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Chambal Fertiliser + Coromandel Fertilisers Coverage

April 19, 2008

Fertiliser stocks have been in the news for a while. Much of this has to do with hardening global food grain and fertilizer prices, which have brought the spotlight on Indian fertiliser stocks.Fertiliser consumption to grow at 4% CAGR FY 07 – 12E. Growing at 4% p.a. Low capacity additions expected to lead to a deficit of 5~6 mtpa till FY11E. Firming international prices of fertilizers, making imports an expensive proposition. Positive view on select commodities like Soda ash & Acetic Acid.

Chambal Fertilizers: CFCL has been operating at over 100% capacity for last 4 years. We expect the capacity utilisation to marginally improve and production to compound 2% during FY07-FY10E.CFCL has the capacity to produce about 1.73 mmt of Urea, which through debottlenecking is expected to go up to 2.2 mmt by FY10, at a marginal capex of about Rs 8 ~10 bn.

CFCL had diversified into many a business including food processing, seeds, shipping, textile and technology. The divesting of its interest in seeds and food processing business during FY07-08 at a marginal profit, hints at getting out of non-core/ not so profit making segments. Expect the topline to compound 7.5%, while the earnings to compound 26.3% during FY07-10E. The trading at more than double the valuations of GSFC & GNFC at 17.5x FY09E and 14.5x FY10E PER.

HDFC has set a base case target price of Rs 68 and bull case target price of Rs 79 with a OUTPERFORM Rating

Coromandel Fertilisers:Coromandal Fertilisers Ltd (CFL) is a part of US $2 bn Murugappa Group. It is a leading producer of complex fertilizers & derives nearly 10% of its turnover from Pesticides.

CFL’s gradual buy out of Godavari Fertilisers and Chemicals (GFCL) during FY05-08 for a consideration of cash and equity seems an excellent decision. We estimate the entire buy out to have cost about Rs 3.4 bn, which is about 42% cheaper than IFFCO’s buyout of Oswal chemicals in Sep’05. The ability of the management to turnaround GFCL from a loss of Rs 136 Mn in FY03 to a profit of Rs 393 Mn in FY07 is a point in case.

CFL has shown the ability to weather adverse business cycles in the past and has made strategic moves to secure future earnings and growth. At the CMP of Rs 122, the stock trades at 5.8x & 5.2x it’s FY09E & FY10E expected earnings. HDFC upgrades recommendation to BUY from Outperformer with a price target of Rs 171 on expectations of EPS of Rs21 for FY2009

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