Chambal Fertilisers And Chemicals: Recommendation Review

BSE Code    500085
Reco Price    Rs 87

We had recommended Chambal Fertilisers and Chemicals (CFCL) as a Mahurat buy in DSIJ Vol. 26, Issue No. 23 (dated 6th November, 2011). The stock is currently available at an 11% discount to our recommended price of Rs 87 per share. At this juncture, is it still advisable to hold the scrip, or would it be wiser to book losses and exit the counter?

Well, before we answer the question, let us briefly analyse the woes faced by CFCL and the possible implications of these.

A majority of the company’s problems are in its non-core shipping and textile businesses, which are currently reporting losses. Judging by the pessimistic outlook for the shipping sector, we expect the sluggish performance to continue in the future. The change in the tax structure can also be interpreted as the management’s negative outlook on the sector.

The core fertilisers manufacturing and trading business seems to be doing well though. After a good Q3 FY12 performance, CFCL is likely to enjoy the benefits of higher urea production above cut-off in Q4. Its fertilisers trading business has also been very robust, registering a 58% growth in revenues (YoY) in Q3 FY12.

However, given the laggard performance of its non-core business, most of the benefits from the core business are likely to be wiped off. A higher share from the low-margin trading business will lead to erosion at the EBIDTA level. Lastly, the government’s ad-hoc and uncertain stand on urea pricing and the new investment policy continues to be an overhang on the stock. In our latest interaction with the management, we learnt that they also expect a cutback in subsidies for complex fertilisers in the coming budget. In the wake of all these headwinds and no clear outlook from the management, we recommend that our readers book losses in the counter and exit completely.