Chambal Fertilisers And Chemicals : An All-weather Friend Of The Indian Farmer
The overall outlook for the company looks healthy in the forthcoming period in view of the central government’s focus to increase farmer income and the sector companies’ moderate capex plans
Chambal Fertilisers and Chemicals Ltd., incorporated in the year 1985, is a mid-cap company with market capitalisation of Rs 15,368.47 crore functioning in the fertiliser sector, which is its key revenue segment. The company caters to the needs of farmers in 12 states in northern, eastern, central and western regions of India and is the lead fertiliser supplier in the state of Rajasthan. It has a vast marketing network comprising 15 regional offices, 2,200 dealers and 22,000 village level outlets.
The company provides all agricultural products through a single window to enable farmers to buy all products from one source. Its dealers provide urea and other agricultural 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. Chambal Fertilisers and Chemicals has attained a leadership position in the pesticide business in North India.
Financial Overview
The company’s quarterly standalone financials reveal operating profit for Q2FY22 at Rs 754.17 crore as compared to operating profit of Rs 789.26 crore for Q2FY21. Its net sales for Q2FY22 were Rs 4,478.61 crore as compared to net sales of Rs 3,986.94 crore in Q2FY21. The net profit has also been on the higher side and stands at Rs 425.38 crore in Q2FY22 which was at Rs 415.03 crore for Q2FY21. On an annual basis, the net sales have increased from Rs 12,205 crore reported in FY20 to Rs 12,719.01 crore reported in FY21. The operating profit stood at Rs 2,500.80 crore as compared to operating profit of Rs 2,008.97 crore for FY20. The company has delivered an exceptional net profit of Rs 1,658.14 crore for FY21 as compared to net profit of Rs 1,222.55 crore for FY20.
During the quarter under review, international prices of DAP and NPK fertilisers rose substantially. Significant initiatives by the Government of India include additional subsidy of Rs 28,655 crore on phosphate fertilisers and a special package of Rs 5,716 crore for additional subsidy on DAP for the rabi season. The company is expected to generate healthy free cash flows for FY20E and FY21E of Rs 9 billion and Rs 5.5 billion, respectively, due to the newly commissioned capacity. Healthy free cash flow generation is likely to help it pare down its debt. It has a target of reducing Rs 4.2 billion for FY20E and FY21E. This, coupled with faster recognition in subsidy receivables, should accelerate debt reduction.
Sector Overview
Urea is an economical form of nitrogenous fertiliser and is synthetically produced in enormous quantities. The fertiliser subsidy allocations have been hiked by around Rs 10,000 crore from Rs 70,090.35 crore to Rs 79,996 crore. Out of this allocation, urea subsidy comprises Rs 53,629 crore and nutrient-based subsidies Rs 26,367 crore. The highest number of subsides are offered for the urea sector at 77 per cent compared to nutrient-based as it is the most commonly used fertiliser. Further, India is the world’s second-biggest consumer of urea and is boosting production of the crop nutrient.
The chemical and fertiliser sector is one of the pioneering sectors of the economy having a strong bearing on the day-today needs of the society. The Indian chemical industry is not only one of the oldest industries in India but also the thirdlargest in Asia with gross value added (GVA) of around 7.21 per cent in the manufacturing sector and about 1.2 per cent in the national GVA. With the current size of approximately USD163 billion, the Indian chemical industry accounts for 3 per cent of the global chemical industry. The sector is poised to reach USD 300 billion by 2025. The Indian chemical industry is both capital and knowledge-intensive.
It has a diversified manufacturing base with over 80,000 commercial products. It is the basis of industrial and agricultural development of the country and a building block for industries such as textiles, papers, paints, varnishes, soaps, detergents, pharmaceuticals, etc. Sub-sectors like speciality chemicals and agro chemicals are also growing at a higher pace. The Indian fertiliser industry has also shown tremendous growth in the last five decades and at present ranks third in the world, behind China and the US.
India also ranks second in the production of nitrogenous fertilisers and third in phosphate fertilisers. The petrochemical market in India is expected to grow at a CAGR of 10 per cent over the next five years to reach Rs 100 billion by 2022. Also, the market for crop protection chemicals in India is expected to reach Rs 7.5 billion. This growth is fuelled by rapidly growing population and a decrease in per capita availability of arable land. The specialty chemicals market has witnessed a growth of 14 per cent in the last five years and the market size is expected to reach Rs 70 billion.
Future Outlook
The overall outlook for the company looks healthy in the forthcoming period in view of the central government’s focus to increase farmer income and the sector companies’ moderate capex plans. Further, IFFCO has reduced the prices of ammonium phosphate sulphate fertilisers by Rs 1,000 per tonne as support to farmers on sulphur, a key input nutrient for the soil. This nutrient is very important for all types of oil seed crops. It improves the quality of the crops and also helps in the good growth of plants. IFFCO will keep on reducing prices wherever possible for farmers.
The Department of Fertilisers has developed various dashboards in order to provide real-time information about the position of supply and requirement of various fertilisers at the national, state and district levels. The Government of India had made additional provision during the FY 2020-21 for making payment of subsidy arrears to fertiliser companies. In view of this, the long outstanding subsidy arrears of the company were released by the government, resulting in substantial reduction in outstanding subsidy as on March 31, 2021 in comparison to the previous year and improvement in the liquidity position of the company.
Chambal Fertilisers and Chemicals is now in a position to look at avenues for expansion in fertilisers and other related sectors. Taking into consideration the company’s brand image and strong marketing network, the outlook for urea production and sales remain positive. Moreover, the brand strength, reliable supply channels and established network with focus on expansion in new geographies shall enable the company to achieve growth in non-urea fertilisers, micronutrients and agrochemicals. Hence, we recommend BUY.