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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 FY21-24E

* During Q2FY22, Chambal reported consolidated net sales at Rs 44.78 bn, registering a growth of 12.3% y-o-y on back of rise in gas cost resulting in higher realisation from Urea. However, volumes of Urea remained muted at 0.92 mn MT, whereas volumes of DAP and MOP declined by 53% and 70% at 0.24 mn MT and 0.04 mn MT respectively.

* Chambal’s focus on crop protection chemicals and micro nutrients has started yielding results. It has achieved substantial double digit growth in its existing territory. Chambal’s emphasis continues on enhancing its presence in this segment besides expanding contribution of nonurea fertilisers in both existing and new geographies of Maharashtra, Andhra Pradesh, Telangana, Gujarat and West Bengal. With geographic expansion, Chambal expects to achieve better performance in crop protection products, micronutrients and NPK fertilisers. Bulk of NPK is used in Western and Southern region. Chambal’s target is to become a significant player in NPK in new geographies.

* High demand for fertilisers in Latin America and North America continued to push prices of fertilisers in the international market. During Q2FY22, international prices of DAP, MOP and NPK fertilisers increased substantially. Restrictions on export of fertilisers from China have further impacted fertiliser volumes causing a continuous increase in the prices of DAP and NPK fertilisers. To mitigate this, GoI has taken a significant initiative under which it has announced an additional subsidy of Rs.286.55 bn on Phosphatic Fertilisers and a special package of Rs 57.16 bn for additional subsidy on DAP for this Rabi Season. However, further increase in fertiliser prices in international market is making the situation challenging again.

* The management 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 which is expected to get finalised by the end of FY22. 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.

* Going forward, we expect consolidated revenue growth of ~10% during FY21-FY24E, backed by continued robust growth in non-Urea products and optimum utilization of Urea plants during FY22E, FY23E and FY24E. Management’s continued focus on traded DAP, other complex fertilizers, micronutrients and crop protection products is expected to generate CAGR growth of 13% in trading business during FY21-24E.

EBIDTA Margins dipped due to rise in gas prices and increasing contribution of trading business:

* EBIDTA margins during Q2FY22, decreased to 16.5% vis-à-vis 19.4% 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 remained flat at 11.3% mainly due to significant fall in interest outgo. Chambal paid interest of Rs 248.4 mn as compared to Rs 766.7 mn in corresponding period last year due to disbursement of prior year subsidy by GoI during Q4FY21.

* Outstanding subsidy of Chambal as on September 2021 has reduced significantly to Rs 27.2 bn vis-à-vis Rs 47.74 bn during September 2020. Subsidy received from the Government stood at Rs 37.38 bn in comparison to Rs 33.09 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 contribution of low margin trading business (with steep rise in input costs) vis-avis Urea business, we expect EBIDTA margins to decline in the vicinity of 15.8% by FY24E.

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.

* We have valued the stock at a P/E of 12x of FY24E EPS of Rs 42.8. We maintain our ‘Buy’ recommendation on the stock with a target price of Rs 514 (~44% upside) in 18 months.

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