December 14, 2018 Zuari Agro Chemicals Ltd. Integrated solution provider for farmers… CMP INR 235 Target INR 407 Result Update–Buy SKP Securities Ltd www.skpsecurities.com Page 1 of 8 Company Background Zuari Agro Chemicals Ltd. (Zuari), a part of Adventz Group of Mr. Saroj Poddar (originally promoted by Late K.K. Birla in 1967), is amongst India’s largest pure-play fertilizer companies on a consolidated basis, manufacturing Urea, DAP, NPK and other complex fertilizers. It acquired Mangalore Chemicals & Fertilisers Ltd. (MCFL) in 2015. It also owns 40% in its associate Paradeep Phosphates Ltd (PPL), Odhisa. Its eight plants are located in Goa, Maharashtra, Karnataka (MCFL) and Odhisa (PPL) with an installed capacity of ~3.5 mtpa, sold under ‘Jai Kisaan’ brand, with pan India presence. It also sells externally sourced products like DAP, SSP, MOP, specialty fertilizers, and other agri inputs like pesticides, seeds and micro-nutrients, through its extensive retail distribution network. Investment Rationale Topline to grow at a CAGR of ~16% over FY18-20E During Q2FY19, Zuari reported net sales of Rs 24.5 bn, registering a growth of 14.4% y- o-y, due to higher Urea realisations on the back of higher gas prices. Zuari sold ~0.57 mn tons of Urea during H1FY19 vis-a-vis ~0.47 mn tonnes last year. It also sold 0.65 mn tonnes, 0.68 mn tonnes and 0.23 mn tonnes of DAP, NPK and MOP respectively, during H1FY19. As prices of phosphoric acid are on the rise since January 2018, Zuari has strategically shifted its focus from DAP to production of NPK which requires less phosphoric acid. This has led to loss of market share in DAP & MOP for Zuari. Outstanding subsidy as on September 30, 2018 is Rs 33.04 bn vis-à-vis Rs 36.1 bn in March 2018. We expect revenue to grow at CAGR of ~16% in volume and value during FY18-FY20E, fuelled by higher realisations coupled with expectations of further price hike to mitigate cost push and availability of imported DAP during H2FY19 (which was not available during first half due to congestion in port and weakening of INR). Margins expected to improve with better product mix EBIDTA margins (consolidated) during Q2FY19, declined by 290 bps y-o-y at 6%, mainly on account of increase in raw material prices due to rise in phosphoric acid prices which the Company has not been able to fully pass on to its customers. Rupee depreciation has also impacted the margins. Zuari has taken price hikes five times during the year which has proven insufficient to mitigate raw material price increase (price hike of Rs 5,500 per ton in DAP) resulting in sales under-recovery of Rs 1,500- 2,000 per ton. PAT margins of the Company also declined during the quarter on the back of rise in interest cost of Rs 1,123.6 mn vis-a-vis Rs 985.9 mn last year. With the stabilization of INR and expected decrease in phosphoric acid prices we expect EBIDTA margins to improve from H2FY19 onwards to ~6.3% by FY20E. Well timed capex to improve energy consumption With an objective to reduce subsidy burden, GoI is tightening energy saving norms and has shrunk the delta of pre-set energy norm and actual consumption of energy (on Gcal/ton basis) from FY19 onwards. To meet the tightened energy saving norms, Zuari is revamping its Urea unit at an investment of Rs. 3.8 bn, at Goa, making it more energy efficient. This will improve energy consumption per tonne of Urea from 6.6 Gcal to 5.39 Gcal. The capex is expected to be met by a mix of debt and equity of 70:30 and the revamped plant is expected to be commissioned by April 2021. Zuari’s plan to increase its Urea capacity by 200,000 MTPA, has been put on hold on viability issues because of weakening of INR. Zuari is also revamping Urea unit of its subsidiary MCFL, at an estimated cost of Rs. 3.5 bn. The revamp will improve the energy consumption to 5.25 Gcal from the present 6.65-6.7 GCal. The management has delayed the capex for NPK at MCFL (Rs 6 bn), till it receives the gas pipeline. Zuari plans to raise funds by making a Rights Issue of Compulsory Convertible Debentures, not exceeding Rs 5 bn and a Foreign Currency Convertible Bonds issue or other similar securities upto Euro 32 mn, on private placement basis, which is expected to get completed by March 2019. VALUATION Amongst India’s largest pure play fertilizer manufacturers, Zuari has a strong brand recall, robust distribution network and has planned a well-timed capex to improve efficiency, productivity and energy saving. Strategic creation of a large retail network to provide integrated solutions to farmers’ needs at one place, can be a game changing value enhancer. It is well-placed to reap benefits of reforms like DBT of fertilizer subsidy, etc. Although the long term big picture is more attractive, uncertainties have been created in the near term by the recent devaluation of INR. Having significant imports, rising prices may have a bearing on demand of Zuari’s products amongst the farmers. In view of this, we have currently valued the stock at a P/E of 10x of FY20E EPS of ~Rs 41 and recommend buy on the stock with a target price of Rs 407 (~73% upside) in 15 months. Key Share Data Face Value (INR) 10.0 Equity Capital (INR Mn) 420.6 Market Cap (INR mn) 9883.6 52 Week High/Low (INR) 594/210 Avg. Daily Volume (BSE) 17,378 BSE Code 534742 NSE Code ZUARI Reuters Code ZUAR.NS Bloomberg Code ZUAC:IN Shareholding Pattern (Sept 30, 2018) 66% 9% 1% 24% Promoters DII FII Public & Others Particulars FY17 FY18 FY19E FY20E Net Sales 63,854.2 72,647.8 86,178.8 97,325.5 Growth (%) -16.1% 13.8% 18.6% 12.9% EBIDTA 4,656.6 5,351.3 5,018.5 6,154.2 PAT (438.7) 1,289.9 889.8 1,712.7 Growth (%) -64.3% -394.0% -31.0% 92.5% EPS (INR) -10.4 30.7 21.2 40.7 BVPS (INR) 397.3 351.0 365.2 397.7 Key Financials (INR mn) Particulars FY17 FY18 FY19E FY20E P/E (x) (22.5) 7.7 11.1 5.8 P/BVPS (x) 0.6 0.7 0.6 0.6 Mcap/Sales (x) 0.2 0.1 0.1 0.1 EV/EBITDA (x) 10.8 9.7 9.5 8.4 ROCE (%) 6.7% 7.8% 7.7% 9.0% ROE (%) -2.6% 8.7% 5.8% 10.2% EBIDTA Mar (%) 7.3% 7.4% 5.8% 6.3% PAT Mar (%) -0.7% 1.8% 1.0% 1.8% Debt - Equity (x) 2.5 2.9 2.5 2.6 Key Financials Ratios Source: Company, SKP Research Price Performance Zuari vs BSE Small Cap -60% -50% -40% -30% -20% -10% 0% 10% 20% 13-Dec-17 13-Mar-18 13-Jun-18 13-Sep-18 Zuari BSE SMALLCAP Analyst: Vineet Agrawal Tel No: +91-22-49226006 e-mail: [email protected]
Transcript
December 14, 2018
Zuari Agro Chemicals Ltd.
Integrated solution provider for farmers…
CMP INR 235 Target INR 407 Result Update–Buy
SKP Securities Ltd www.skpsecurities.com Page 1 of 8
Company Background
Zuari Agro Chemicals Ltd. (Zuari), a part of Adventz Group of Mr. Saroj Poddar (originally promoted by Late K.K. Birla in 1967), is amongst India’s largest pure-play fertilizer companies on a consolidated basis, manufacturing Urea, DAP, NPK and other complex fertilizers. It acquired Mangalore Chemicals & Fertilisers Ltd. (MCFL) in 2015. It also owns 40% in its associate Paradeep Phosphates Ltd (PPL), Odhisa. Its eight plants are located in Goa, Maharashtra, Karnataka (MCFL) and Odhisa (PPL) with an installed capacity of ~3.5 mtpa, sold under ‘Jai Kisaan’ brand, with pan India presence. It also sells externally sourced products like DAP, SSP, MOP, specialty fertilizers, and other agri inputs like pesticides, seeds and micro-nutrients, through its extensive retail distribution network. Investment Rationale
Topline to grow at a CAGR of ~16% over FY18-20E
During Q2FY19, Zuari reported net sales of Rs 24.5 bn, registering a growth of 14.4% y-o-y, due to higher Urea realisations on the back of higher gas prices. Zuari sold ~0.57 mn tons of Urea during H1FY19 vis-a-vis ~0.47 mn tonnes last year. It also sold 0.65 mn tonnes, 0.68 mn tonnes and 0.23 mn tonnes of DAP, NPK and MOP respectively, during H1FY19. As prices of phosphoric acid are on the rise since January 2018, Zuari has strategically shifted its focus from DAP to production of NPK which requires less phosphoric acid. This has led to loss of market share in DAP & MOP for Zuari.
Outstanding subsidy as on September 30, 2018 is Rs 33.04 bn vis-à-vis Rs 36.1 bn in March 2018.
We expect revenue to grow at CAGR of ~16% in volume and value during FY18-FY20E, fuelled by higher realisations coupled with expectations of further price hike to mitigate cost push and availability of imported DAP during H2FY19 (which was not available during first half due to congestion in port and weakening of INR).
Margins expected to improve with better product mix EBIDTA margins (consolidated) during Q2FY19, declined by 290 bps y-o-y at 6%,
mainly on account of increase in raw material prices due to rise in phosphoric acid prices which the Company has not been able to fully pass on to its customers. Rupee depreciation has also impacted the margins. Zuari has taken price hikes five times during the year which has proven insufficient to mitigate raw material price increase (price hike of Rs 5,500 per ton in DAP) resulting in sales under-recovery of Rs 1,500-2,000 per ton.
PAT margins of the Company also declined during the quarter on the back of rise in interest cost of Rs 1,123.6 mn vis-a-vis Rs 985.9 mn last year.
With the stabilization of INR and expected decrease in phosphoric acid prices we expect EBIDTA margins to improve from H2FY19 onwards to ~6.3% by FY20E.
Well timed capex to improve energy consumption With an objective to reduce subsidy burden, GoI is tightening energy saving norms and
has shrunk the delta of pre-set energy norm and actual consumption of energy (on Gcal/ton basis) from FY19 onwards. To meet the tightened energy saving norms, Zuari is revamping its Urea unit at an investment of Rs. 3.8 bn, at Goa, making it more energy efficient. This will improve energy consumption per tonne of Urea from 6.6 Gcal to 5.39 Gcal. The capex is expected to be met by a mix of debt and equity of 70:30 and the revamped plant is expected to be commissioned by April 2021. Zuari’s plan to increase its Urea capacity by 200,000 MTPA, has been put on hold on viability issues because of weakening of INR.
Zuari is also revamping Urea unit of its subsidiary MCFL, at an estimated cost of Rs. 3.5 bn. The revamp will improve the energy consumption to 5.25 Gcal from the present 6.65-6.7 GCal. The management has delayed the capex for NPK at MCFL (Rs 6 bn), till it receives the gas pipeline.
Zuari plans to raise funds by making a Rights Issue of Compulsory Convertible Debentures, not exceeding Rs 5 bn and a Foreign Currency Convertible Bonds issue or other similar securities upto Euro 32 mn, on private placement basis, which is expected to get completed by March 2019.
VALUATION Amongst India’s largest pure play fertilizer manufacturers, Zuari has a strong brand recall, robust distribution network and has planned a well-timed capex to improve efficiency, productivity and energy saving. Strategic creation of a large retail network to provide integrated solutions to farmers’ needs at one place, can be a game changing value enhancer. It is well-placed to reap benefits of reforms like DBT of fertilizer subsidy, etc. Although the long term big picture is more attractive, uncertainties have been created in the near term by the recent devaluation of INR. Having significant imports, rising prices may have a bearing on demand of Zuari’s products amongst the farmers. In view of this, we have currently valued the stock at a P/E of 10x of FY20E EPS of ~Rs 41 and recommend buy on the stock with a target price of Rs 407 (~73% upside) in 15 months.
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