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Coverage on Indian Fertilizer Stocks

March 12, 2010

Indian Fertilizer sector stocks have recovered due to the allocation of natural gas, which has reduced cost and increased utilization levels of fertilizer plants. Many of these plants ran on expensive naphtha or FO / LSHS feedstock. Closed units are also likely to open due to this cost reduction. The consumption of fertilizers in India is expected to grow by 4% CAGR till FY12. Urea is expected to witness a supply deficit of 5.4mmtpa by FY12. Phosphatic and potash fertilizers also remain matters of concern due to the lack of indigenous raw materials.

De-regulation of Fertilizer Prices – While Urea was under mandatory pricing control under the New Pricing Scheme, Stage-III, the government recommended an MRP for DAP, MOP, MAP, TSP, SSP, Ammonium Sulphate and 11 other complex fertilizers under the Concession Scheme. With this background, here is coverage on India’s Best Fertilizer Stocks

Chambal Fertilizers & Chemicals:Chambal Fertilizers & Chemicals Ltd (Cfcl) is the largest private player in urea. The recent hike of 10% in urea retail price will reduce the subsidy burden of the company. Deregulation of DAP and MOP will also improve margins further. CFCL has diversified into shipping and textiles. Both contribute ~15% of the standalone revenues and are expected to improve margins as shipping rates improve. It has five Aframax tankers with a total capacity of 5,00,000DWT. Chambal is expected to report an EPS of Rs 8.21 for FY 10 and Rs 8.5 for FY 11 respectively. HDFC Institutional Research has a BUY recommendation with a target price of Rs 82.

Zuari Industries: It is a major player in phosphatic fertilizers, is expected to gain from the nutrient based subsidy regime going forward. ZIL sold 0.33mmt of MOP and 0.25mmt of DAP in FY09. It is a significant player in urea with a reassessed capacity of 0.4mmtpa. Through its subsidiaries and JVs, ZIL is also diversified into furniture, real estate, cement, terminalling services of petroleum products and EPC. Through its 50:50 JV with Maroc Phosphore S.A., Morocco, it holds 40% stake in Paradeep Phosphates Ltd (PPL).

The stock is currently trading at 0.9x, 5.4x and 5.1x its one year forward P/BV, P/E and EV/EBITDA respectively. The company has been trading at an average one year forward EV/EBITDA of 5x since 2006 post implementation of NPS Stage-III. HDFC Research Values the stock using the same average multiple 5x and the average EBITDA of FY11E and FY12E to arrive at 12m target price at Rs805/share.

Deepak Fertilizers & Petrochemicals Corp Ltd (DFPCL) is one of the largest manufacturers of industrial chemicals in the nation. With expansion of TAN capacity and possible forays into new business segments (ammonia derivates, mining consultancy, micronutrients), the company presents an exciting future going forward. However, concerns continue over highly volatile raw material prices and low import prices due to subsidized natural gas offered to international players, especially from the Middle East.

The company is expected to report an EPS of Rs 15 and Rs 12 for FY 10 and FY 11 respectively. Investors may consider switching to Zuari Industries which offers upside potential.

Coromandel Fertilizers / International belongs to the Murugappa Group and is a subsidiary of E.I.D. Parry (India), which holds 62.87% equity. The company has 8 manufacturing plants in Andhra Pradesh, Tamil Nadu, Maharashtra, Gujarat and Jammu & Kashmir. It is primarily into fertilizers, pesticides and specialty chemicals. CIL has a capacity of 2.31mmtpa of ammonium phosphatic fertilizers, 0.815mmtpa of DAP and 0.132mmtpa of SSP. It has also set up rural retail stores across Andhra Pradesh. CIL is also setting up a JV, TIFERT, in Tunisia for manufacturing phosphoric acid. The plant is expected to be commissioned by 2011. CIL’s pesticide business grew by 23% in FY09 to Rs3bn.

CIL is expected to report an EPS of Rs 33 and Rs 36 for FY10 and FY 11 respectively. On the basis of fundamentals, the stock appears to be fully valued. HDFC has a HOLD recommendation on the stock.

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