Strong demand environment for augmented capacities: India is the second largest consumer of fertilizer in the world next to China. Fertilizer consumption has outpaced food grain production in the country over FY03-12. India’s per hectare fertilizer consumption at 141 kg for FY12 is lower than developed and many developing countries. The domestic capacity and production had stagnated leading to increasing imports in a rising raw material costs scenario. However post NBS regime, we believe CIL is well prepared to cater to the increasing domestic demand with capacity expansion and raw material availability issues getting over during FY13.
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Key beneficiary of NBS regime: CIL has been one of the major beneficiaries from Nutrient Based Subsidy (NBS) policy which allowed companies to fix MRPs of P&K fertilizers. The company witnessed 20% YoY increase in revenues, 271bps improvement in margins and 48% rise in net profit for FY11. The impact of higher prices is likely to impact volumes in FY13, however benefits of capacity expansion and resolution of raw material availability is expected to benefit the company during FY14.
Robust free cash flow generation post capex: CIL has plans of capex of Rs 620 crores for Kakinada, Punjab and retail stores expansion. The major capex of Rs 350 crores at Kakinada is expected to be completed in Q3FY13 which will increase its fertilizer manufacturing capacity from 32.6 lac MT to 40 lac MT. The total capex of Rs 120 crores for SSP plant at Punjab is likely to be completed in FY14 and the company will be left out for a capex of Rs 150 crores which includes retail capex of Rs 50 crores. Post FY14, company’s D/E ratio is expected to come down from 1.2x in FY12 to 0.8x in FY14. The benefits of expanded capacity and repayment of debt is expected to yield over 1000 crores free cash flow from FY14 onwards.
Successful turnaround of Sabero Organics: Sabero Organics has started showing signs of improvement turning EBITDA positive during Q1FY13. CIL is implementing Environment Management System (EMS) which will increase the capacity utilization of Sabero Organics to 75% from 40-45% during FY13. Consequently, we expect higher contribution from Sabero with increased production and sales from FY13 onwards.
Higher contribution from non-subsidy verticals: The company is scaling up its non subsidy verticals like Speciality Nutrients & Compost, Crop protection and Retail which cumulatively contributed to 10% of revenues and 30% of EBITDA during FY12. The company is targeting 50% EBITDA contribution from these verticals. We believe higher revenue contribution from non-subsidy business with expansion of speciality nutrients division and of retail stores is likely to increase EBITDA margins for the company going ahead.
Valuation & Recommendation: We have valued CIL on DCF basis factoring high growth phase for the company during FY13-FY17. Our DCF valuation factors 12.3% WACC and a terminal year growth rate of 3% giving us a fair value of Rs 352 per share. We recommend BUY.
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