October 26, 2017 Chambal Fertilizers and chemicals Ltd. Bridging structural demand supply gap for growth CMP INR 141 Target INR 228 Initiating Coverage – Buy SKP Securities Ltd www.skpmoneywise.com Page 1 of 26 Company Background Chambal Fertilizers and Chemicals Ltd (Chambal), promoted by Late K K Birla in 1985, now professionally managed under Chairmanship of Mr Saroj Poddar, is India’s largest private sector urea manufacturer. Its two hi-tech nitrogenous fertilizer plants are located at Gadepan, District Kota, Rajasthan, with an installed capacity of ~2 mtpa, sold under ‘Uttam Veer’ brand, primarily in North & West India. It trades in complex fertilizers like DAP, MOP, NPK fertilizers, crop protection chemicals (insecticides, fungicides & herbicides), seeds, sulphur, micro-nutrients, complex fertilisers and city compost etc. Investment Rationale Largest private urea manufacturer with robust distribution network Chambal is the largest domestic private urea manufacturer with ~6% market share (4 th largest in capacity). It has a vast marketing network comprising ~11 regional offices, ~1,500 dealers and ~20,000 village level outlets, through which it caters to farmers in ~10 states in northern (80%), central and western regions of India. To broaden its product offerings, Chambal trades in P&K fertilizers, specialty fertilizers, pesticides, seeds and micro nutrients. Well timed capex to bridge structural demand supply gap With no new capacity addition during the last 2 decades (except revamp of few existing plants), India is now a urea deficit market where it produces ~24 mn mt against demand of ~32 mn mt. With a view to bridge this gap, and Government’s favourable New Investment Policy, Chambal is setting up 1.34 mtpa brownfield urea plant at Gadepan, Rajasthan (named as Gadepan III) at a capex of USD 917 mn (~Rs 59.4 bn) of which ~USD 711 mn is being funded through debt. The plant is expected to commission by January 2019. Post expansion, Chambal’s urea capacity will increase from 2.01 mtpa to 3.35 mtpa, further strengthening its leadership position in the industry. Chambal has entered into long term agreement w.e.f. April 1, 2018 with GAIL for supply of natural gas for Gadepan III unit. The gas can also be used in existing plants Gadepan I & Gadepan II. Easing/favourable Government regulations augurs well The fertilizer industry is highly regulated and with an aim to boost investments, GoI has initiated policy steps that could structurally improve fertiliser industry’s dynamics with schemes like gas price pooling, DBT, NPS III, Modified NPS III, New Investment Policy, and New Urea policy. The manufacturers get subsidy based on the policies slated in these schemes. Gas price pooling seeks to change industry dynamics by levelling gas costs for all players. The scheme encourages competition among fertilizer manufacturers mainly on the basis of energy efficiency and production volume and not on price of natural gas input. Under DBT, the government aims to transfer the subsidy amount directly to manufacturers and importers on the basis of actual sales made by retailers to beneficiaries. Currently, pilot projects are being conducted and pan-India DBT rollout will take some time. Post DBT implementation, we believe companies across the sector are likely to benefit in terms of better working capital cycle. Sale of non-core business to turn Chambal a pure urea company As part of long-term strategy, Chambal has divested its non-core businesses (textiles, shipping and BPO/BPM arm of IT business solutions). These three businesses were either loss-making or had relatively lower margins, but accounted for ~30% of the company’s capital employed. The business reorganisation has enabled Chambal to focus on its core business of urea manufacturing and trading in complex fertilisers, where it is planning an aggressive expansion. Valuation Chambal is the largest private urea manufacturer with robust distribution network and has planned a well timed capex to bridge structural demand supply gap in the industry. Post FY19, it is well placed to reap the benefits of reforms such as DBT of fertilizer subsidy and possible steps towards removing price regulations on urea in the long term. Its earnings and margins profile is also likely to improve substantially. We have valued the stock at a P/E of 10x of FY20E EPS of Rs 22.8and recommend buy on the stock with a target price if Rs 228 (~62% upside) in 18 months. Key Share Data Face Value (INR) 10.0 Equity Capital (INR Mn) 4162.1 Market Cap (INR mn) 58685.3 52 Week High/Low (INR) 157/54 Avg. Daily Volume (BSE) 229,282 BSE Code 500085 NSE Code CHAMBLFERT Reuters Code CHMB.NS Bloomberg Code CHMB:IN Shareholding Pattern (Sept 30, 2017) 58% 8% 13% 21% Promoters FII DII Particulars FY17 FY18E FY19E FY20E Net Sales 75,534.5 81,784.3 88,002.0 112,590.7 Growth (%) -28.2% 8.3% 7.6% 27.9% EBT 5,656.3 8,056.4 8,337.9 14,505.9 PAT 2,092.1 5,268.1 5,452.2 9,485.4 Growth (%) -3.2% 151.8% 3.5% 74.0% EPS (INR) 5.0 12.7 13.1 22.8 BVPS (INR) 51.0 61.4 72.2 92.7 Key Financials (INR mn) Key Financials Ratios Particulars FY17 FY18E FY19E FY20E P/E (x) 28.1 11.1 10.8 6.2 P/BVPS (x) 2.8 2.3 2.0 1.5 Mcap/Sales (x) 0.8 0.7 0.7 0.5 EV/EBITDA (x) 13.3 15.0 15.2 7.8 ROCE (%) 10.1% 8.2% 7.3% 11.4% ROE (%) 9.9% 20.6% 18.1% 24.6% EBT Mar (%) 7.5% 9.9% 9.5% 12.9% PAT Mar (%) 5.0% 6.4% 6.2% 8.4% Debt - Equity (x) 2.2 2.7 2.8 2.3 Source: Company, SKP Research Price Performance Chambal vs BSE 500 -20% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Chambal BSE 500 Analysts: Nikhil Saboo Tel No: +91-33-40077019; Mobile: +91-9330186643 e-mail: [email protected]VineetAgrawal Tel No: +91-22-49226006; Mobile: +91-9819510575 e-mail: [email protected]
SKP Securities Ltd www.skpmoneywise.com Page 1 of 26
Company Background
Chambal Fertilizers and Chemicals Ltd (Chambal), promoted by Late K K Birla in 1985, now professionally managed under Chairmanship of Mr Saroj Poddar, is India’s largest private sector urea manufacturer. Its two hi-tech nitrogenous fertilizer plants are located at Gadepan, District Kota, Rajasthan, with an installed capacity of ~2 mtpa, sold under ‘Uttam Veer’ brand, primarily in North & West India. It trades in complex fertilizers like DAP, MOP, NPK fertilizers, crop protection chemicals (insecticides, fungicides & herbicides), seeds, sulphur, micro-nutrients, complex fertilisers and city compost etc.
Investment Rationale Largest private urea manufacturer with robust distribution network Chambal is the largest domestic private urea manufacturer with ~6% market
share (4th largest in capacity). It has a vast marketing network comprising ~11 regional offices, ~1,500 dealers and ~20,000 village level outlets, through which it caters to farmers in ~10 states in northern (80%), central and western regions of India. To broaden its product offerings, Chambal trades in P&K fertilizers, specialty fertilizers, pesticides, seeds and micro nutrients.
Well timed capex to bridge structural demand supply gap With no new capacity addition during the last 2 decades (except revamp of few
existing plants), India is now a urea deficit market where it produces ~24 mn mt against demand of ~32 mn mt. With a view to bridge this gap, and Government’s favourable New Investment Policy, Chambal is setting up 1.34 mtpa brownfield urea plant at Gadepan, Rajasthan (named as Gadepan III) at a capex of USD 917 mn (~Rs 59.4 bn) of which ~USD 711 mn is being funded through debt. The plant is expected to commission by January 2019. Post expansion, Chambal’s urea capacity will increase from 2.01 mtpa to 3.35 mtpa, further strengthening its leadership position in the industry.
Chambal has entered into long term agreement w.e.f. April 1, 2018 with GAIL for supply of natural gas for Gadepan III unit. The gas can also be used in existing plants Gadepan I & Gadepan II.
Easing/favourable Government regulations augurs well The fertilizer industry is highly regulated and with an aim to boost investments,
GoI has initiated policy steps that could structurally improve fertiliser industry’s dynamics with schemes like gas price pooling, DBT, NPS III, Modified NPS III, New Investment Policy, and New Urea policy. The manufacturers get subsidy based on the policies slated in these schemes.
Gas price pooling seeks to change industry dynamics by levelling gas costs for all players. The scheme encourages competition among fertilizer manufacturers mainly on the basis of energy efficiency and production volume and not on price of natural gas input.
Under DBT, the government aims to transfer the subsidy amount directly to manufacturers and importers on the basis of actual sales made by retailers to beneficiaries. Currently, pilot projects are being conducted and pan-India DBT rollout will take some time. Post DBT implementation, we believe companies across the sector are likely to benefit in terms of better working capital cycle.
Sale of non-core business to turn Chambal a pure urea company As part of long-term strategy, Chambal has divested its non-core businesses
(textiles, shipping and BPO/BPM arm of IT business solutions). These three businesses were either loss-making or had relatively lower margins, but accounted for ~30% of the company’s capital employed.
The business reorganisation has enabled Chambal to focus on its core business of urea manufacturing and trading in complex fertilisers, where it is planning an aggressive expansion.
Valuation Chambal is the largest private urea manufacturer with robust distribution
network and has planned a well timed capex to bridge structural demand supply gap in the industry. Post FY19, it is well placed to reap the benefits of reforms such as DBT of fertilizer subsidy and possible steps towards removing price regulations on urea in the long term. Its earnings and margins profile is also likely to improve substantially.
We have valued the stock at a P/E of 10x of FY20E EPS of Rs 22.8and recommend buy on the stock with a target price if Rs 228 (~62% upside) in 18 months.
Ammonium (NH4+), Dihydrogen Phosphate etc. NPK are frequently required in a crop
fertilization programme and are needed in larger quantity by plants. Thus, the Indian fertilizer
industry majorly focuses on primary nutrients.
Secondary nutrients: Calcium (Ca2+), Magnesium (Mg2+) and Sulfur are secondary nutrients
for plants, but are as important as other essential plant nutrients.
Micronutrients: Micronutrients which includes Iron, Cobalt, Chromium, Copper, Iodine,
Manganese, Selenium, Zinc and Molybdenum, are nutrients required by plants throughout life
in small quantities to orchestrate a range of physiological functions.
Micronutrients are as important to plant nutrition as primary and secondary macronutrients,
though plants don't require as much of them. A lack of any one of the micronutrients in the soil
can limit growth, even when all other nutrients are present in adequate amounts.
Primary nutrients
Secondary nutrients
Micronutrients
Nitrogen (N)
Phosphorus (P)
Potassium (K)
Calcium (Ca2+)
Magnesium (Mg2+) Sulfur
Iron, Cobalt, Chromium,
Copper, Iodine, manganese,
Selenium, Zinc etc
These are basic nutrients
needed in large quantity
Lack of micronutrients may
hamper plant growth
Category
Comments
Nutrients
Needed in small quantity
Chambal Fertilizers and Chemicals Ltd.
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Demand drivers for fertilizers
1. Scarcity of nutrients creates demand for fertilizers: Deficiency of nutrients that are
essential for plant growth can lead to lower plant yield. More than 50% of districts in India are
deficient in essential plant nutrients, as shown in the diagram below:
Source: Investor Roadshow Presentation – May 2017 – Coromandel Fertilizers
As per the estimates of ‘Indian Institute of Soil Science’, about 90 mn hectare land is affected
by various soil related deficiencies and around 41% of the Indian soil are deficit in Sulphur
content leading to stunted plant growth and subsequent lower yields. This creates demand for
fertilizers and opportunities for players like Chambal.
2. Unbalanced nutrient applications: Though India ranks amongst the largest agriculture
economies globally, its crop yields remain marginal. Nutrient application, a major determinant to
crop productivity, has been grossly inadequate and unbalanced, affecting soil health and output
quality. Against the ideal NPK nutrient application ratio of 4:2:1, fertiliser usage is divergent
towards N, recording nutrient ratio of 7.8:3.2:1 in 2015-16. The main reason behind this imbalance is availability of urea at subsidised price (Rs 5,360/ton),
leading the farmers to use urea in unbalanced way. This has also led to illegal export of urea to
neighbouring countries. Potash and Phosphate fertilizers are available at ~Rs 24,000/ton and
are currently under a decontrolled regime (sold at indicative maximum retail prices).
Once decontrolled, there was a steep hike in P&K fertilizers resulting in decline in their
demand, causing nutrient imbalance in the soil.
Exhibit:Urea remains the preferred choice as part of the nutrient mix for more than two decades
Source: Fertiliser Association of India (FAI),SKP Research
Share of major fertilizers to nutrient consumption
Urea, 80%
DAP & Others, 17
%
AS, CAN & ACl, 30%
Year - FY1991-92
Urea, 83%
DAP & Others, 16
%
AS, CAN & ACl, 1%
Year- FY2014-15
Chambal Fertilizers and Chemicals Ltd.
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3. Increasing use of micro-irrigation provides opportunities for water soluble fertilizers:
Micro-irrigation is defined as the frequent application of small quantities of water directly above
and below the soil surface; usually as discrete drops, continuous drops or tiny streams through
emitters placed along a water delivery line. As the agriculture sector
consumes 80% of freshwater in
India, micro-irrigation is often
promoted by Central and State
Governments to tackle the growing
water crisis, as the drip and
sprinkler irrigation delivers water to
farms in far lesser quantities than
conventional gravity flow irrigation.
Due to recurring droughts in years
2012, 2015 and 2016, micro-
irrigation has become a policy
priority in India. The new catch-
phrase in one of the Central
Government’s schemes (Pradhan Mantri Krishi Sinchai Yojana), is “Per Drop More Crop”.
Apparently, the shift towards micro-irrigation is thought to “save” water and boost crop yields. The global water-soluble fertilizers market is estimated to be valued at USD 12.24 bn in 2016
and projected to reach USD 17.06 bn by 2022, at a CAGR of 5.69% from 2016. Just 7.7 mn hectare of land is under drip irrigation out of the potential of 69 mn hectares. With
increase in demand for food security for the growing population, along with limited
agricultural land available in the world, and rise in crop loss due to nutrient deficiency,
usage of water-soluble fertilizers is expected to increase with higher penetration micro-
irrigation in India.
Industry and Trends
Currently, there are 144 big size fertilizer plants in India producing various nitrogenous,
phosphatic and complex fertilizers. Of these, 31 plants (29 in operation) produce urea and 33
plants produce DAP and complex fertilizers. In addition, there are about 80 small &medium
scale plants in operation manufacturing single super phosphate (SSP).
3.1
4.9
6.1
7.7
0
1
2
3
4
5
6
7
8
9
2005 2010 2012 2015
mn H
ect
ares
Micro Irrigation Potential in India 69 mn Hectares
Source: Investor Road show Presentation – May 2017 – Coromandel fertilizers
54% of India faces high to extreme high water stress
Source: Investor Roadshow Presentation – May 2017 – Coromandel fertilizers
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 5 of 26
Exhibit:Total installed capacity of fertilizers in India
Urea *31 21
DAP 12 7
Complexes 21 5
SSP 80 8
Total 144 41
Source: Department of fertilizers, SKP Research
Total installed Capacity (Mn MT
per annum)No. of UnitsProduct
*At present operational capacity is 200.30 LMT since FACT-Cochin and DIL Kanpur are under
shut down. In the absence of domestic natural resources, complete requirement of potash is
imported
Urea: Urea is the most popular source of major plant nutrient (Nitrogen), plays a vital role in
ensuring food security in the country and is produced by public, co-operative and private sector
entities. With increase in area under irrigation and introduction of high yielding varieties of
crops, there has been a gradual increase in demand of urea over the years.
No new urea capacity added in last 17 years: Despite increase in demand, no new urea
capacities were added during last 17 years except revamp of few existing plants. This has
resulted into widening of gap between demand and domestic supply thereby increasing
imports. The key reasons for stagnant urea capacities are as follows:
Setting-up a fertilizer plant in India is a long process which generally takes three to
four years from time of issue of letter of intent to start of production. There was an
absence of a clear policy for setting up fertilizer plants in the country.
Government policy towards private sector players in fertilizers has not been clear.
Business environment for fertilizer companies has been hostile due to urea subsidy
and erratic supply of natural gas, which is the key feedstock for manufacturing urea.
India could not attract foreign companies to produce fertilizers because they earn
huge profits in exports to India. Since local production is low, India is dependent on
fertilizer imports.
Demand and supply trends of urea in the past nine years is given below:
Source: The Company & SKP Research
Imports have more or less remained stagnated during FY16 & FY17 on account of 100% neem
coating and record imports in 2015 merged with poor monsoons that lowered farm-level
consumption, allowing significant inventories to build up throughout the supply chain.2 mtpa of
urea is imported from Oman under ‘urea off take agreement’. Rest is imported from China and
Iran.
Canalization of urea: Urea is imported on Government account, through canalizing agencies
viz. Metal and Minerals Trading Corporation of India (MMTC), State Trading Corporation (STC)
and Indian Potash Ltd (IPL), to meet the gap between demand and indigenous availability.
SKP Securities Ltd www.skpmoneywise.com Page 9 of 26
Non-payment of additional fixed cost of urea: The Government continued to defer the
implementation of the policy notified on 2nd April, 2014 known as Modified NPS-III. The
industry continues to suffer under recovery of about Rs. 9.4 bn per annum on account of
fixed cost since 2014-15. This is one of the reasons for poor viability of Urea unit’s inspite very
high level of capacity utilization.
Reduction in energy consumption norms under NUP 2015: Major change in NUP 2015 in
comparison to NPS-III is reduction in energy norms. This has been done without providing any
window for recovery of capital expenditure required for such energy improvement.
Government has effectively mopped up the energy efficiency achieved in last several years
while fixing energy consumption norms for 2015-16 to 2017-18. Further drastic reduction in
energy norms have been proposed for the period 2018-19 onwards with only 3 energy groups
of 5.5 Gcal per ton, 6.2 Gcal per ton and 6.5 Gcal per ton of urea. For achieving these norms,
major capital replacements are required. In view of scarce availability of resources under
present policy environment and short lead time, many urea units may not be able to achieve
these norms by 2018-19.
Huge dependency on imports: One of the constraints for fertilizer industry in India is raw
material availability. The feedstock for Nitrogenous (NG, Naphtha, & Fuel Oil/LSHS) phosphoric
(Rock Phosphate & Sulphur) and potashes (Rock Potash) based fertilizers are largely import
dependent. Currently, about 5mn tons of rock phosphate and 1.2mn tons of sulphur are
imported every year. Outlook: World fertilizer demand is seen as expanding moderately in 2017. Close to 100 new production
units and expansion projects are expected to come on stream in 2016 and 2017, adding 19 mn
mt nutrients in incremental capacity for primary products (ammonia, phosphoric acid and
potash). As per World Bank estimates, prices are generally expected to increase moderately
over the medium term due to expected growth in demand and higher energy costs.
On the domestic front also, fertiliser availability is likely to improve over the next two years with
new capacities getting added in Urea and Phosphatic fertilizers space. Industry channel
inventory has been brought down moderately during 2016-17 and with agrarian and GST
reforms taking shape, market is expected to grow 5%-10% in 2017-18.
Chambal Fertilizers and Chemicals Ltd.
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Company Profile
Introduction: Chambal Fertilizers and Chemicals Ltd (Chambal),promoted by the then Zuari
Industries Ltd (ZIL) of late Dr. K.K. Birla, with his long term vision of requirement of technology
and science in agriculture to fulfil India’s food security needs is currently managed
professionally under the Chairmanship of Mr Saroj Kumar Poddar. The first urea plant was
setup near village Sancoale, Goa by ZIL.
Gadepan I - First urea plant: In 1985, ZIL incorporated Aravali Fertilizers Ltd which was
renamed as Chambal, in 1989. The company commissioned its first urea plant in October 1993,
in Gadepan, Kota, Rajasthan, which started commercial production in January 1994, with an
installed capacity of 3,100 mtpd and sold under ‘Uttam Veer Urea’ brand.
Gadepan II – The second urea plant: In 1999, Chambal commissioned its second urea plant
having an installed capacity of 3,000mtpd. Gadepan II is modern plant in comparison with
Gadepan I, thus, enjoys better margins. Today, Chambal is the largest domestic private urea
manufacturer with a total installed capacity of 6,100 mtpd (~2 mn tonnes/annum).
Gadepan III – The third urea plant: Chambal is in the process of setting up its third urea plant
Gadepan III, having an installed capacity of ~4,060 mtpd, which is expected to get
commissioned by January 2019. Post commissioning of new plant, Chambal’s capacity will
enhance by 67%.It has imported the technology from Denmark, Italy, USA and Japan.
It has the presence in 11 states of central, northern, eastern and western region of India and is
the leading supplier of urea in Rajasthan and North India where it sells 80% of its produce.
SSP production: In 2012, the company commissioned its SSP plant in Gadepan, with an
installed capacity of 180,000 mtpa. As mentioned earlier, SSP market is very small and
fragmented and company also sources SSP from third party manufacturers. The company has
temporarily shut down its SSP plant in September 2017.
Trade of other agri-inputs: Chambal also trades and supplies other agri-inputs through its well
established marketing network. It imports and supplies DAP, MOP and NPK fertilizers. There
are large players in the market who manufactures and/or imports DAP. As mentioned earlier,
~50% consumption of DAP is met through imports.
The Company also deals in other agri-inputs like sulphur, micro-nutrients, crop protection,
chemicals (insecticides, herbicides and fungicides), seeds, etc. with a large portfolio of
products. It sources the products from reputed manufacturers and is known for quality products
in the market.
The insecticides market is dominated by multi-national companies (MNC’s) and the products
are either manufactured by them or they supply the basic ingredients to domestic manufactures
for production of finished products. The seeds and micro-nutrients market is fragmented with
many small manufactures.
IMACID – the first JV: The Company made first overseas joint venture (IMACID) investment in
Morocco, in 1997, with OCP and Tata Chemicals Ltd, located at Port of Jorf Lasfar. IMACID
produces sulfuric acid (with installed capacity of 3,800 mtpd) and merchant grade phosphoric
acid (with installed capacity of 1,400 mtpd).
Chambal Fertilizers and Chemicals Ltd.
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Chambal’s Fertilizer business at a glance:
Source: The Company and SKP Research
Dynamics of fertilizer business – Government regulated industry: Fertilizer business is
highly regulated by Government of India. The Government introduces various schemes, from
time to time, beneficiary of which are end farmers and fertilizer manufacturers.
Subsidy on urea – Retention pricing scheme (RPS): The Government introduced RPS in
1977 with the goals of providing urea to farmers at reasonable rate without affecting the
profitability of manufacturers. Under this scheme, Government would pay the difference
between administered price and retention price as subsidy to the industry.
Own Manufacturing
Trading
Chambal’s Fertilizer and other Agri-Input Business
Urea
SSP
Ammonia
Plant capacity
180,000 mtpa
Crop protection
Chemicals market is
dominated by MNC’s.
Chambal procures crop
protection chemicals and
seeds indigenously
Seeds & Micro nutrients
markets are fragmented
Insecticides
Fungicides
Herbicides
Plants
Gadepan I (3,100 mtpd)
Gadepan II (3,000 mtpd)
Upcoming Gadepan III (4,060
mtpd)
Revenue contribution
45%
(To total fertilizer revenue)
Revenue contribution
2%
(To total fertilizer revenue)
Internal consumption for
manufacturing urea and
external sales
Revenue contribution
1%
(To total fertilizer revenue)
Crop
Protection
Chemicals
(Revenue
contribution
3%)
MOP
DAP
NPK
Chambal imports MOP,
DAP, NPK and other
complex fertilizers from
reputed suppliers in the
international market
Seeds
(Revenue
cont. 1%)
Other
complex
fertilizers
Micro-
Nutrients
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 12 of 26
When RPS became burden on exchequer: With steep rise in outstanding subsidy (from Rs
2,660 mn in 1977-78 to Rs 94.8 bn in 2000-01) and fall in international prices of urea, the
Government had no option but to re-examine RPS.
Increase in subsidy was due to:
Rapid increase in capacity of urea on the back of favourable environment provided by
RPS. Thus, ramping up of capacity with high capacity utilization (upto 120%) resulted
in oversupply of urea in the market
Government’s inability to increase farm-gate prices in comparison to rising production
cost; and
Pass through of the burden of overcapitalization to the Government, through higher
capacity utilization
International price of urea is dependent upon imports from China and India. With both the
countries attained self-sufficiency in 1990s, the international urea price softened (International
prices were tad lower in comparison with the production cost of domestic players).
Conditions became worse with the steep price increase of crude resulting in higher outgo of
subsidy for naphtha and fuel oil based urea plants. With the above factors in play, the
Government was forced to shelve RPS in 2003.
Other Subsidy schemes: The Government has come up with other schemes such as
New Pricing Scheme (in three phases – NPS I (2003-04),NPS II (2004-06) and NPS III
(2006 onwards)
Modified NPS in 2014,
New Investment Policy in 2012, and
New Urea Policy in 2015
Shortcoming of NPS schemes: The problem with NPS was that the fertilizer companies
started bleeding due to fixed urea prices and rising cost of inputs such as natural gas and
naphtha (as much as 80% of India’s production of urea is gas-based). GoIhiked the prices of
urea by Rs 50/ton in 2012, which was the last price hike taken for urea. With this increase, urea
now cost Rs 5,360/ton, still cheaper than potash and phosphate fertilizers, which cost Rs
24,000/ton.
Thus, because of lower urea prices, farmers not only started using urea in unbalanced way but
also illegally exported it to neighbouring countries. Hence, modification was required in NPS III
so that manufacturers are allowed to hike urea prices and there can be a check on the
imbalanced use of soil nutrients resulting in reducing Government subsidy burden.
The Government formed a GoM, in Jan 2013, to look into the Modified NPS III for urea as well
as consider earlier proposals for de-regulating the sector. The constitution of the GoM comes in
the backdrop of stiff resistance by Fertiliser Ministry in raising urea prices and bringing the
sector under the nutrient based policy (NBS) like P&K fertilisers. But nothing happened, as the
political class could not take bold steps. Thus, urea is still under price control regime.
Currently, the urea subsidy is governed by NPS III, Modified NPS III, New Investment Policy,
and New Urea policy.
Subsidy on other fertilizers - NBS: Government has implemented NBS scheme for other
fertilizers w.e.f. April 1, 2010. Given below is the salient features of the scheme:
This scheme is for 22 grades of decontrolled fertilizers namely DAP, MAP, TSP, DAP
Lite, MOP, SSP, Ammonium Sulphate and 15 grades of complex fertilizers
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 13 of 26
These fertilizers are provided to the farmers at subsidized rates based on the nutrients
(N, P, K & S) contained in these fertilizers
Additional subsidy is also provided on the fertilizers fortified with secondary and
micronutrients as per the Fertilizer Control Order such as Boron and Zinc
Subsidy given to the companies is fixed annually on the basis of its nutrients content
(i.e. N, P, K & S)
Under this scheme, Maximum Retail Price (MRP) of fertilizers has been left open and
manufacturers/marketers are allowed to fix the MRP at reasonable level
Mandatory compliances for Chambal and other fertilizer players: In order to check the
prices fixed by P&K companies, the Government directed fertilizer companies, in 2011, to fix
the prices of P&K fertilizers at reasonable level under the NBS regime. In order to ensure
reasonableness of prices fixed by fertilizer companies, while announcing the NBS Policy and
rates the following clauses have been incorporated in NBS Policy applicable:
It is mandatory for all the fertilizer companies to submit, along with their claims of
subsidy, certified cost data in the prescribed format
In cases, where after scrutiny, unreasonableness of MRP is established or where
there is no correlation between the cost of production or acquisition and the MRP
printed on the bags, the subsidy may be restricted or denied even if the product is
otherwise eligible for subsidy under NBS
The companies have to continue to submit the certified cost data as per the
requirement and direction of DOF from time to time. The companies also have to
report MRPs of P&K fertilizers regularly to DOF.
The P&K companies have to print the same MRP on the bags as applicable for each
State in FMS. In other words, there should not be any difference in MRP printed on
the fertilizer bags and that reported in the FMS for a particular state
Is NBS reasonable? Under NBS policy companies are allowed to fix the MRP on their own.
The intention behind introduction of NBS was to increase competition among the fertilizer
companies to facilitate availability of diversified products in the market at reasonable prices.
However, the prices of P&K fertilizers have gone up substantially (which increased on an
average from Rs10,000/mt before the introduction of NBS to Rs25,000/mt in 2013)and doubts
have been raised about reasonableness of the prices fixed by the companies. The prices have
gone up substantially on account of
Increase in prices of raw materials/finished fertilizers in international market,
Depreciation of Indian Rupee versus US Dollar and
Larger profit margins by the companies
This has lead to lot of hue and cry from various quarters and has also lead to imbalance in use
of fertilizers, as urea was available tad cheaper.
Furthermore, the NBS, which sought to deregulate subsidy on non-urea fertilizers, was
expected to reduce the subsidy burden substantially. Total fertilizer subsidy, which was
Rs.262.22 bn in 2006-07, had increased by around three times to Rs.766.03 bn in 2008-09.The
NBS, certainly, did not lead to any decline in subsidy on fertilizer, it did lead to worsening of soil
nutrient quality, along with shortages and price increase in all three types of fertilizers, namely
nitrogenous, phosphoric and potassic (NPK).
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 14 of 26
Software and BPO business: Chambal is also involved in the business of designing,
developing, marketing and distribution of software products for mortgage lending industry, USA,
through its wholly owned subsidiary ISGN Corporation, USA.
The company was also engaged in BPO business through its downstream subsidiary ISG
Novasoft Technologies Ltd, till it was sold to Firstsource Process Management Services Ltd,
India. The transactions were completed in May 18, 2016. Accordingly, ISGN Solutions Inc, USA
and its subsidiaries, namely ISGN Fulfillment Agency LLC, USA and ISGN Fulfillment Services
Inc., USA, ceased to be the subsidiaries of Chambal.
Software business of Chambal at a glance:
Source: The Company & SKP Research; BPO: Business Process Outsource; BPM: Business Process Management
After sale and disposal of its subsidiaries as mentioned above, ISGN Corporation, USA is now a pure-play technology product company with concerted focus on sale of software products to existing and new customers. ISGN Corporation, USA registered a robust growth in its technology product business during the 15 months period ended March 31, 2017.
Continuous efforts have been made to reduce the cost of operations and modernize key software products. This has enabled ISGN Corporation to increase its revenue stream in technology product business.
ISGN Fulfillment
Agency, USA
ISGN Solutions Inc, USA
BPO/BPM Company for mortgage
industry, USA)
ISGN Fulfillment
Services, USA
ISGN Corporation entered in stock
purchase agreement for sale and
transfer of entire shareholding in its
subsidiary ISGN Solutions Inc, to
Firstsource Group for USD 12.56 mn,
USA, on January 28, 2016
ISG Novasoft Technologies Ltd has
signed an agreement for the sale of
its BPO business, to Firstsource
Process Management Services Ltd,
India, for Rs 30 mn, on January 28,
2016
Chambal
CFCL Ventures Ltd, Cayman Islands
ISGN Corporation, USA
(Designing, developing, marketing and
distribution of software products for
mortgage lending industry, USA)
ISGNovasoft Technologies Ltd
(Provides necessary support in
running software product business)
Inuva Info Management Pvt Ltd,
India
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 15 of 26
Exit from shipping business: Chambal ventured into shipping business, in 2004, by
amalgamating one of the oldest shipping companies of India - ‘India Steamship Company Ltd’,
with dual rationale of capitalizing on the growth opportunity from shipping industry along with
strong financials on one hand and providing meaningful business diversification on the other.
The company’s fleet consists of four Aframax Tankers viz., Ratna Shalini, Ratna Shruti, Ratna
Namrta and Ratna Shraddha, having combined capacity of over 400,000 DWT.
Shipping industry is inter-linked with the global economy and is complex and volatile in nature.
It is highly dependent on trade flows across the globe. Due to unfavourable outlook for global
trade and to focus on the core business of fertilizers and other agri-inputs, Chambal has sold its
shipping business, in 2017, on slump sale basis, the details of which are given below:
Source: The Company
Investment Rationale:
1. Largest private urea manufacturer with robust distribution network:
Chambal is the largest domestic private urea manufacturer, with total installed capacity of over
2 mn mtpa and market share of 6.3%.
The market structure of urea producing companies can be seen as under:
Player Ownership Feedstock Annual
capacity (mn mtpa)
Market Share @ 100% CU
IFFCO Co-
operative Natural gas 3.69 11.5%
National Fertilizers Government Natural gas 3.56 11.1%
RCF Government Natural gas 2.33 7.3%
Chambal Fertilizers Private Natural gas 2.01 6.3%
KrishakBharti Co-
operative Natural gas 1.73 5.4%
Tata Chemicals Private Natural gas 0.86 2.7%
Kribhco Fertilizers Private Natural gas 0.86 2.7%
Indo Gulf Fertilizers Private Natural gas 0.86 2.7%
Zuari Agro (Incl MCFL) Private Natural gas 0.78 2.4%
Kanpur Fertilizers & Cement Private Natural gas 0.72 2.3%
GNFC Government Natural gas 0.63 2.0%
Southern Petrochemicals Private Naphtha 0.49 1.5%
Madras Fertilizers Naphtha 0.49 1.5%
DCM Sriram Private Dual Feed –Naphtha& Natural Gas 0.38 1.2%
Other Indigenous Players 4.61 14.4%
Total Indigenous Supply 24.00 75.0%
Imports China, Iran,
Oman 8.00 25.0%
Total Demand 32.00 Source: DOF & SKP Research
Vessel Delivery Buyer USD mnRatna Namrata 7-Sep-17 M/S Gizmo Shipping Ltd, Malta 21.5Ratna Shraddha 21-Aug-17 Sempreviva Shipping Ltd, Malta 21.5Ratna Shruti 9-Aug-17 Campanella Shipping Ltd, Malta 21.5Ratna Shalini 11-Jul-17 Rialto Navigation S.A., Liberia 24.5Total 89.0
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 16 of 26
As evident from the table above, Chambal is the 4th largest domestic player in India. The
company has been able to retain this position for many years with the help of its robust
distribution network. Chambal has a vast marketing network comprising ~11 regional offices,
~1,500 dealers and ~20,000 village level outlets, through which it caters to farmers in ~10
states in northern, central and western regions of India (sells 80% of its produce in northern
India). To broaden its product offerings, Chambal trades in P&K fertilizers, specialty fertilizers,
pesticides, seeds and micro nutrients.
2. Well timed capex to bridge structural demand supply gap:
With no new capacity addition during the last 2 decades (except revamp of few existing plants),
India is now a urea deficit market where it produces ~24 mn MT against demand of ~32 mn MT.
With a view to bridge this gap, and Government’s favourable New Investment Policy, Chambal
is setting up a 1.34 mtpa brownfield ammonia‐urea plant at Gadepan, Rajasthan (named as
Gadepan III) at a capex of USD 917 mn (~Rs 59.4 bn) of which ~USD 711 mn will be funded
through debt. The plant is expected to commission by January 2019. With this expansion the
existing capacity of Urea will increase from 2.01 mtpa to 3.35 mtpa, further strengthening
Chambal’s leadership position in the industry.
Toyo Engineering Corporation, Japan is appointed as turnkey contractor, in 2013. The project
includes the construction of a 18 MW power generation unit, 100 TPH heat recovery steam
generation unit, a processing unit, a distribution unit, packing facility, storage space, an
administrative building, access roads, the installation of rotating cycle systems, gasification
tanks, pellet cooling unit and safety systems.
Project implementation is on time, as planned. Basic engineering, design, order placement for
all materials, prilling tower shaft, control room and underground piping work are complete.
Construction activities at site on civil foundations, steel structures, equipment installation, site-
fabricated equipment, above ground piping and finishing work of building is in progress. Amount
of Rs 27.5 bn has already been spent by September 30, 2017. Progress of the plant at a
glance:
Overall Progress Engineering Procurement Construction Overall
As on Sept 30, 2017 98.9% 85.6% 35.6% 76.9%
Source: The Company
The capacity of Chambal, in FY19E, at a glance:
Plants MT Per day capacity Annual Capacity ( mn MTPA)
Gadepan I 3,100 1.02
Gadepan II 3,000 0.99
Gadepan III 4,060 1.34
Total Capacity 3.35
Source: The Company
New Investment Policy 2012 states that setting up of a new ammonia-urea plant in the
premises of the existing fertilizer plants, utilizing some of the common utilities will qualify for
being treated as an expansion project, with the condition that the investment should exceed a
minimum limit of Rs 30 bn, to be eligible. Since the capital cost of plant is more than the
required threshold, the new plant is also eligible for the subsidy programme.
Long-term gas supply contract with GAIL: Chambal has entered into a long term natural gas
purchase agreement with GAIL for supply of 24,955 bn British Thermal Units annually. The
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 17 of 26
supply of gas will commence on April 1, 2018 and will last for nine years. The gas can also be
used in existing plants Gadepan I & Gadepan II
Shortage of gas supply: The rationale of long term tie-up of natural gas can be seen from the
fact that there is acute shortage of gas in the industry. The average supply of domestic gas
came down from 25.8 mmscmd in FY16 to 21.1 mmscmd in FY17. Thus, share of domestic gas
in total gas supply for fertilisers was reduced from 58.9% to 48.0% during the period.
Natural gas is one of the key components for manufacturing Urea and comprises 95% of the
total raw material cost.
3. Favourable Government policies augers well:
Fertilizer industry is highly regulated and with an aim to boost investments, GoI has initiated
policy steps that could structurally improve the fertiliser industry’s dynamics with schemes
like gas price pooling, DBT, NPS III, Modified NPS III, New Investment Policy, and New Urea
policy. The manufacturers get subsidy based on the policies slated in these schemes.
NPS III (2006 onwards) - Salient features:
Encourages indigenous urea production: The policy seeks to encourage urea production
from the indigenous urea units beyond 100% of their installed capacity by introducing a system
of incentives for additional urea production subject to merit order procurement.
Promotes usage of natural gas: It seeks to promote the usage of natural gas, which is the
most efficient and comparatively cheaper feedstock, for production of urea. A definite time
schedule has been provided for conversion of all non-gas based urea units to gas within next
three years. In case of non-conversion, the policy dis-incentivises high cost production from
non-gas based units by restricting their subsidy to import parity price of urea, after three years.
Reimbursement of actual freight: To facilitate unhindered movement of fertilizers to far-flung
area, the reimbursement of freight is based on actual leads for rail and road movement. The rail
freight is reimbursed as per the actual expenditure and the road freight is escalated with
respect to the composite road transport index every year.
New Investment Policy 2012:
New urea investment policy 2012 governs urea producers in India for new capacities –
greenfield or brownfield. Product pricing is linked to import parity price (IPP) of urea. Salient
features of NIP 2012 is given below:
Source: Investor’s Presentation 2012 – National Fertilizers.
For greenfield/revival and brownfield projects, the new policy protects downside risk (high has
price and low IPP ratio) through implicit pass through of gas.
It also provides a moderate upside (to the extent of RoE of 20% till gas prices of US$14/mmbtu)
at high IPP and moderate to high gas prices compared to the old policy.
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 18 of 26
Modified NBS (2014):
Modified NBS scheme continued with the calculation of concession rate of urea units subject to
following changes:
Modifications Clarification
Additional fixed cost
The maximum additional fixed cost, towards increase of four
components such as salaries and wages, contract labour, selling
& distribution expenditure and repair and maintenance, of Rs
350/mt to existing urea units or actual increase in above four
components of fixed cost during the year 2012-13 compared to
the year 2002-03, whichever is lower will be paid.
Minimum fixed cost
The minimum fixed cost of Rs 2,300/mt or actual fixed cost
prevailing during 2012-13, whichever is lower, after taking in to
account the compensation of ‘Additional fixed Cost’.
Special compensation
The special compensation of Rs 150/mt will be paid to gas
based urea plants which have converted to gas and are more
than 30 years old. Old and inefficient units to be phased out in due course of time
after addition of new capacity. Source: Ministry of Chemicals & Fertilizers; only the provisions pertaining to Chambal is mentioned.
New Urea Policy for existing gas based urea manufacturing units (2015):
The policy sets the norms for energy consumption. It throws light on the gains earned by the
urea units as delta of pre-set energy norm and actual consumption of energy (on G Cal/ton
basis). The existing gas based urea units is classified in the following three groups: Group Pre-set energy norms Urea units
I 5.0 G Cal/MT – 6.0 G Cal/MT Chambal’s Gadepan I & II among other urea
units (of other companies)
II 6.0 G Cal/MT – 7.0 G Cal/MT IFFCO-Kalol, GSFC-Baroda, RCF-Thal and
GNVFC-Bharuch
III 7.0 G Cal/MT and above Zuari’s Goa unit and its subsidiary MCFL,
among other units (of other Companies).
Source: Ministry of Chemicals & Fertilizers; only the provisions pertaining to Chambal is mentioned.
As evident from the above table, Chambal falls under group I and energy norm set by the
Government, for FY18E, is 5.587 G Cal/MT and 5.533 G Cal/MT for Gadepan I and
Gadepan II respectively. Both the plants of Chambal consume less energy (5.5 G Cal/MT
and 5.4 G cal/MT for Gadepan I and Gadepan II respectively) than the above prescribed
norms. Thus Chambal enjoys energy savings in both its plants.
Other Government policies - gas price pooling:
From July 1, 2015; there is a ‘gas price pooling’ mechanism in place in India. Under this
scheme; the price of domestic natural gas is averaged or pooled with the cost of imported LNG
to create a uniform rate for fertilizer plants. All fertilizer plants in the country get the feedstock
natural gas to make urea at this uniform price.
Earlier arrangement: The gas price pooling seeks to change the industry dynamics in urea
sector by levelling gas costs for all players. Earlier, the situation was that every urea unit that
needed natural gas was making its own arrangement/contracts individually on varied costs from
different suppliers. This situation was particularly disadvantageous for the plants which had no
access to cheap domestic gas. By pooling domestic gas with imported gas, the delivered gas
cost for all units become uniform for all players who are connected to the natural gas grid.
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 19 of 26
Implications of this policy: Since price is same for input gas for all plants and the subsidy
provided by the Government is also same (MRP - Rs 5,360/ton); this policy has incentivised the
competition among the various fertilizers makers. The competition is mainly on energy
efficiency and production volume and not on price of natural gas input.
This policy allows the industry to focus on its core business of increasing urea production at
healthy energy efficiency. Their problem of dealing with the gas supply has been now left to
LNG suppliers and gas pool operator - GAIL (India) Ltd.
Fertiliser plants consume about 42.25 mmscmd of gas for manufacture of subsidised urea. Out
of this, 26.50 mmscmd comes from domestic fields and the rest 15.75 mmscmd is imported
liquefied natural gas (LNG).
Direct Benefit Transfer (DBT):
The DBT being implemented in
fertilizer subsidy payment is slightly
different from the normal DBT being
implemented in LPG subsidy in the
sense that the subsidy is released to
the fertilizer companies instead of
the beneficiaries, after the sale is
made by the retailers to the
beneficiaries.
Why subsidy was not given
directly to beneficiaries: Multiple
subsidized products such as urea
and 21 grades of phosphatic &
potassic fertilizers have different
subsidy rates. The subsidy rate in
respect of urea varies from company
to company due to different production processes, energy efficiencies of plants, vintage etc. As
the amount of subsidy, particularly in urea, is more than double the MRP, it becomes a huge
financial burden on the farmers to pay the MRP and subsidy upfront and receive the subsidy
amount subsequently.
Secondly, in many places, land is not in the name of the tiller; it is taken on lease for cultivation.
Thus, it is difficult for the Government to ensure actual subsidy went to the right person, so a
revamped version of DBT was adopted for fertilizer.
Pilot project on DBT: Currently, pilot projects are being conducted and pan-India DBT rollout
will take some time. Post DBT implementation, we believe companies across the sector are
likely to benefit in terms of better working capital cycle.
4. Sale of non-core business to turn Chambal a pure urea company
As part of long-term strategy, Chambal has divested its non-core businesses (textiles, shipping
and BPO/BPM arm of IT business solutions). These three businesses were either loss-making
or had relatively lower margins, but accounted for ~30% of the company’s capital employed.
Textiles Business: Chambal has exited from its textiles business and sold its
‘Birla Textiles Mills’ to Sutlej Textiles and Industries for Rs 23.26 bn, on slump
sale basis. The company has executed business purchase agreement on June
30, 2015.
Source: Investor Roadshow Presentation – May 2017 – Coromandel Fertilizers
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 20 of 26
Shipping Business:, Chambal has sold its shipping business, in 2017, on slump
sale basis for USD 89 mn. The Company entered into this business by acquiring
flagship Indian shipping company ‘India Steamship company ltd’.
BPO Business: Chambal has also exited from its BPO/BPM arm of its IT
business through its downstream subsidiary ISGN Corporation Inc, USA, for USD
12.56 mn. With this sale, ISGN Corporation, USA has now become a pure-play
technology product company with concerted focus on sale of software products
to existing and new customers.
The business reorganisation has enabled Chambal to focus on its core business of urea
manufacturing and trading in complex fertilisers, where it is planning an aggressive expansion.
5. Robust financials:
Consolidated topline to grow
with a CAGR of ~14% during
FY17-20E: In FY17, consolidated
revenues of Chambal witnessed a
dip of 25% to Rs 75,534.5 mn on
the back of downward trend in the
prices of imported fertilizers. The
prices of urea were in the range of
USD 185 to USD 270/mt during the
year. Prices of DAP also remained
volatile in international market.
Prices of DAP has cascaded down
to USD 315/mt in March 2017 from
USD 370/mt last year. Source: SKP Research
Volume remained more or less stable as Chambal sold 2 mnmt of urea during the year as
compared to 2.1 mnmt in FY16. Similarly, volume from SSP also remained stable at 0.14 mnmt.
We expect ~14% CAGR revenue growth during FY17-FY20E, fuelled by commissioning of
Gadepan-III (volume & value growth) and traded fertilizers. We expect the new plant to run at
the capacity utilization of ~90% during FY20E. Since, this is the most modern plant with latest
technology, gas consumption (at ~20MMBTU for the production of 1 ton urea) and conversion
cost (at USD 25 per ton of urea manufactured) will be lower vis-a-vis other two plants. Thus, the
plant will fetch better realisations and margins.Revenue bifurcation of Chambal at a glance:
Value wise Manufacturing Contribution Revenue from Traded fertilizer
Manufactured Fertilizer Sales
29
88
0.2
34
97
5.0
42
12
5.8
43
34
0.4
41
80
7.6
33
32
6.9
36
48
0.7
39
18
7.2 5
99
15
.1
0.0
10000.0
20000.0
30000.0
40000.0
50000.0
60000.0
70000.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
SSP Ammonia Urea
96% 96%95% 95% 95% 94% 94%
96%
3%3%
2% 2% 2%1% 1%
1%
1% 1%
3% 4% 4% 4% 4%3%
91%
92%
93%
94%
95%
96%
97%
98%
99%
100%
FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Urea Ammonia SSP
30
43
6.2
26
26
8.3
32
03
7.0
43
93
7.3
39
21
6.8
41
96
2.0
45
31
9.0
48
94
4.5
12%
-14%
22%
37%
-11%
7% 8% 8%
-20%
-10%
0%
10%
20%
30%
40%
0.0
10000.0
20000.0
30000.0
40000.0
50000.0
60000.0
FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Traded Fertilizers
% Growth
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 21 of 26
Manufacturing vs Traded fertilizer Sales Overall Consolidated Revenues
Source: SKP Research
EBIDTA margins to improve to~17% by FY20E: The EBIDTA margins of Chambal have
remained subdued since FY11. It has fallen from 16.2% in FY10 to 8.2% in FY17. We expect it
to improve to ~17% by FY20E on the back of better operating leverage in the form of lower
natural gas consumption and conversion cost.
PAT margins to improve: PAT was also at peak in FY10 at 5.3% which has fallen to 2.8% in
FY17. We expect it to remain in the vicinity of 8.4% by FY20E.
SKP Securities Ltd www.skpmoneywise.com Page 22 of 26
Key Concerns
1. Heavily dependent on Government policies:
The fertilizer business of Chambal is heavily dependent on Government policies for it success.
For instance, under NUP 2015, government has reduced energy consumption norms in
comparison to NPS III. This means efficiency of urea units consuming more energy have to be
revamped up, which requires huge capital. Government have not provided any window for
capital requirement for such revamp. Any such negative move from government may negatively
impact the profitability of the Company.
2. Delay in payment of subsidy by the Government:
As mentioned earlier, the fertiliser industry is highly regulated and dependent on the
Government policies. Subsidy from Government is a major component of revenue of the
Company. The delay in payment of subsidy by the Government of India creates stress on the
working capital and increases the finance cost of the Company. Total subsidy outstanding for
Chambal during H1FY18 is Rs 21.6 bn (including Rs 13.4 bn from urea) vis-a-vis Rs 21.2 bn in
H1FY17.
3. Demand fluctuations due to monsoon:
The end use of fertilizers is in agriculture, which is heavily dependent on monsoon, even today.
One season of bad monsoon depletes the demand of fertilizers, directly impacting topline and
margins of Chambal.
Outlook &Valuations
Chambal is the largest private urea manufacturer with robust distribution network and has planned a well time capex to bridge structural demand supply gap. It is well-placed post FY19, to reap the benefits of the reforms such as DBT of fertiliser subsidy and possible steps towards removing price regulations on urea in the long term. Its earnings and margins profile is also likely to improve substantially.
We have valued the stock at a P/E of 10x of FY20E EPS of Rs 22.8 and recommend buy on the stock with a target price if Rs 228 (~62% upside) in 18 months.
Forward looking P/E Band
Source: SKP Research Desk
0
20
40
60
80
100
120
140
160
180
Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17
Adj Close Price 4 8 12 16 20
Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 23 of 26
SKP Securities Ltd www.skpmoneywise.com Page 25 of 26
Notes:
The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg and
Thomson First Call.
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Chambal Fertilizers and Chemicals Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 26 of 26
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The views expressed in this research report accurately reflect the personal views of the analyst about the subject securities or issues, which are subject to change without prior notice and does not represent to be an authority on the subject. No part of the compensation of the research analyst was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst in this report. The research analysts, strategists, or research associates principally responsible for preparation of SKP research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
