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Lower urea volume drags EBITDA

Revenue drop led by lower gas cost and lower traded volume

Chambal Fertilisers (CHMB IN) reported 49% EBITDA growth to INR 1.7bn but it was lower than our estimates of INR 3.8bn. Lower-than-expected EBITDA growth was due to a 13% YoY decline in urea sales volume, lower profitability in the ammonia business and maintenance shutdown-related cost. In FY25, we expect urea business to turnaround, driven by better volume and cost savings aided by energy efficiency initiatives. We also expect traded fertilizer and crop protection businesses to deliver better profit in FY25.

Energy efficiency and better volume to drive urea business in FY25

Urea volume declined 13% to 0.7mn tonne, due to weak demand amid rising channel inventory. Shutdown cost was incurred for two plants and marred profitability. We expect 4.4% urea volume growth to 3.4mn tonne in FY25E, driven by expectations of onset of the La Nina phenomenon along with the Monsoon, which should result in good rainfall. CHMB has improved urea energy consumption in two of its fertilizers plants, which should cut cost of production, thereby lifting EBITDA per tonne for the urea business. Further investment in energy efficiency initiatives are planned over 2-3 years.

Valuation: retain Reduce with a higher TP of INR 397

CHMB is evaluating its entry in the nitric acid value chain post completion of the technical ammonium nitrate (TAN) project, which would ease concerns on capital allocation. Fertilizer, which is a large part of the current business, stands on a solid footing but lacks a growth driver. On top of that, there is an overhang of quantum of EBITDA erosion post expiry of benefits for its G3 plant at Gadepan in Rajasthan in CY27. While management is making efforts to grow the business, we do not have clarity on growth visibility beyond the TAN project, which can offset potential EBITDA erosion post expiry of benefits. Hence, we reiterate Reduce with a higher TP of INR 397 from INR 345 based on 10x (unchanged) FY26E EPS of INR 39.7 despite an efficient business model and good management pedigree. We raise our EBITDA by 7% and PAT by 10% for FY25E and introduce FY26 estimates.

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