INVESTMENT RESEARCH FUNDAMENTAL COVERAGE - CHAMBAL FERTILISERS & CHEMICALS LTD. Investment Rationale. Stock Details. Key Financial

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1 INVESTMENT RESEARCH Price ` 143 Fair Value 180 Upside 26% Div Yield 1.40% Tenure 1 Year Well timed capex to bridge structural demand supply gap Sensex Nifty Group/Index A / S&P BSE 500 M.cap (` in cr) 5943 Equity (` In cr) FUNDAMENTAL COVERAGE - CHAMBAL FERTILISERS & CHEMICALS LTD Dated : 07 th Aug BUY Stock Details Investment Rationale Largest private urea manufacturer with robust distribution network and has planned a well timed capex to bridge structural demand supply gap in the industry. With no new capacity addition during the last 2 decades, India is now a urea deficit market where it produces 24 Mn MT against demand of 32 Mn MT. With a view to bridge this gap & government s favorable New Investment Policy, Chambal is setting up a 1.34 MMTPA Brownfield ammonia urea plant at Gadepan, Rajasthan at a capex of USD 917 Mn of which USD 711 Mn will be funded through debt, is expected to commission by January With this expansion, existing capacity of Urea will increase from 2.01 MMTPA to 3.35 MMTPA, further strengthening Chambal s leadership position in the industry. 52 wk H/L ` / Face Value ` NSE code BSE code CHAMBLFERT Key Valuation Ratios RONW 19% P/E P/BV 2.3 EV/EBIDTA Key Financial IN ` EV (`in cr) BV (`in cr) NW(`in cr) Adj.EPS Share Holding Pattern Promoter 41 % Others 59 % Overall progress of project is as per schedule with the total expenditure on new Urea Project till June 30, 2018 is ` Crore Chambal has entered into long term agreement with GAIL w.e.f. April 1, 2018 for supply of 24,955 bn British Thermal Units annually natural gas for Gadepan III unit. The gas can also be used in existing plants Gadepan I & Gadepan II. Rationale of long term tie-up of natural gas is that there is acute shortage of gas in the industry. Gadepan - Ill Project will be governed by the New Investment Policy 2012 of the Government of India. In NIP 2012, the base price of gas is taken as USO 6.5 per MMBTU and for each USO 0.1 per MMBTU change in the delivered price of gas, the floor and ceiling price for the purpose of determination of subsidy will change by USO 2 per MT up to the delivered gas price of USO 14 per MMBTU. New Investment Policy 2012 will remain effective for eight years after commencement of production which provides assurance of the cash flows for repayment of debt taken for Gadepan- 111 Project. During first 1-2 years of operations of Gadepan - Ill Project, the Company plans to focus on reduction of debt. VALUATION (` In Cr except per share) FY 19Est. Earnings Equity Share Capital FV No. of Equity Shares EPS(FY19Est.) Estimated P/E Ratio 14 Estimated Price/share 180 Source: Google Corporate Governance Transparency Ratio's Year End Tax Rate % Rece. days Div. Pay. % Page 1

2 Favorable demand-supply scenario of urea in India due to price differential with non-urea fertilizers - Fertilizers sales witnessed growth of around 2% in FY2018 Primary fertilizers sales witnessed a modest growth of around 2% in FY2018, on the back of low systemic inventory maintained by the fertilizer companies in view of pan-india implementation of Direct Benefit Transfer (DBT) while, Non-urea fertilizer sales volume also grew at a fair rate of 2% during FY2018 driven by healthy sales of DAP, MOP and complexes. Recent softening of spot R-LNG prices is expected to partially offset the higher domestic price in H1 FY2019 as well as crude oil linked long-term R-LNG prices, which have seen significant upward movement in recent months. Subdued pooled gas prices will enable indigenous urea production to remain competitive against imported urea, low gas prices result in lower subsidy for urea players which in turn, leads to lower working capital borrowings and associated interest costs. However, with pan-india implementation of Direct Benefit Transfer (DBT) the working capital cycle of the industry may witness marginal elongation owing to shifting of subsidy payment from point of dispatch to point of sale to farmers. CCEA has approved an increase in the nutrient-based subsidy (NBS) rates for phosphate and sulphur for financial year The subsidy for phosphate (P) has been increased to ` /kg from ` /kg (27% increase) while the rate for sulphur (S) has been raised by 22% to `2.722/kg from 2.240/kg. The subsidy for Potash (K) has been reduced by 10% to ` /kg from ` /kg. With the revision in NBS rates the subsidy for Di-ammonium phosphate (DAP) will rise by nearly 16% while for various grades of complex fertilizers the increase in subsidy will be 4%-10% y-o-y. Demand for fertilizers in H1 FY2019 is expected to remain stable given the outlook for normal monsoon during the kharif season and expected higher farm realization for crops supported by assurance by the Government of India for MSP at 150% of the cost incurred by farmers. In the union budget of FY , GoI had increased the subsidy allocation for P&K fertilizers to ` 250 billion from ` 222 billion in FY ; the increased allocation should enable the government to meet the increased subsidy outgo for the P&K fertilizers (estimated at ` 230 billion for FY ). The revision in NBS rates is largely neutral for the fertilizer industry unless monsoon acts as a disappointment in the upcoming kharif season leading to diminution of demand and impacting profitability of the industry Post implementation of the Nutrient Based Subsidy (NBS) in 2010 for non-urea fertilizers there has been a significant price differential between urea and P&K fertilizers which has resulted in farmers showing preference for urea due to lower price. The total domestic production in FY2018 was around 24.1 MMT, as against domestic demand of ~30.3 MMT which resulted in significant dependence on imports to meet the shortfall. Thus, the demand risk for urea remains low. Government regulations - Augurs well for company Fertilizer industry is highly regulated & with an aim to boost investments, GOI has initiated policy steps that could structurally improve fertilizer industry s dynamics with schemes like gas price pooling, DBT, NPS III, Modified NPS III, New Investment Policy, and New Urea policy. The policy aims to reduce the import of fertilizers components and make India self-sufficient. Under DBT, government aims to transfer the subsidy amount directly to manufacturers and importers on the basis of actual sales made by retailers to beneficiaries. Currently, pilot projects are being conducted and pan-india DBT rollout will take some time. Post DBT implementation, companies across sector are likely to benefit in terms of better working capital cycle. Under Gas Pooling policy, GOI proposed pooling of Domestic Gas with Re-Gasified LNG which is imported. This would help provide natural gas at uniform delivered price to all Natural gas grid connected Urea manufacturing plants. The new gas pooling policy encourages production above cut-off which is beneficial for Chambal as it enjoy strong energy efficiency at its plant. Page 2

3 Quarterly & Half Months Results Analysis Key Concerns Heavily dependent on Government policies fertilizer business of Chambal is heavily dependent on Government policies for it success. For instance, under NUP 2015, government has reduced energy consumption norms in comparison to NPS III. This means efficiency of Urea units consuming more energy have to be revamped up, which requires huge capital. Government have not provided any window for capital requirement for such revamp. Any such negative move from government may negatively impact the profitability of the Company. Delay in subsidy receipts impact profitability and cash flows Subsidy from Government is a major component of revenue of the Company. The delay in payment of subsidy by the Government of India creates stress on the working capital and increases the finance cost of the Company. Total subsidy outstanding for Chambal during FY18 is ` 23.6 bn (including ` 14.6 bn from Urea) vis-a-vis ` 26.3 bn in FY17 Low international urea prices could impact profitability; favorable policy measures by DoF regarding production beyond the RAC to largely protect profitability International urea prices have remained subdued in the past one year owing to oversupply situation in the global markets. While CFCL s production has remained competitive against urea imports due to high energy efficiency, recent policy measures by GoI to increase the IPP linked realization for production beyond RAC and autonomy given to DoF to take decision in case of any material decline in international urea prices are positive for the industry. An Eye on the Quarterly numbers:- Company s revenue for Q1FY19 came in at ` cr, up 11.4% yoy.the adjusted net profit after tax (excluding discontinued operations) stood at ` cr, up 14.9% yoy.gross profit margin increased significantly by 525bps yoy to 38.1% in Q1FY19 on account of likely higher levels of change in finished goods inventory and improvement in overall realizations. Graphical presentation Q1 FY 19 & FY 2018 Results: Particulars Revenue EBITDA EBITDA % PBT PBT% PAT PAT % EPS Results Snapshot ` in crores Standalone Results Consolidated Results Quarter Ended % change % change % change FY18 FY 17 Q1 FY 19 Q4 FY 18 Q1 FY 18 Q-0-Q Y-0-Y Y-0-Y % 11.40% % % 8.92% % 13.01% 11.21% 13.31% % 12.13% % 14.09% % 10.41% 6.94% 10.17% % 7.54% 29.51% % 14.85% % 7.09% 4.54% 6.88% % 5.03% 29.58% % 14.77% % Page 3

4 Company Overview Chambal Fertilizers and Chemicals Limited is one of the largest private sector fertilizer producers in India. It was promoted by Zuari Industries Limited in the year Its two hi-tech nitrogenous fertilizer (urea) plants are located at Gadepan in Kota district of Rajasthan. The two plants produce about 2 million MT of Urea per annum.the company is also in process of setting up a third Urea plant at Gadepan with an annual capacity of 1.34 million MT of Urea per annum which is expected to be completed by January Once commissioned, Gadepan will be a unique and only site in the country with single largest production at one place. Valuation Conclusion Largest private urea manufacturer with robust distribution network and has planned a well timed capex bridge structural demand supply gap in the industry. Post FY19, it is well placed to reap the benefits of reforms such as DBT of fertilizer subsidy and possible steps towards removing price regulations on urea in the long term. Its earnings and margins profile is also likely to improve substantially. The implementation of NBS Policy by the Government of India few years back has opened new business avenues and company has grabbed this opportunity with rapid expansion of its DAP and MOP business. The Company has utilized its marketing and brand strength to increase the business volumes in the existing territory and to expand its reach to the new territories. The Company has established itself as a significant player in this segment and it gave a major boost to the revenue and profitability of the Company. Recent favorable changes in policies, expected commissioning of new capacity in Jan 2019, increased focus on agriculture and food production, business reorganization coupled with better than average monsoon is one of the reasons to boost demand of urea would enabled Chambal to focus on its core business of urea manufacturing and trading in complex fertilizers, where it is planning an aggressive expansion. Estimating the share price of the company as per P/E valuation P/E of FY19E at 14x, EPS(Est.) at ` 13.31, the estimated share price for next 1 year tenure turns around to be ` 180. We recommend to BUY this script. Page 4

5 Particulars Net Sales EBITDA Depreciation Op Income Misc.Inc (Exp.) Interest Exp EBT Taxes Net Inc(Reg) Extraord. Items Rep Net Inc EPS Adj. EPS Quarterly Results (` in cr except per share) LTM Income Statement and Estimates ( ` in Cr except per share) Particulars E 2020E 2021E Sales Other operating Income Total Inc. from operations Operating EBITA Profit & Loss Total Inc. from operations TOTAL EXPENDITURE EBITDA Depreciation (216.49) (111.25) (92.20) (85.39) (87.63) (94.56) (102.42) Rep. profit before othrinc., fin.cost,tax & excp. Item Goodwill amortization Rep. profit before othrinc., fin.cost,tax & excp. Item OTHER INCOME Profit from ordinary act. Before Fin.Cost,TAX & Exp.Items Net financials Interest income Interest expenses (163.18) (265.86) (253.95) (155.19) (142.80) (141.50) (143.81) Net Financial Items (163.18) (265.86) (253.95) (155.19) (142.80) (141.50) (143.81) Reported Pre-tax profit Reported Tax charge (179.72) (160.46) (185.52) (244.93) (272.80) (312.22) (361.89) Reported Net profit Minorities (15.09) P/L OF ASSOCIATE CO Rep. NP after min. Int Extra Ordinary income - (42.97) (2.76) Rep.Net Income after extra ordinary items EPS and Dividend Dividend Paid (82.79) (83.24) (83.24) (83.24) (83.36) (83.04) (83.39) Retained earnings Reported EPS Adjusted Basic EPS DPS - originally declared Number Of Shares Opening Balance Iss. during the Period Closing Balance FV Wtd. Avg. no. of shares Note:- The figures shown in the brackets means NEGATIVE. Page 5

6 BALANCE SHEET Particulars E 2020E 2021E Equity & Liabilities Shareholders' Fund Share Capital Reserves and Surplus Minority Interests (76.87) (82.57) (87.36) (87.36) (87.36) (87.36) Total Shareholders' Fund Non-Current Liabilities Long-term Borrowings Other LT Liabilities Deferred Tax Liability Long term Provisions Total Non-Current Liab Current Liabilities Short term Borrowings Trade Payables Other current liability Short term Provisions Total current Liab Total Equity & Liab Assets Non-Current Assets Fixed Assets Tangible fixed Assets G/W On Consolidation Non-current Investment Long term L&A Other Non current Ass Deferred tax receiv Total Non-Current Ass Current Assets Current Investments Inventories Trade Receivables Cash & cash Equi Short Term L&A Other current Assets Total current Assets Total Assets Cash & cash equivalents Other int. bearing assets Interest-bearing debt Net interest-bearing debt Net gearing (%) % % % % % % % Investments Tangible assets Gross capex (191.41) (639.56) ( ) ( ) (507.55) (549.42) (619.05) Sale of fixed assets Net capex (185.29) (638.53) (879.19) ( ) (507.55) (549.42) (619.05) Depreciation tangibles (216.49) (111.25) (92.20) (85.39) (87.63) (94.56) (102.42) Note:- The figures shown in the brackets means NEGATIVE. Page 6

7 RATIO ANALYSIS Particulars E 2020E 2021E Return on assets % 4.47% 5.65% 5.70% 6.14% 6.57% Return on equity % 18.88% 22.22% 20.87% 20.03% 19.51% ROCE % 13.54% 9.37% 7.28% 7.33% 7.77% EBIT Margin % 10.57% 11.88% 12.42% 12.87% 13.02% Pre tax margin % 7.21% 9.82% 10.59% 11.19% 11.51% Net Profit Margin % 4.79% 6.57% 7.09% 7.50% 7.71% Total asset turnover Fixed asset turnover Equity turnover Current Ratio Quick Ratio Cash Ratio Receivable Days Inventory Days Payable Days Conversion Cycle (Days) Financial Leverage Effect Debt to Capital Debt to Equity Note:- The figures shown in the brackets means NEGATIVE. Page 7

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