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Company Background

Chambal Fertilisers & Chemicals Ltd (Chambal), promoted by Late K K Birla in 1985, now equal controlling stakes held by Nopany, Bhartia and Poddar families and 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 outsources and sells complex fertilizers like DAP, MOP, NPK fertilizers, crop protection chemicals (insecticides, fungicides & herbicides), seeds, sulphur, micro-nutrients, complex fertilisers and city compost etc., leveraging its vast agri retail network

Investment Rationale

Topline to grow at a CAGR of ~29% over FY22-24E

* During Q1FY23, Chambal reported consolidated net sales at Rs 72.91 bn, registering a growth of ~106% y-o-y driven by strong volumes in non-Urea segment and high realisation from both Urea and non-Urea segments. Realisation from Urea increased due to rise in pooled gas price which increased from USD 11.4/MMBTU in Q1FY22 to USD 24/MMBTU during Q1FY23. Gas prices in international market remained high due to geopolitical tension between EU and Russia. Realisation of non-Urea fertilisers increased with recent subsidy increase given by GoI for the Khariff season led by higher fertiliser prices in international markets. Volumes of Urea remained muted at 7.89 LMT, during the quarter whereas volume of DAP, MOP and other NPK fertilisers grew by 45%, 511% and 67% at 3.39 LMT, 0.55 LMT and 0.72 LMT respectively..

* The CPCS segment of Chambal grew significantly by ~64% from Rs 1,540 mn in Q1FY22 to Rs 2,530 mn in Q1FY23, of which volumes drove 2/3rd growth. Management?s aim is to grow CPCS segment by 3x of FY22 revenues in next 3-4 years, thus, putting strong focus and efforts into the business. Chambal has enhanced its product portfolio by adding five new products during the quarter.

* Going forward, we expect consolidated revenue growth at ~29% during FY22- FY24E, backed by higher gas prices, which is a pass-on coupled with continued robust growth in non-Urea products and optimum CU of Urea plants

EBIDTA margins dipped due to rise in gas prices and excess production from G-III:

* EBIDTA margins during Q1FY23, decreased to 8.1% vis-à-vis 16.4% last year on the back of an increase in pooled gas prices which is a total pass through and a sharp rise in input costs of non-Urea fertilisers which could not be passed on. Resultantly, PAT margins decreased by 610 bps at 4.7%.

* Interest outgo increased significantly by ~58% y-o-y to Rs 481.1 mn mainly because of delay in the subsidy payment by GoI which has led to an increase in outstanding subsidy to Rs 54.8 bn vis-a-vis Rs 23.45 bn in corresponding period last year. Subsidy received from GoI for Q1FY23 stood at Rs 19.17 bn vis-a-vis Rs 10.75 bn last year.

* GoI has budgeted a fertiliser subsidy of Rs 2 tn for FY23. However, market expects subsidy to remain in the vicinity of Rs 2.5 tn for FY23 due to elevated RM and finished product prices.

* With expected correction in pooled gas and international fertiliser prices, we expect EBIDTA margins to improve in the vicinity of 10.4% by FY24E.

Diversifying in value-added Technical Ammonium Nitrate (TAN) business:

* The Company has excess Ammonia being produced due to technical reasons which is presently being sold in the domestic market. In order to enhance margins, the Company is venturing into ~220,000 MTPA TAN manufacturing, along with ~180,000 MTPA of Weak Nitric Acid (WNA) plant at its existing site at an estimated cost of ~Rs. 11.70 bn. WNA is a key RM required for manufacturing TAN, after Ammonia and entire requirement of Ammonia and WNA for TAN business will be met internally.

* Chambal will primarily cater to the domestic market for TAN in India, which is 1 mn MTPA, growing at a CAGR of 5-6%, resulting in an additional ~200,000 MTPA of demand every three years. Since, Chambal is the lowest cost producer of Ammonia in India, the management is confident of making a profit equivalent to industry standards. 

* The project is progressing as per the plan and is estimated to be commissioned in FY25. Commercial discussions are going on with international vendors of repute. The statutory approval process is also on track.

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 is in a growth mode with related diversification into TAN and is likely to take other growth initiatives as well, for which it has financial resources. We have valued the stock at a P/E of 10x, reducing it from 12x in last quarter due to prevailing unfavourable business conditions, of FY24E EPS of Rs 43.7. We maintain our „Buy? recommendation on the stock with a target price of Rs 438 (~36% upside) in 18 months.

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