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Bigger becomes biggest

EBITDA per tonne down 19% YoY

Paradeep Phosphates (PARADEEP IN) reported lower-than-expected results, driven by the sharp fall in subsidy levels. EBITDA declined 24% to INR 2.8bn vs our estimates of INR 3.1bn. Blended EBITDA per tonne was down 19% YoY at INR 4,778 vs our estimates of INR 3,540. It did well in containing impact on profitability vs larger peer, Coromandel International (CRIN IN, Buy, CMP: INR 1076, TP: INR 1345), which saw a 74% reduction in EBITDA per tonne. PARADEEP achieved this primarily through its ability to store raw materials at plant sites. Management expects Q4 to be soft under the current subsidy regime as benefits of raw material procured at lower prices would be absent.

MCFL to merge with PARADEEP

The Board of PARADEEP has approved the firm’s merger with Mangalore Chemicals and Fertilisers (MCFL IN, Not Rated, CMP: INR 129) in a ratio of 187 shares of PARADEEP for every 100 shares of MCFL. The merger will provide access 1) to additional markets within India, and 2) additional grades of complex fertilizers. The combined entity will have a complex fertilizer capacity of 2.9mn tonne and urea capacity of 0.78mn tonne. This will take total capacity to 3.7mn tonnes of finished fertilizers, making it the largest private sector fertilizer company in India.

Valuation: reiterate Accumulate with a higher TP of INR 84

We expect a soft Q4 due to continuation in lower subsidy regime. While the subsidy cuts are sharp, they are temporary, and relief may come during the next revision, likely from 1 April 2024. Due to lower subsidy, we lower our EBITDA by 31% and PAT by 78% for FY24E, but remain largely unchanged for FY25E. The combined entity is expected to benefit from scale in terms of sourcing, distribution reach, and a wider product portfolio. The date and time of the merger are unclear, and regulatory approvals may take a year; hence, benefits are likely to accrue from FY26. Hence, we are not incorporating MCFL financials into PARADEEP currently. We reiterate Accumulate with a higher TP of INR 84 from INR 71 based on 8x (from 7x) FY25E EV/EBITDA.

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