Seeds Of Growth - Mangalore Chemicals And Fertilizers
11/22/2010 12:39 PM Monday
Despite having a huge potential, there are a few sectors that have always suffered the investor’s apathy. The Indian fertilizer sector is one such example. It has largely underperformed the broader market indices due to the fact that the government has exercised strict control over this category so far. The scenario changed somewhat at the beginning of this financial year when the Union Cabinet decontrolled the prices of specialty and complex fertilizers while approving a 10 per cent increase in the retail price of urea. The result of this decision is evidently seen in the stock prices of fertilizer companies that have almost doubled since then. Mangalore Chemicals and Fertilizers (MCFL), part of the UB Group of companies that have interests spanning from distilleries to aviation, is our selection as this issue’s ‘Low Priced Scrip’. Recently, the firm has displayed a spectacular financial performance and an improved balance sheet condition.
The icing on the cake is a healthy dividend yield of 2.4 per cent at a CMP of Rs 41.5. MCFL is based in southern India and is engaged in the manufacturing and selling of fertilizers primarily in the domestic market. The company’s product portfolio mainly consists of Urea and DAP (Di-Ammonium Phosphate) that contribute 47 per cent and 35 per cent respectively. The firm also imports and trades in muriate of potash, specialty fertilizers, fertigation and organic products. Urea, which constitutes 81 per cent of fertilizer application by nutrient, is still not decontrolled in India.Thus, fresh investment in this segment is not flowing. But MCFL has announced Rs 500 crore of capex last year to establish a network for collection, distribution, processing, storage in cold chains of vegetables, potatoes, etc., to improve its operating margins.
Moreover, looking at the latest government policy to go for a nutrient based fertilizer subsidy scheme, the growth of non-urea based fertilizers could gain momentum. MCFL is in a good position to take advantage of such a situation. In addition to that, an increase in gas availability and government incentives to convert all urea plants to gas based facilities will lower urea production costs for the company. It will also reduce the subsidy by the government and improve the cash flow and working capital cycle of the company.MCFL’s latest quarterly performance reflects strong topline and bottomline growth. Revenues grew by 67 per cent on a yearly basis to Rs 1023 crore while profit more than doubled to Rs 33.82 crores in the same period. Notably, a 26 per cent decrease in interest costs was witnessed thanks to a decline in company debt by two-thirds to Rs 100 crore at the end of FY10. This has in turn brought down the debt equity ratio below one at 0.78 times. The company is currently trading at 6.29 times of its last twelve month earning, which looks cheap compared to its peers that are trading at double digits. Even on the EV/EBITDA basis, it is trading at just 4.5 times. Hence, we advise our readers to invest in the stock for a time horizon of 9-12 months and a return expectation of 20-25 per cent from the current level.
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