Let's explore growth potential in Chambal Fertilizers & Chemicals Limited

Business and financial risk profiles should sustain in medium term due to strong market position, healthy operating efficiency, and expectation of adequate subsidy budget allocation by Indian Government. Healthy liquidity and comfortable financial risk profile should continue to support investments in long-run. Established market position and operating efficiency are expected to act as principal growth enablers.

About Chambal Fertilizers & Chemicals Limited

India needs modernized agriculture sector to ensure food security to its population. To meet food grain requirements, agricultural productivity and growth should be sustained and improved. It is important to manage fertilizers for higher food production. Chambal Fertilizers & Chemicals Limited makes up for ~15% of total Urea produced in India. Since 2+ decades, the company has contributed to food security of India with responsibility. It caters to need of farmers in 10 states in northern, eastern, central and western regions of India. The company is categorized as a lead fertiliser supplier in State of Rajasthan, Madhya Pradesh, Punjab and Haryana. It has vast marketing network. It holds highest market share among Urea manufacturers present in private sector in India. 

Growth enablers of Chambal Fertilizers & Chemicals Limited:

·        Volume growth in both segments: Total income of the company came in at INR8,675.56 crores in 2Q23, a significant jump from INR4,495.91 in 2Q22. The company’s profit was INR240.41 crores in 2Q23 in comparison to INR425.91 in 2Q22. Chambal Fertilizers & Chemicals Limited revised its TAN (Technical Ammonium Nitrate) expansion plans and it is now expected to spend INR16.45 billion (in comparison to INR11.7 billion earlier) to build 0.24 million mt (in comparison to 0.22 million mt earlier) and is expected to be commissioned over upcoming 34 months. The company is expected to ramp up their excess ammonia capacities over next 24 months to meet their ammonia requirement in TAN project. In 2Q23, the company posted strong growth in fertiliser volumes, with Urea and P&K sales volume up 10% and 28% year-over-year to 1.0 and 0.44mn mt, respectively. Its agrochemical revenues increased 61% year-over-year. The company’s EBITDA was impacted by INR2.4 billion of one-off adjustments principally because of government recognizing subsidy payable amount lower than which was specified by NBS policy on inventory as at Mar 2022. The company’s Urea facilities continue to operate at optimal levels with overall better energy efficiency. In FY22, the company’s revenue from operations came in at INR16,068.83 crores in comparison to INR12,719.01 crores in FY21. It has posted PAT number of INR1,287.12 crores in FY22.

·        Higher working capital: Higher raw material cost scenario and delay in subsidy receipts from government led to higher working capital requirement and increase in interest cost for the company. As on Sept 30, 2022, subsidy outstanding was INR79 billion, implying 190% growth year-over-year while market receivables were slow at INR2.5 billion, up 46% year-over-year. Despite subsidy receipts during 1HFY23 standing at INR79.9 billion, it was not sufficient enough to compensate higher working capital requirements. As a result, net debt saw an increase of 151% year-over-year to INR68 billion.

·        Established market position should lend support: The company is a largest private player in urea industry in India in terms of production capacity. Share of the company in total domestic urea production saw an increase to 13.4% principally due to ramp-up of Gadepan-III plant. The company has maintained its share in non-urea fertilisers segment. The company sold 0.97 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium during FY22, exhibiting a fall from 1.64 million tonne in FY21 as a result of global shortage of fertilisers due to Russia-Ukraine war. Significant market share in north India, stemming from strong brand (Uttam Vir) and robust distribution network, should help the company continue growth in its revenues in upcoming years. Location of plants (near end-user markets and feedstock source), large capacity and low energy consumption are some of added advantages. The company’s urea plants are close to Hazira-Bijapur-Jagdishpur gas pipeline, ensuring sufficient gas availability.

·        Operating efficiency: High operating efficiency is being supported by plants operating at over 100% of capacity, energy consumption being below prescribed norms and additional fixed cost of INR350 per tonne offered by Indian government for urea players. Excluding months where plants were not operational due to maintenance activity, Gadepan-I and -II plants operated below energy norm of 5.500 gigacalorie per tonne during FY22 and 1Q23. Gadepan-III unit consumed less than 5.00 gigacalorie per tonne, which improves operating efficiency of urea manufacturing business. The company sold 3.31 million tonne of urea and 0.97 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium in FY22. Even though uneven distribution of rainfall resulted in marginal decline in urea sales, shortage of complex fertilisers impacted sales volume in domestic market. During 1Q23, the company sold 0.81 million tonne of urea and 0.47 million tonne of DAP/muriate of potash/nitrogen phosphorus potassium.

·        Strong industry dynamics: Consumption of Urea is highest among all fertilisers in India and demand is addressed through indigenous production and imports. Urea industry is made up of manufacturers from public, co-operative and private sector. Import of Urea is done by entities nominated by Indian government. During FY22, like several other commodities, there was an increase in prices of Urea in international market. Higher prices of natural gas impacted prices of ammonia. As a result, prices of Urea were also impacted. Higher demand in few markets in world led to short term supply constraints which also led to price rally in Urea. Production cost of indigenous Urea grew because of higher prices of natural gas. However, Government of India has not increased sale price of Urea to farmers. Therefore, there was higher subsidy outgo for Indian government.

·     Future growth prospects: Strong demand of the company’s products in market and strong market collection and timely release of subsidy by Indian government should provide sound growth opportunities. It has decided to diversify its business as it plans to set up a plant for manufacture of Technical Ammonium Nitrate which should add to its revenues and profits. It will also help diversify risks and returns of the company. Stable performance of Urea business should continue to give consistency to the company, while non-urea fertilisers, crop protection chemicals and specialty plant nutrients should act as engines of growth. Expansion in new geographies and sustained focus on existing territory should allow the company to achieve sustainable growth in non-urea fertilisers, crop protection chemicals and specialty plant nutrients.

Conclusion

Additional subsidies by government over previous 2 fiscal years were mainly used for repayment of working capital borrowings, which helped in improving capital structure and debt protection metrics of Chambal Fertilizers & Chemicals Limited. Adjusted debt to adjusted net-worth saw an improvement to come at 0.75x as on Mar 31, 2021 (in comparison to 2.94x as on Mar 31, 2020). Unprecedented rise in raw material prices (especially pooled gas prices) and imported fertiliser rates mainly in 2H22 has increased dependence on subsidy receipts from Indian government. Additional subsidies of INR60,593 crore added to initial budget of INR79,530 crore announced by Indian government restricted an increase in subsidy arrears for previous fiscal.

To address continued increase in raw material and fertiliser rates, Indian government continues to extend required support of financing, through announcement of additional subsidies. Initially, a subsidy payout of INR105,222 crore was budgeted for FY23, government approved an additional payout of INR110,000 crores in May 2022. As a result, the company’s working capital position is expected to remain steady and there will not be any material built-up in subsidy receivables in FY23.

The company has no material cash outflows for investments over near term. Thus, net debt to OPBDIT ratio should remain below 1.5x in medium term.

Chambal Fertilizers & Chemicals Limited has a free float market cap of ~INR4,58,475.84 lakhs. At current market price, stock of the company trades at ~7.52x of FY22 EPS. This exhibits a deep discount to sectoral average of ~15.42x. Therefore, investors should go long. 

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