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¾ Moderation in rural growth & shrinking farm profitability is
unlikely to impact domestic urea players. Any decline in urea
consumption will reduce urea imports
¾ Chambal is likely to benefit from incremental production
above cutoff which qualifies for IPP linked subsidy. Rupee
depreciation would further augment earnings
¾ However, unrelated diversification in shipping, textiles & IT is
a drag to profitability. We have modeled for losses in shipping
& textiles in FY12; IT business poses risk to earnings
¾ Chambal has traded in the PE band of 6-17x with an average
of 9.5x. Valuations remain comfortable at 8.5x fwd estimates.
Maintain Accumulate with target of Rs 98
Urea players unlikely to be hit in the current scenario; rupee depreciation
to benefit IPP linked production
Chambal Fertilisers is one of the leading players in the domestic urea space comprising
of 1.85mn mt of installed capacity with 8% domestic market share (by capacity). As
discussed above in the report any moderation in demand growth is unlikely to have any
impact on domestic urea production hence keeping the company’s earnings intact.
Chambal being a proxy to urea players, since 80% of profits is contributed by urea, is
likely to witness stable earnings. On the contrary it may surprise on positive side due to
benefit from rupee depreciation having favourable impact on IPP linked production.
However, unrelated diversification in shipping, textiles & IT is a drag
Chambal’s unrelated diversification in shipping, textiles & IT business is a drag to the
company’s profitability and has always weighed on investors’ sentiments. Out of
Chambal’s six vessels, only 1 vessel is currently under long term contract while the
remaining 5 ships are operating on spot rates. Textiles business is also under pressure
due to decline in cotton prices resulting into inventory losses. We believe shipping &
textiles are likely to remain laggard in the current scenario and have modeled for losses
in both these segments for FY12. IT business is also likely to post losses in FY12
creating further pressure on bottomline.
Valuations remain comfortable; Earnings might surprise in Q4 due to
higher IPP linked production;
Historically, Chambal Fertilisers has traded in the PE band of 6x-17x with an average of
9.5x during FY06-11 based on 1 year forward earnings estimates. Valuations remain
comfortable in the current scenario with the stock quoting at 8.5x currently. Earnings are
likely to surprise in Q4 due to higher IPP linked production coupled with incremental
gain from rupee depreciation. Further, any positive news flow related to implementation
of NBS in urea is likely to be a positive trigger. However continued pressure on
company’s other businesses (textiles, shipping and IT) and huge debt Rs 25bn on
balance sheet leading to M-t-M loss are key concerns. We maintain our Accumulate
rating on the stock with price target of Rs 98.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
¾ Moderation in rural growth & shrinking farm profitability is
unlikely to impact domestic urea players. Any decline in urea
consumption will reduce urea imports
¾ Chambal is likely to benefit from incremental production
above cutoff which qualifies for IPP linked subsidy. Rupee
depreciation would further augment earnings
¾ However, unrelated diversification in shipping, textiles & IT is
a drag to profitability. We have modeled for losses in shipping
& textiles in FY12; IT business poses risk to earnings
¾ Chambal has traded in the PE band of 6-17x with an average
of 9.5x. Valuations remain comfortable at 8.5x fwd estimates.
Maintain Accumulate with target of Rs 98
Urea players unlikely to be hit in the current scenario; rupee depreciation
to benefit IPP linked production
Chambal Fertilisers is one of the leading players in the domestic urea space comprising
of 1.85mn mt of installed capacity with 8% domestic market share (by capacity). As
discussed above in the report any moderation in demand growth is unlikely to have any
impact on domestic urea production hence keeping the company’s earnings intact.
Chambal being a proxy to urea players, since 80% of profits is contributed by urea, is
likely to witness stable earnings. On the contrary it may surprise on positive side due to
benefit from rupee depreciation having favourable impact on IPP linked production.
However, unrelated diversification in shipping, textiles & IT is a drag
Chambal’s unrelated diversification in shipping, textiles & IT business is a drag to the
company’s profitability and has always weighed on investors’ sentiments. Out of
Chambal’s six vessels, only 1 vessel is currently under long term contract while the
remaining 5 ships are operating on spot rates. Textiles business is also under pressure
due to decline in cotton prices resulting into inventory losses. We believe shipping &
textiles are likely to remain laggard in the current scenario and have modeled for losses
in both these segments for FY12. IT business is also likely to post losses in FY12
creating further pressure on bottomline.
Valuations remain comfortable; Earnings might surprise in Q4 due to
higher IPP linked production;
Historically, Chambal Fertilisers has traded in the PE band of 6x-17x with an average of
9.5x during FY06-11 based on 1 year forward earnings estimates. Valuations remain
comfortable in the current scenario with the stock quoting at 8.5x currently. Earnings are
likely to surprise in Q4 due to higher IPP linked production coupled with incremental
gain from rupee depreciation. Further, any positive news flow related to implementation
of NBS in urea is likely to be a positive trigger. However continued pressure on
company’s other businesses (textiles, shipping and IT) and huge debt Rs 25bn on
balance sheet leading to M-t-M loss are key concerns. We maintain our Accumulate
rating on the stock with price target of Rs 98.
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