Q1FY18: Strong performance on low base
Fertiliser sector companies in our coverage are likely to witness ~44% YoY jump in profitability in Q1FY18. However, large part of this increase will likely be driven by non-fertiliser businesses and low comparison base in fertiliser businesses of some companies. While Coromandel International (CRIN) is likely to gain from increase in mancozeb capacity, better retail profitability, increased proportion of ‘unique grade’ fertilisers and weak YoY comparison base, GSFC will benefit from better capro-benzene spread and lower tax rates while Tata Chemicals (TTCH) performance will be aided by improvement in global operations and continued deleveraging. However, sale of shipping business will offset the improved performance of Chambal Fertilisers’ trading business, resulting in ~5% deterioration in its Q1FY18 PAT.
* Volumes grow, but impacted by destocking in anticipation of clarity around DBT and GST: Urea and P&K volumes are likely to register growth of >9% and >5% respectively in Q1FY18 (as per mFMS). Our channel checks suggest that there might be volume growth was impacted by de-stocking of inventory as industry awaits clarity around DBT and GST implementation.
* GST – Confusion around tax-rate slab and treatment of input credits resulted in players preferring to hold back sales till clarity emerged. However, large pre-buying by farmers in Punjab before the increase in tax rate offered windfall opportunity to players like Chambal.
* DBT – Availability of PoS machines and long lead times in peak season remain matters of concern for the government. While the official rollout date has been fixed as 1-Aug’17, channel believes government will wait for the peak season to end.
* Government going all-out on subsidy clearance; Chambal, GSFC, Tata Chemicals key beneficiaries: Our channel checks also suggest that the government is aggressively clearing old outstanding subsidy dues with subsidy only for FY18 likely outstanding by end-Jun’17. Adequate Budget provisioning and lower imports are aiding this exercise. Fertiliser companies had demanded clearance of subsidy dues before DBT rollout so as to minimise their working capital hit.
* Q1FY18E takeaways:
* Chambal Fertilisers (Chambal): Q1FY18 profitability is expected to be YoY lower due to sale of shipping business and marginally lower urea volumes. However, pre-buying of DAP before GST implementation is likely to limit YoY PAT decline to ~5%.
* Coromandel International (CRIN): Expect sharp increase in CRIN’s Q1FY18 profitability YoY (on low base) despite lower revenues on account of increased profitability in crop protection business post Dahej plant expansion, improved retail profitability and better fertiliser business performance largely against a weak base.
* GSFC: better capro-benzene spread YoY and lower tax rate (on benefit under Section 80-IA) are likely to result in ~16% PAT growth YoY despite weakness in fertiliser volumes.
* TTCH: Despite likely lower revenues YoY (-8.5%), TTCH’s PAT will increase 42.8% YoY in Q1FY18 on account of lower interest costs (as the company continues deleveraging its balance sheet) and improved profitability of urea business on a weak base (not consolidated now as it is being held for sale).
* Stock views:
* Maintain Chambal as our top pick in the space with a BUY rating as we believe it is more than pricing-in all existing concerns and appears attractive at FY21E P/E of >6x. On-track execution of Gadepan-3 plant, likely to be commissioned in end- FY19, which will result in FY21E EPS of Rs21.5/share, is comforting.
* We believe Coromandel International is richly valued at current levels as the benefit of DBT is over-estimated for P&K players and DBT rollout will disappoint both in terms of form and timeline. Maintain SELL.
* We maintain our BUY rating on GSFC as we believe positive resolution of the ASsubsidy issue will translate into a value unlock to the tune of Rs25/share in addition to accounting of Rs1.4bn worth of AS-subsidy per annum.
* We continue assigning ADD to Tata Chemicals, maintaining our view that NPK business sale and deleveraging will be the key rerating triggers.
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