IGI Logo

Company Background

Mangalore Chemicals and Fertilisers Ltd. (MCFL), a part of Adventz Group of Mr Saroj Poddar, is amongst India’s most integrated fertilizer companies, manufacturing Urea, DAP, NPK and other complex fertilizers; at its plant located near Mangaluru, Karnataka, with an installed capacity of ~681,500 MTPA, sold under ‘Mangala’ brand, having strong presence in South India. It also sells externally sourced products like DAP, MOP, specialty fertilizers, and other agri inputs like water soluble fertilisers and micro-nutrients, through its extensive retail distribution network. It also has small presence in industrial products viz. SNF and ABC.

Investment Rationale

Topline to grow at a CAGR of ~29% over FY21-24E

* During Q4FY22, MCFL reported consolidated net sales at Rs 7.18 bn, registering a growth of ~20% y-o-y driven by strong volumes and realisation. Volumes of Urea and DAP increased significantly by 202% and 104% at 3.38 Lakh and 0.29 Lakh MT whereas 20:20:00:13 (owned manufactured) decreased substantially at 0.01 Lakh MT. Realisation was higher due to high pooled gas prices and a rise in subsidy of non-Urea fertilisers by GoI due to higher fertiliser prices in international markets. MCFL registered record Urea volumes of 4.31 Lakh MT in FY22 as the plant worked beyond reassessed capacity. Urea unit of MCFL will remain shut between June and August 2022, for the implementation of energy improvement program. Thus, the plant is expected to work at reassessed capacity in FY23E.

* Demand of fertilisers remained robust globally, throughout the year. However, availability was low due to 1) export restrictions by China and export quota imposed by Russia; and 2) supply side constraints due to geopolitical uncertainties because of Russia-Ukraine war; which has led to a continued surge in prices of DAP, MOP and NPK in international market.

* Government budgeted for Rs 1.05 tn subsidy for FY23 vis-à-vis Rs 1.4 tn in FY22 in Union Budget 2023. However, on April 27, 2022, keeping in view the rising fertiliser costs, especially after Russia-Ukraine crisis, it has increased the subsidy on P&K fertilisers by Rs 609.4 bn for the Kharif season of FY23 vis-à-vis Rs 420 bn budgeted for full year in the Union Budget.

* MCFL’s strategy is to leverage Urea distribution network to enhance its trading sales, going forward. Production volumes are expected to skew towards 20:20:00:13 in FY23 as well, whereas trading volumes is expected to remain low on the back of continued unprecedented price rise of imported fertilisers. However, we have factored in a ~395% increase in trading sales in FY23E at Rs 4.55 bn due to rise in realisations. We presume the scenario to improve by FY23 end, led by a correction in key input and international fertiliser prices, and thus, expect a good pickup in trading volumes in FY24E. Volumes from Urea will remain muted due to capacity constraints.

EBIDTA Margins declined significantly by 450 bps y-o-y at 3.4%

* EBITDA margins during Q4FY22 decreased by 450 bps y-o-y to 3.4% on the back of sharp rise in input costs and delay in subsidy by GoI. The Company remained at breakeven in P&K fertiliser segment due to reduction in non-Urea production and temporary discontinuation of trading volumes. EBITDA margin of Urea improved due to conversion from Naphtha to gas and rise in gas prices

* PAT margin has also declined significantly by 200 bps y-o-y to 0.5%, mainly due to decline in operating margins and high interest outflow. Interest outgo for the quarter increased by ~40% y-oy to Rs 155.1 mn, mainly on account of increase in the borrowings of the company. Its LTD and STD increased from Rs 1,271.6 mn and Rs 7,351.4 mn in FY21 to Rs 2,181.5 mn and Rs 11,234.6 mn during the year due to EIP program undertaken by MCFL and lag between input cost rise and subsidy increase by GoI. Outstanding subsidy of MCFL as on March 2022 stood at Rs 6.83 bn vis-à-vis Rs 6.07 bn during March 2021.

Naphtha to Gas conversion + implementation of EIP to take profitability to new orbit

* In December 2020, the Company has successfully converted its plant from Naphtha to Gas, resulting in lower energy consumption (from 6.35 GCal/MT to 6.25 GCal/MT) and higher assured subsidy redemption from GoI (from 6.902 GCal/MT to 7.356 GCal/MT). With this, margin has increased, resulting in incremental EBITDA of ~Rs 600-800 mn/pa till December 14, 2025.

* In order to mitigate the risk of lower margins post December 14, 2025, MCFL is undertaking an energy improvement project (EIP) at a cost of ~Rs 3.95 bn (D/E of 70%/30%) to further reduce energy consumption for Urea manufacturing from current 6.25 GCal/MT to 5.5 GCal/MT, resulting in incremental EBITDA of ~Rs 1 bn/pa. The capex is expected to be completed by Aug 2022.

* With improvement in margin contribution from Urea manufacturing due to conversion of plant from Naphtha to Gas and successful implementation of EIP program coupled with expected correction in key input costs of non-Urea fertilisers by FY23 end, we expect improvement in overall EBIDTA margins to ~8.9% and ~8.7% in FY23E and FY24E respectively.

* The above EIP program will also result in the gradual increase in the production of Ammonia by 180 MT/day, increasing the capacity to 880 MT/day. This excess ammonia will be used to produce DAP and other fertilisers which will reduce the dependency of MCFL on imports.

VALUATION

MCFL has a strong brand recall, robust distribution network and has planned a well-timed capex to improve energy consumption of its Urea unit resulting in plant efficiency, energy saving and profitability, on top of Conversion from Naphtha to Natural Gas. It is well-placed to reap benefits of reforms like DBT of fertilizer subsidy, clearance of past years’ subsidy backlog by GoI, etc. However, the long term big picture is more attractive. Continuous rise in raw material prices may have a bearing on demand of its products amongst farmers; response by GoI, fertilizer industry and the Company needs to be seen. In view of this, we have currently valued the stock at a P/E of 7x of FY24E EPS of Rs 16.6 and recommend BUY on the stock with a target price of Rs 116 (~22% upside) in 18 months.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.skpsecurities.com/index.php/Disclaimer_new/disclaimer

SEBI Registration number is NOS : NSE : INB/INF 230707532

Above views are of the author and not of the website kindly read disclaimer