Recommendation From Fertilizers Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

Chambal Fertilisers and Chemicals 

GROW YOUR CAPITAL WITH THIS FERTILISER STOCK 

HERE IS WHY
Expanding its production capacity
Favourable government policies bodes well
Secured long term gas supply from GAIL 

Chambal Fertilisers and Chemicals Ltd is one of the largest private sector fertiliser producers in India. The company owns two hi-tech nitrogenous fertiliser (urea) plants which are located at Gadepan in Kota, Rajasthan. The two plants have a production capacity of around 2 million MT of urea per annum. The company caters to the needs of the farmers in twelve states in northern, eastern, central and western regions of India and is the lead fertiliser supplier in the state of Rajasthan. The company has a robust distribution network consisting of 15 regional offices, 2,000 dealers and 20,000 village level outlets. 

Looking at recent quarterly results, the company’s net sales in Q1FY19 rose almost 11 per cent to Rs 2190 crore over the corresponding quarter of the last fiscal. During this period, the sales volumes to surged almost 26 per cent YoY to 0.64 million MT. At the operating level, the EBITDA for the quarter increased almost 22 per cent YoY to Rs 230 crore, with corresponding margin expansion of 90 bps. The EBITDA margin for Q1FY19 was at 10.5 per cent. Also, EBITDA per MT for the quarter increased to Rs 2,658 from Rs 2,224 in the corresponding quarter of the last fiscal. The net profit for Q1FY19 was Rs 155.38 as against Rs 140.29 crore in Q1FY18, representing a growth of ~11 per cent YoY. 

On the annual front, the net sales for the full year 2017-18 was flat at Rs 7,461 crore as compared to Rs 7,410 crore in FY17. Its EBITDA for the FY18 was Rs 781 crore, as against Rs 745.7 crore in the previous fiscal. The EBITDA margin for FY18 was at 10.5 per cent as against 10 per cent in the previous fiscal. The net profit for the year was Rs 480 crore as against Rs 425 crore in the previous year. 

In term of valuations, the stock of Chambal Fertilisers & Chemicals is currently available at an attractive P/E multiple of 13.5x on TTM earnings, which is close to five-year median P/E of 11.2x. The company’s ROE and ROCE for FY18 was at comfortable levels of 17.7 per cent and 11.6 per cent, respectively. The company’s D/E for FY18 stood at 1.94x but with interest coverage ratio of 5.81x, the company is well-placed to service its debt. 

Presently, India’s production of urea is around 24 million MT, which is far less than the demand of around 32 million MT. Thus, to encash this opportunity, the company is setting up a 1.34 million MT per annum brownfield ammonia-urea plant at Gadepan, Rajasthan with an investment of around USD 917 million. Out of the total capex amount, USD 711 million will be funded through debt. 

According to the company, the new urea project is proceeding as per schedule and is expected to be commissioned by January 2019. Further, the company has secured long term gas supply from GAIL for its existing and new facilities. Besides, the government’s various policies such as gas price pooling, DBT, NPS III, Modified NPS III, New Investment Policy and the New Urea Policy bodes well for the fertiliser producers. Under DBT, the government is looking to transfer the subsidy amount directly to producers and importers on the basis of actual sales made by retailers to beneficiaries. Owing to all these, we urge our reader-investors to BUY this scrip