Chambal Fertilisers & Chemicals - A Good Value Pick

Sometimes taking a contrary investment view of certain sectors and stocks is not a bad idea. Look at the fertiliser stocks which have been substantially beaten down since their November peak prices. The correction in prices has actually thrown up some good value picks in this sector. One such stock is Chambal Fertilisers & Chemicals (CFCL), which is one of the largest private sector fertiliser producers in India with a market share of around 10 per cent in the domestic market. It has posted a very strong financial performance with its 9MFY11 profits already higher than its FY10 profits. The scrip is off 34 per cent from its November peak and 24 per cent on a YTD basis amd  at FY11 estimated PE of 8x, with a dividend yield of 2.75 per cent, it is worth a grab at CMP of Rs 69.

CFCL is a manufacturer of urea and caters to over 10 states in the northern, central and western regions. It is also into trading of other agricultural inputs like DAP (Di-Ammonium Phosphate), MOP (Muriate of Potash), SSP (Single Super Phosphate), pesticides and seeds, thus positioning itself as a one-stop solution of agri products. CFCL’s business also includes a shipping division with a fleet capacity of six Aframax tankers and a textile division, which manufactures cotton and synthetic yarn. However, its fertiliser business drives its growth and brings in 88 per cent of the total revenues with the balance 12 per cent coming from the shipping and textile divisions.

There are reasons we believe CFCL will do well. The first factor is the budget which continues to support agriculture. A higher farm credit allocation of Rs 4,75,000 crore and the interest subvention for short-term crop loans having gone up will provide easy access to farm credit, and also increase the demand for fertilisers. Secondly, with the government mulling to extend the Nutrient-Based Scheme (NBS) regime to cover urea too it would mean that the fertiliser companies would be able to raise their retail prices, which will help them push their revenues further. While the government’s plan of direct cash subsidy for fertilisers will not only benefit the intended beneficiaries, it will also create a higher demand for fertilisers. Besides, with the monsoon expected to start in about three months from now, the demand for fertilisers is bound to go up in the coming period.

As for its other segments, while the textile division has put up a decent show in 9MFY11, CFCL is planning a restructuring of its shipping business, whose profit growth has declined during the same period. However, there are no further details on the restructuring, but it would surely keep the scrip active on the bourses.

On the financial front, for 9MFY11 CFCL’s revenues increased by 34 per cent to Rs 3,869.56 crore, while profits increased by 29 per cent to Rs 257.45 crore. This was primarily on account of higher volumes, trading margins due to the NBS scheme implementation and de-bottlenecking of the plants. On an annualised basis we expect CFCL to post revenues and profits of around Rs 5,100 crore and Rs 340-350 crore. At these estimates CFCL is available at EV/EBDITA of 6.6x and PE of 8x, which is low and makes it an attractive buy with a one-year target of Rs 95.