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Remain on sidelines; downgrade to Hold
* CRIN’s stock jumped 32% over the last three months on account of robust rabi season. It is currently trading at 18x/16x FY21/22E EPS, which leaves no room for upsides. We prefer to remain on the sidelines and wait for kharif monsoon to play out.
* In our view, the CMP already factors in normal monsoon for FY21/22 and improvement in margins on: 1) backward integration in fertilizers (phosphoric acid at Vizag), and 2) new product launches in the crop protection segment.
* Nutrient segment revenue increased 8.4% yoy (manufactured fertilizer volumes +42% yoy; urea volumes -40% yoy). Management expects Q4 also to be robust on strong rabi momentum. Crop protection (CP) segment revenues rose 3.6% yoy, mainly due to product mix.
* We have raised FY20/21E revenue by 2.8%/1.4% and PAT by 3.5%/4.1% due to improvement in margins. Downgrade to Hold with a revised TP of Rs650 (17x Dec’21E EPS) (5-yr/10-yr mean at 16.4x/15x) on rich valuations. We have recently turned EW in EAP.
Nutrient segment EBIT up on backward integration and operating leverage: The nutrient segment’s revenues rose by 8.4% yoy to Rs28.4bn in Q3 on a 42% increase in manufactured fertilizer volumes, partially offset by a 40% fall in urea volumes. Management remained confident of a robust Q4 due to the spillover of some Q3 sales to Q4. The key highlight was an improvement in nutrient segment EBIT by 364bps yoy to 12.8% in the wake of backward integration, retention of some benefit of falling raw material prices and operating leverage. CRIN has benefitted from a higher reservoir level in its key markets of Andhra Pradesh/Telangana in FY20 and a higher base should be a challenge to volume growth in FY21E. We have factored in 8.3% manufactured volume growth for FY21E.
New product launches to re-vitalize CP segment: CRIN’s CP revenues grew 3.6% yoy despite challenges in the export market due to robust domestic sales. EBIT margins decreased 25bps yoy despite higher raw material prices and realization pressure due to change in product mix in favor of higher-margin products. This structural change has been on account of new product launches (four already launched YTD and one more in Q4), which should drive margin expansion in this segment. CRIN has revised its capex guidance upwards to Rs4-4.5bn from Rs2bn for FY21 as it plans capacity expansion in the CP segment to ramp up recently launched products.
Valuations: CRIN is trading at 18x/16x FY21/22E EPS, which leaves no room for upsides. We prefer to remain on the sidelines and wait for kharif monsoon to play out. Downgrade the rating to Hold from Buy with a revised TP of Rs650 (17x Dec’21E EPS) (5-yr/10-yr mean at 16.4x/15x). Key risks are: a) a sharp change in RM prices, b) erratic weather and c) lower demand in export markets.
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