Chambal Fertilisers (3QFY15) : Favourable risk-reward. Maintain BUY :: HDFC Securities

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Favourable risk-reward Chambal Fertilisers’ (CHMB) 3QFY15 EBITDA was muted at Rs 2.3bn (-2% YoY) led by lower profits in the agri trading biz. Lower depreciation (change in accounting policy), lower interest cost (lower farm receivables/inventory) and higher other income boosted PAT to Rs 1.4bn (+60% YoY). There are multiple positive triggers for CHMB : (1) Additional fixed subsidy of Rs 350/t (FY15 onwards) for urea players will lead to an additional PAT of ~Rs 400mn (2) Improvement in sector fundamentals [INR, channel inventory, farm receivables] (3) Other biz segments profitability has bottomed out. We are hopeful that the central govt. will address the long pending issues like high subsidy receivables, balanced usage of nutrients and investment policy. However, any duty boost to NPK producers (vs traders) under the ‘Make in India’ theme will be negative for Co. Cheap valuations (6.6/0.9x FY17E EPS/BV) and a div. yield of 3% protect the downside. Maintain BUY with a TP of Rs 74 (8x FY17E EPS). 3QFY15 highlights  Urea sales volumes were 520 kT (-2% YoY). Company has undertaken a shutdown at its Gadepan-II unit due to non-attractive policy for IPP linked production.  Trading volumes were very strong at 310 kT (+55%) led by lower channel inventory. Expecting improvement across segments  Urea : Even with status quo on IPP linked urea (no production) and higher interest cost (high subsidy receivables), extra fixed subsidy will boost profits.  Trading : Decline in channel inventory will lead to vol growth. PBIT fall of 29% in FY14 protects downside.  Shipping : Losses continue from FY12. In the worst case, performance will remain flat.  Software : FY14 was a turnaround year. PBIT losses reduced to Rs 127mn (vs Rs 793mn YoY). EBITDA loss/ net loss in CY14 was USD 1/9 mn.  Textile : We believe textile profitability will improve or remain flat

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