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Company Background

Chambal Fertilisers & Chemicals Ltd (Chambal), promoted by Late K K Birla in 1985, now professionally managed under the Chairmanship of Mr Saroj Poddar, is India’s largest private sector Urea manufacturer. Its three hi-tech nitrogenous fertilizer plants are located at Gadepan, District Kota, Rajasthan, with an installed capacity of ~3.3 MTPA, sold under ‘Uttam Veer’ brand, primarily in North and West India. It also trades in complex fertilizers like DAP, MOP, NPK fertilizers, crop protection chemicals (insecticides, fungicides & herbicides), seeds, sulphur, micro-nutrients, complex fertilisers and city compost etc.

Investment Rationale

Topline to grow at a CAGR of ~10% over FY21-23E

* During Q1FY22, Chambal reported consolidated net sales at Rs 35.4 bn, registering a growth of 10% y-o-y on back of rise in gas cost resulting in higher realisations from Urea. However, Volumes of Urea, DAP and MOP remained muted at 0.805 mn MT, 0.234 mn MT and 0.009 mn MT during the quarter vis-à-vis 0.89 mn MT, 0.3 mn MT and 0.06 mn MT respectively, corresponding period last year. The Company also witnessed significant double digit growth in crop protection and speciality nutrients segment which is expected to continue going forward.

* The Company's production, dispatches, sales and market collections remained unaffected. There is no impact of COVID-19 on financial statements/results of the Company for the quarter.

* With GoI aiming at Urea self-sufficiency by 2023, Chambal continues its focus on the nonUrea products, both, in fertilizer and agri-chemicals for its future growth. The Company has launched six new age crop protection products which is gaining acceptance in the market. These products are manufactured by well-known MNCs like Mitsui Chemicals, Nippon Chemicals, Bayer AG, FMC Corporation, Syngenta etc. Total market size for these products in India is ~Rs 6.5 bn.

* New geographies like Maharashtra, Andhra Pradesh, Telangana and West Bengal became operational during the quarter which has increased accessible market for Chambal.

* Management said that there will be no impact of recently launched Nano Urea by IFFCO, on Chambal’s Urea volumes.

* Chambal does not have any plans to undertake further capex in Urea, barring improvement of energy consumption of old plants. Further, the management is evaluating plans to set up manufacturing facilities of phosphatics, crop protection and ammonia. Chambal produces excess ammonia in Gadepan which they sell in the market. Company is exploring to manufacture value added products (downstream chemicals) from this excess ammonia for better monetisation. Management said there is no plan for capacity addition for ammonia.

* International prices of agri-inputs and fertilisers have gone up substantially over last three months to multi year highs due to rise in demand globally, particularly in North America where farmers are striving to increase production and willing to pay high prices of DAP and complex fertilisers. Industry is working closely with the government to identify the best course of action keeping in mind all stakeholders.

* Going forward, we expect consolidated revenue growth of ~10% during FY21-FY23E, backed by continued robust growth in non-Urea products and optimum utilization of Urea plants during FY22E and FY23E. Management’s continued focus on traded DAP, other complex fertilizers, micronutrients and crop protection products is expected to generate CAGR growth of 8% in trading business during FY21-23E.

EBIDTA Margins dipped due to rise in gas prices:

* EBIDTA margins during Q1FY22, decreased to 16.4% vis-à-vis 19.3% last year on the back of increase in pooled gas prices which is total pass through and increased contribution from nonUrea traded products.

* PAT margins during the quarter improved at 10.8% during the quarter vis-à-vis 9.3% in the corresponding period last year, mainly due to significant fall in interest outgo. The Company paid interest of Rs 304.1 mn as compared to Rs 1,081.6 mn in corresponding period last year due to disbursement of prior year subsidy by GoI during Q4FY21.

* Outstanding subsidy of Chambal as on June 2021 has reduced significantly to Rs 23.4 bn visà-vis Rs 53.91 bn during June 2020. Subsidy received from the government doubled during the quarter at Rs 10.75 bn in comparison to Rs 5.71 bn corresponding period last year. Interest is expected to remain low during the remaining period of FY22 as the GoI has done adequate budgetary provision for fertiliser subsidy for the year.

* With expected increase in pooled gas prices backed by higher Brent crude prices and rise in the contribution of low margin trading business (with steep rise in input costs) vis-a-vis Urea business, we expect EBIDTA margins to decline in the vicinity of 16% by FY23E.

VALUATION

* Chambal is India’s largest private Urea manufacturer with a robust distribution network. It is well-placed to reap the benefits of reforms such as repayment of subsidy backlog of prior years by GoI, timely release of subsidy going forward, amendment in Modified NPS-III, DBT of fertilizer subsidy and possible steps towards removing price regulations on Urea in the long term. It has introduced new products and is penetrating into new markets.

* We have valued the stock at a P/E of 12x, improving it from 10x in the previous quarter, on the back of visibility of growth from new geographies. We maintain our ‘buy’ recommendation on the stock with a target price of Rs 434 (~36% upside) in 18 months.

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