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Nagarjuna Fertilizers & Chemicals Ltd.
Over-run in oil refinery costs;
retain Underperform
Strong Q2 helped by trading; Upping dated estimates, PO
Post our discussion with the company and Q2 results we raise our dated
estimates by ~40% led by better than expected operational efficiency and lower
depreciation. We also raise PO to INR27.5 (earlier PO INR23.5) based on:
Fertilizer business – INR20 (at 5.3x FY12e EV/EBITDA) and refinery investment -
INR7.5 (at 50% discount to book value given cost overruns). Retain Underperform
on i) rich valuations ii) sector low return ratios and iii) uncertainty over oil refinery.
Fertilizers post a robust quarter led by trading
NFCL posted a robust 121% yoy EBIT growth in Q2, driven by i) higher trading
revenues, ii) on a lower base of Q2FY10 that was impacted by 25day urea plant
shutdown and iii) lower depreciation as one of the plants is now fully depreciated.
Oil Refinery cost over-run at INR22bn- remains a drag
NFCL is building a 6mn ton oil refinery which has been long delayed. While this
refinery is expected to be commissioned by Feb 2012, there has been INR22bn
cost overrun vs earlier slated investment of INR47bn. This will lead to additional
debt burden for NFCL ahead, stretching balance sheet and depressing return
ratios. However company mentioned that it can dilute stake in the refinery ahead.
Valuations are rich; Retain Underperform
NFCL trades at 19xFY12e PE and 8.31xFY12e EV/EBITDA. We believe these are
rich valuations given sector low return ratios and potential stretch on the balance
sheet pending issuance of debt. However we see upside risk to PO led by
favorable fertilizer policy announcements.
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