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Challenging operating environment

Paradeep Phosphates (PARADEEP IN) reported better-than-expected results, driven by inventory gains which arose due to declaration of higher subsidy rates for H1FY27. Total sales volume declined 10% to 0.84mn tonne in Q4FY26, driven by a 14% decline in complex fertilizer volume to 0.48mn tonne. Due to the West Asia war, fertilizer raw materials availability (especially for ammonia & sulphur) and rising prices are cause for concern for GoI as well as companies. Although sulphur and ammonia prices have surged by 80-100% since the start of the war, subsidy increase has been minor. In this scenario, we expect a sharp erosion in EBITDA in FY27E, leading to a decline in our earnings estimates by 37%. Hence, we lower our TP to INR 156 based on 8x FY28E EV/EBITDA. We retain Buy.

Challenging near-term environment:

The near-term environment is challenging as raw materials availability is under strain, which has led to a sharp increase in prices. The GoI decision to increase subsidy by ~10% has complicated the situation for fertilizer manufacturers. To fully pass on the cost burden, fertilizer price hike would be significant, which has the potential to create a big dent on demand. Fertilizer companies, through the industry association FAI is in daily discussions with the government to find a suitable solution. We expect the government to announce additional subsidy by Q2FY27, if not in Q1, as we are heading off into a crisis-like situation for many companies.

FY27 EBITDA hit to be meaningful:

EBITDA is likely to decline 19% YoY in FY27E, due to expectations of lower volume, reduced backward integration benefits, as well as lower subsidy declared by the government. Rising sulphur prices have reduced cost savings, which arises due to manufacturing phosphoric acid in-house. Due to rising fertilizer prices and scarcity in availability of raw materials, sales volume may be under pressure in FY27.

Capacity expansion plan on track:

PARADEEP’s plan to double phosphoric acid capacity and increase granulation capacity by 1.2mn tonne is on track, and it will commence phase-wise in the next three years. It is likely to start operations of the 0.2-mn-tonne phosphoric acid plant in FY27, followed by 0.2-mn-tonne granulation plant in FY28. The 0.25-mn-tonne phosphoric acid plant and 1.0-mn-tonne granulation plant through Brownfield expansion will commence operations in FY29. The company has invited bids from engineering companies to build the plant and is likely to finalize the vendors in the near term.

Retain Buy with a lower TP of INR 156:

Expansion plans would drive meaningful EBITDA growth from FY29. In the interim, debottlenecking-led capacity creation in the phosphoric acid and granulation plant would bolster volume-led growth. But FY27E looks a challenging yea, given rising raw materials prices and lower subsidy pass-through from the government; hence, we reduce our EBITDA by 27% and PAT by 38% for FY27E. We lower our TP to INR 156 from INR 247 based on 8.0x (from 11.5x) FY28E EV/EBITDA, as the surge in leverage has significantly deteriorated balance sheet (net debt-equity of 1x and net debt-EBITDA of 3x for FY26). We retain Buy. We introduce our FY29 estimates.

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