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Robust volume growth to drive EPS CAGR of 15% over FY11-14E
We initiate coverage on CIL with a Buy rating and target price of INR340, implying
13% upside potential. Including a bonus debenture of INR15, our target price
implies 18% total return potential. Our positive investment case is premised on 1)
robust volume growth in complex fertilisers driven by capacity expansion of 25%,
2) 186bps improvement in EBITDA margins over the next five years driven by
higher phosphoric acid availability, and 3) increasing share of margin-accretive nonsubsidised
businesses. We are 10%/ 5% above consensus on FY12/13 EPS.
Key beneficiary of NBS policy
CIL is the second largest manufacturer of phosphatic fertilisers in India and is a
key beneficiary of the nutrient based subsidy (NBS) policy implemented in April
2010. Under this policy, the government announces a fixed subsidy for each
nutrient, and the manufacturer is free to pass on any cost increases to the farmer.
The implementation of NBS has seen CIL’s EBITDA margin jump from 11.1% in
FY10 to 12.6% in FY11 and 14.2% in H1FY12. RoEs also rose to 40% in FY11 from
35% in FY10. We forecast CIL’s RoE to range 38%-34% over FY12-FY14.
Focusing on increasing share of non-subsidised businesses
CIL is focusing on growing its non-subsidised businesses such as agrochemicals
(plant protection, technicals, and formulations) and specialty nutrients
(micronutrients, organic compost, etc). Non-subsidised businesses currently
contribute c.12% to CIL’s revenues and c.26% to EBITDA. CIL aims to increase
the share of EBITDA from its non-subsidised businesses to 50% in the next three
years. In May 2011, CIL announced its intention to acquire a majority stake in
Sabero Organics, which should help CIL get closer to its target EBITDA share of
50% from these businesses.
DCF-based value of INR340; lower production volumes a key risk
We value CIL at INR340, based on DCF with a WACC of 12%. We base our
WACC on Deutsche Bank’s cost of equity assumptions for India (risk-free rate of
6% and risk premium of 8.5%) and a three-year average beta of 0.85. Key
downside risks are lower-than-expected production volumes, lesser availability of
imported raw materials, and a delay in planned capacity expansions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Robust volume growth to drive EPS CAGR of 15% over FY11-14E
We initiate coverage on CIL with a Buy rating and target price of INR340, implying
13% upside potential. Including a bonus debenture of INR15, our target price
implies 18% total return potential. Our positive investment case is premised on 1)
robust volume growth in complex fertilisers driven by capacity expansion of 25%,
2) 186bps improvement in EBITDA margins over the next five years driven by
higher phosphoric acid availability, and 3) increasing share of margin-accretive nonsubsidised
businesses. We are 10%/ 5% above consensus on FY12/13 EPS.
Key beneficiary of NBS policy
CIL is the second largest manufacturer of phosphatic fertilisers in India and is a
key beneficiary of the nutrient based subsidy (NBS) policy implemented in April
2010. Under this policy, the government announces a fixed subsidy for each
nutrient, and the manufacturer is free to pass on any cost increases to the farmer.
The implementation of NBS has seen CIL’s EBITDA margin jump from 11.1% in
FY10 to 12.6% in FY11 and 14.2% in H1FY12. RoEs also rose to 40% in FY11 from
35% in FY10. We forecast CIL’s RoE to range 38%-34% over FY12-FY14.
Focusing on increasing share of non-subsidised businesses
CIL is focusing on growing its non-subsidised businesses such as agrochemicals
(plant protection, technicals, and formulations) and specialty nutrients
(micronutrients, organic compost, etc). Non-subsidised businesses currently
contribute c.12% to CIL’s revenues and c.26% to EBITDA. CIL aims to increase
the share of EBITDA from its non-subsidised businesses to 50% in the next three
years. In May 2011, CIL announced its intention to acquire a majority stake in
Sabero Organics, which should help CIL get closer to its target EBITDA share of
50% from these businesses.
DCF-based value of INR340; lower production volumes a key risk
We value CIL at INR340, based on DCF with a WACC of 12%. We base our
WACC on Deutsche Bank’s cost of equity assumptions for India (risk-free rate of
6% and risk premium of 8.5%) and a three-year average beta of 0.85. Key
downside risks are lower-than-expected production volumes, lesser availability of
imported raw materials, and a delay in planned capacity expansions.
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