Recommendation From Fertilisers Sector

NOURISH YOUR PORTFOLIO

​HERE IS WHY
Positive macroeconomic cues
Government measures on subsidy
Attractive valuations

The Indian fertilizer industry is the third largest in the world in terms of production and the second largest in terms of consumption. The government of India has been consistently pursuing policies conducive to increased availability and consumption of chemical fertilisers and thereby maximising agricultural production in the country. The domestic production is well below demand, forcing the country to import fertilisers to meet the demand-supply gap.

Rashtriya Chemicals & Fertilisers (RCF) is a fertiliser and chemical manufacturing company. The company manufactures urea, complex fertilizers, bio-fertilizers, micro-nutrients, water soluble fertilisers, soil conditioners and a range of industrial chemicals. It is engaged in the manufacture and sale of fertilisers and industrial products. RCF’s products include methanol, ammonia, ammonium nitrate, sodium nitrate, sodium nitrite, ammonium bicarbonate, methylamines, dimethyl formamide, dimethyl acetamide, formic acid and argon.

The company caters its products to manufacture dyes, solvents, leather, pharmaceuticals and other industrial products. It produces approximately 23 lakh metric tonnes (MT) urea, over 6.5 lakh MT of complex fertilizers and approximately 1.6 lakh MT of industrial chemicals. 

The government has approved the proposal of half-yearly review of nutrientbased subsidy (NBS) rates for phosphatic and potassic (P&K) fertilizers for FY17 against the present practice of annual review. The government also clarified that it will ensure that any fall in international prices should be reflected by the fertiliser companies with subsequent reduction in maximum retail prices. On the financial front, RCF’s revenue declined 19.91 per cent to Rs.4993 crore in 9MFY17 as compared to the same period in the previous financial year.

The company’s EBITDA too declined 18.86 per cent to Rs.304 crore in 9MFY17 on a yearly basis. Its net profit also decreased 14.53 per cent to Rs.127 crore in 9MFY17 as compared to the same period in the previous financial year. On the segmental revenue front, RCF has earned 89.6 per cent from fertilizers, 10.13 per cent from industrial products in FY16. RCF has total debt-to-equity of 1.08x in FY16. The company’s interest coverage ratio stood at 2.92x in FY16. The company’s ROE and ROCE stood at 6.68 per cent and 8.18 per cent, respectively, in FY16. On the valuation front, the share price of RCF is trading at trailing twelve months (TTM) PE of 16.16x as compared to peers such as National Fertilizers (17.7x) and Chambal Fertilizers & Chemicals (15.23x).

Also, the company’s PE is trading at an attractive valuation as compared to industry PE of 16.11x. The company’s PB is 1.06x as compared to Chambal Fertilizers & Chemicals (1.41x) and Zuari Agro Chemicals (1.54x). We recommend our reader-investors to BUY the stock.