(73% Return) - CHAMBAL FERTILISERS AND CHEMICALS LIMITED

Dear Readers,

Chambal Fertilisers was recommended on 29th May 2017 at 120 Rs. Today (20/04/2018) it has touched to 208 Rs and is giving 73% return within 11 Months which is fantastic.

Enjoy!!

Regards,

Kamlesh

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DATE: 29/05/2017

Recommendation: BUY   
Hold for 3 years      
Target: 250 Rs.

Equity Research Report: By Kamlesh Bavrva

                              

Company Name: Chambal Fertilisers and Chemicals Limited

BSE Code: 500085

NSE Code: CHAMBLFERT

CMP: 120

Market Capital: 4953 Cr.

Face Value: 10

52 Week Low / High: 53.7/138

Book Value: 65.6

Price/Book Value: 1.8

Dividend Yield (%): 1.6

Part – 1 Company Overview:

Chambal Fertilisers and Chemicals Limited is one of the largest private sector fertilizer producers in India. It was promoted by Zuari Industries Limited in the year 1985. Its two hi-tech nitrogenous fertiliser (urea) plants are located at Gadepan in Kota district of Rajasthan. The two plants produce about 2 million MT of Urea per annum. The first plant was commissioned in 1993 and second plant in 1999. These plants use state-of-the-art technology from Denmark, Italy, United States and Japan.

Chambal Fertilisers caters to the need of the farmers in twelve states in northern, eastern, central and western regions of India and is the lead fertiliser supplier in the State of Rajasthan. The Company has a vast marketing network comprising 15 regional offices, 2,000 dealers and 20,000 village level outlets.

The Company has donned the mantle of providing all agri-products through a 'single window' to enable the farmer to buy all products from one source. The Company dealers provide Urea and other agri-inputs like DAP (Di-Ammonium Phosphate), MOP (Murate of Potash), SSP (Single Super Phosphate), pesticides and seeds. Most of these products are sourced from reputed suppliers and sold under the 'Uttam' umbrella brand. Today, the Company has attained a leadership position in the pesticide business in North India.

Today, Chambal Fertilisers has consolidated its position in agri-business and diversified into other sectors. Its shipping division under the name India Steamship operates 5 Aframax tankers with a combined capacity of over 5,00,000 DWT.

In addition, Chambal Fertilisers has other business interests through its subsidiary in the software sector. It also has a joint venture in Morocco for manufacturing phosphoric acid.

List of Subsidiaries Company:

Company at Glance:

Chambal Fertilisers and Chemicals Limited (CFCL) is flagship company of ZuariChambal, part of K.K. Birla group, having 2 plants Ammonia & Urea plants (Gadepan - I & II) manufacturing nitrogenous fertiliser at Gadepan, Kota.

Products:

Fertilisers (Major nutrients)

Fertiliser	Technical Name
Uttam Neem Urea	46% Nitrogen
Uttam DAP	Di-Ammonium Phosphate (46% Phosphorous 18% Nitrogen)
Uttam MOP	Murate of Potash (60% Potassium)
Uttam SSP	Single Super Phosphate (16% Phosphorous 11% Sulphur)

Specialty Fertilisers / Micro Nutrients

Brand Name	Technical Name
Uttam Neem (Neem coated Urea)	46% Nitrogen
Uttam Sulton	90% Sulphur
Uttam Zinc	Zinc Sulphate Monohydrate – Zinc 33%
Uttam Sampoorn	Micro Nutrient Mixture Fertiliser
Uttam Polybor	Di Sodium Octa Borate Tetra Hydrate (Boron 20%)
Calrich	Calcium Nitrate (Ca 18.8%, N 15.5%)
Uttam Recharge	N.P.K. (100% water soluble fertiliser)
Granubor	15 % Boron

Uttam Kranti:

Product	Brand Name
Uttam Kranti Hybrid SSG (Sorghum Sudan Grass)	Moti, Manik
Uttam Kranti Research Mustard Seeds	UKM-101, UKM-111, UKM-121, UKM-131, UKM-141
Uttam Kranti Barley Seeds	Certified seeds of notified varieties
Uttam Kranti Mustard & Soya bean Seeds	Certified seeds of notified varieties
Uttam Kranti Paddy & Wheat Seeds	Certified seeds of notified varieties

Detail overview of Company business and Products:

1.    Urea Product:

v Urea is a major plant nutrient used by farming community. The demand of Urea in the country is met by domestic production and imports.

v Urea production in the country remained almost stagnant for many years despite steady increase in consumption.

v No new capacities were added during last 16 years except revamp of few existing plants. This has resulted into increasing dependence on imports.

v India imported around 8.47 million MT of Urea during the year 2015-16, constituting about 26.50% of the total urea consumption in the country.

v Urea production in the country during the year was 24.47 million MT against

22.59 million MT during the previous year.

v The increase in production was a result of positive changes in the Government

policy coupled with pooling of Gas for Urea sector.

v The prices of imported Urea remained volatile during the year.

v The international prices (FOB – Arabian Gulf) of Urea were in the range of USD 260-265 per MT in April 2015 which went up to USD 300 – 305 per MT in June 2015 and came down to USD 205-215 per MT in March 2016.

Developments in Government Policies:

The Government of India has notified the New Urea Policy, 2015 (“NUP 2015”) with effect from June 1, 2015. Under NUP 2015 (i) the energy norms have been revised downwards, resulting into partial mopping up of energy gains; and (ii) for production beyond the re-assessed capacity, the Urea units are now entitled for the variable cost, energy savings and incentive at a uniform rate subject to Import Party Price plus incidental charges. In addition to this, the Government of India has also notified guidelines for pooling of Gas in Fertilizer (Urea) Sector.

The pooling of Gas gave a level playing field to the players in Urea Industry. The aforesaid policy decisions have augured well for the Urea Industry and enabled the Urea manufacturers to produce up to the maximum level.

After notification of amended New Investment Policy 2012 (NIP) and due to growing demand of the green revolution/Fertilisers, CFCL had planned a new 3^rd CFG3 Ammonia/Urea Brownfield expansion project of its fertilizer manufacturing unit at Gadepan, Kota (Rajasthan) by installing a Ammonia Plant Capacity – 2200 MTPD, Urea Plant Capacity - 4000 MTPD (2 Trains) plus Power Generation Unit - 18 MWh.

This project will be a stepping stone in the journey of growth the Company as there will be an increase of about 63% in the present Urea production capacity of the Company.

The new project CFG3 is under implementation and expected to commence commercial production in January 2019.

Company had invested approx. 4000 cr in the new CFG3 Project.

Opportunities & Threats:

v This is a huge opportunity available to the Company to expand its core business.

v The new plant is a most modern and energy efficient plant in the country and it will substantially increase the production capacity of the Company.

However, demand fluctuation due to monsoon variations, volatility in the global prices of the fertilisers and variation in the foreign exchange rates are the challenges and can impact on company business.

Risks and Concerns:

v The fertiliser Industry is highly dependent on the Government policies and changes in such policies may sometimes adversely affect the Company.

v The subsidy is major component of revenue of the Company and delay in payment of subsidy by the Government creates stress on the working capital and increases the finance cost of the Company.

v During last few years, the Government has resorted to under-provisioning of fertilizer subsidy in the union budget.

v The subsidy provision lasts only for first few months of the Financial Year and the fertiliser companies have to wait for long for release of subsidy thereafter.

v This is a concern area which is adversely affecting the bottom-line of the fertiliser companies.

v The variations in demand of DAP and MOP due to change in monsoon patterns, volatility in foreign exchange rates and prices of the products in international markets and interest burden due to delay in payment of subsidy may impact the profitability of the Company.

2.    Single Super Phosphate (SSP) Product:

v Apart from Urea, the Company also manufactures Single Super Phosphate (SSP) at its manufacturing Unit at Gadepan with an installed capacity of 180,000 MT per annum. The SSP market is very fragmented with many small players.

v The Company also sourced SSP manufactured by other parties.

Urea & SSP Operational & Financial Performance:

3.    INDIA Steamship- Shipping Division:

v The company financial year 2015-16 was started with a positive note with strengthening of spot earning rates of ships which were significantly higher than the earning rates during previous two years.

v However, there was a major slide in the spot earning rates in the second quarter of the financial year 2015-16 and the earning rates went down further towards the end of the year.

v The reduction in earning rates also had its impact on asset prices and the market value of ships also came down.

Opportunity & Threats:

v The company shipping business earning rates and value of ships seems to have bottomed out and further slide is not expected.

v Any positive developments in global economy are likely to support the earning rates and asset prices of ships as the downside is limited.

Risks and Concerns:

v The impact of global economic scenario can reflect in the shipping business due to international nature of this business.

v The movement in demand and supply of petroleum products has a correlation with the demand and supply of oil tankers.

v The low earning rates and low value of ships is also an area of concern.

Financial and Operational Performance:

4.    Other Products Marketing Business:

v The Company also supplies other agri-inputs through its well established marketing network.

v The Company imports and supplies Di-ammonium Phosphate (DAP), Muriate of Potash (MOP) and NPK Fertilisers in its marketing territory.

v The major consumption of DAP is met through imports in the country.

v As against total consumption of 9.76 Million MT during the year, around 5.60 million MT of DAP was imported constituting about 57% of total consumption in the country.

v The revenue from traded products was Rs. 4394.03 crore during the financial year 2015-16 in comparison to Rs. 3209.71 crore in the previous year.

The sales of various products were as under:

v During the year under review, the company has completed the sale of its textile business i.e. Birla Textile Mills to Sutlej Textiles and Industries Limited as a going concern on slump sale basis with effect from April 1, 2015.

Chambal Fertilisers - Share holding Pattern
	% Share holding	% Share pledged
Shareholding of Promoters & Promoters Group	58.11	6.69
Public holding	41.89
Total	100

Key Financial Ratio:

Chambal Fertilisers and Chemicals Limited
Particulars (Cr.)	Mar-16	Mar-15	Mar-14	Mar-13	Mar-12	Mar-11	Mar-10	Mar-09	Mar-08	Mar-07
Net sale/Revenue	9536.3	8882.13	7981.89	7340.82	6461.29	4654.1	3583.3	4603.2	2728.26	2596.54
Other Income	145.28	135.07	161.47	78.29	155.2	88.75	29.01	-23.18	52.37	14.29
Total Income	9,610.03	8,969.78	7,567.19	8,097.12	6,746.01	4,860.85	3,534.68	4,628.48	2,731.86	2,696.76
Total Expenses	9,065.29	8,510.06	7,797.43	6,974.33	6,056.85	4,306.43	3,258.85	4,274.52	2,539.50	2,404.27
Interest Expense	140	157.49	198.95	129.83	120.26	110.02	99.25	139.68	102.67	105.85
Depreciation & Amortization	160.38	173.32	230.31	222.04	262.08	267.95	257.62	227.14	184.94	176.6
Total Tax	159.95	163.34	42.85	151.12	312.34	115.62	109.76	87.54	64.28	66.5
PBDIT	546.63	730.93	775.17	808.61	941.97	818.77	711.91	682.92	554.71	499.83
PBT	246.25	400.12	345.91	456.74	559.63	440.8	355.04	316.1	267.1	217.38
Net Profit	86.3	236.78	303.07	305.61	247.29	325.18	249.05	230.56	203.8	151.13
Operating Profit	771.4	702.88	613.7	718.36	786.77	725.65	686.9	708.03	481.07	479.36
OPM Margin%	0.9	2.66	3.79	4.16	3.82	6.98	6.95	5	7.46	5.82
Debt to equity Ratio	1.93	1.58	1.98	2.45	1.89	1.44	1.88	1.96	1.58	1.86
Current Ratio	1.02	1.08	1.06	1.07	1.03	0.95	1.22	0.82	1.05	1.00
Interest Coverage Ratio	2.76	3.54	2.74	4.52	5.65	5.01	4.58	3.26	3.60	3.05
EV/EBITDA	7.35	7.68	7.68	8.45	6.7	6.58	7.39	6.16	7.34	6.47
ROE	3.71	10.23	13.86	15.34	13.90	20.03	17.92	18.68	17.90	14.79
ROCE	2.5	6.69	8.29	8.54	7.27	10.3	6.84	6.84	7.54	5.9
Equity	416.21	413.95	413.95	416.21	416.21	416.21	416.21	416.21	416.21	416.21
EPS	2.07	5.69	7.28	7.34	5.94	7.81	5.98	5.54	4.9	3.63

Comparison Quarter to Quarter & Year to Year Basis
Particulars	Quarter ended		Period ended
	March31,2017	March31,2016	March31,2017	March31,2016
EBITDA (before exceptional item)	140.97	92.81	923.88	845.5
PBT (before exceptional item)	84.22	28.62	616.51	499.29
PBT (after exceptional item)	84.22	67.44	616.51	107.04
PAT from continued operations	58.75	79.42	434.39	45.62

Chambal Fertilisers & Chemicals Limited
	Standalone		Standalone
	Quarter ended		Year ended
	31/03/2017	31/03/2016	31/03/2017	31/03/2016
Net Profit before tax from continuing operation	8421	6744	61650	10704
Net Profit before tax	3436.8	14668	53196	15430

Company Loan Outstanding figure (Rs. Crores):

Financial Chart:

From continuing operations:

Investment Rational:

1.     Flagship K.K Birla Group and Strong Promoter Group.

2.     Strong increasing in Net Sale on YOY basis.

3.     PAT from continued operation has increased to 434 Cr (2016-2017) compare to previous year 46Cr (2015-2016) year.

4.     Net PBT has increased to 531.96 Cr (2016-2017) compare to previous year 154 Cr (2015-2016) year.

5.     Profit after Tax during the March 2016 year was much lower in comparison to the previous year due to company had made a provision of Rs. 296.19 Crore on account of impairment in the value of its investment in CFCL Technologies Limited, Cayman Islands, a subsidiary of the Company. In addition to this, the Company had made a provision for impairment loss of Rs. 111.99 Crore as a result of sale transaction of the vessel - Ratna Puja.

6.      After completing the new CFG3 project, Urea production capacity will increase as below

This will strongly impact on company business and profit will increase.

7.     The demand of Urea is increasing gradually without matching capacity addition. Subject to risks and concerns as mentioned above, the Urea business will unlikely to face any challenge in terms of sales volumes in near future in view of demand-supply gap. The Company has registered encouraging growth in sales volumes of traded fertilisers. The Company has a strong marketing network and brand loyalty for the products of the Company.

Risks and Concerns:

v The Fertiliser Industry is highly dependent on the Government policies and changes in such policies may sometimes adversely affect the Company.

v The subsidy is major component of revenue of the Company and delay in payment of subsidy by the Government creates stress on the working capital and increases the finance cost of the Company.

v During last few years, the Government has resorted to under-provisioning of fertilizer subsidy in the union budget.

v The subsidy provision lasts only for first few months of the Financial Year and the fertiliser companies have to wait for long for release of subsidy thereafter.

v This is a concern area which is adversely affecting the bottom-line of the fertiliser companies.

Recommendation:

Based on above financial data and strong sales growth plus plant expansion/Capex, I expect the 2019E EPS to be around 15, at CMP 122 Rs the stock is trading at 12X. In the positively changing growing demand of urea, i expect the stock to trade at PE multiple of 17 2019E.

Based on this Chambal Fertiliser share value can touch 250 Rs within a 3 year time horizon.

Please note:

Note: The articles are not research reports but assimilation of information available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that I might have the discussed companies in my portfolio and hence my point of view can be biased. Readers should consult registered consultants before making any investments.