Rs 903 mn, +13.2% yoy, was in line with our estimates of Rs 898

mn. AEPS for the quarter stood at Rs 2.2 as against Rs 1.9 previous year. Company

reported profit of Rs 1.07 bn, +35% yoy. Company reported APAT of Rs 2.7 bn in

9MFY11, +26% yoy and EPS of Rs 6.5.

Maintain Accumulate rating, upgrade price target by 12%

We maintain our FY11 / FY12 estimates at Rs 8.5 and Rs 8.6. Chambal along with

being beneficiary of changes in urea policies should also benefit from additional urea

production in FY11E / FY12E under IPP based subsidy due to strong global urea prices

which should help it to improve its margins and RoE. We are upgrading target multiple

from previous 9x FY12 eps to 10X (as against 15x to complex fertiliser players).

Subsequently we are upgrading target price from Rs 76 to Rs 86 and maintain

Accumulate recommendation. Disappointing performance of shipping division in near

future due to weak charter rates and lower asset utilization rates are key risks.