CMP- 70
Market Cap- 2944 crores
Industry Analysis
On the policy front, China reduced the export taxes for 2016 on ammonia, phosphoric acid and phosphate rock, which is likely to improve the raw material availability to India in future.
Urea is a major plant nutrient used by farming community. The demand of Urea in the country is met by domestic production and imports. Urea production in the country remained almost stagnant for many years despite steady increase in consumption.
The domestic gas is pooled with Re-gasifi ed Liquified Natural Gas to provide natural gas at uniform delivered price to all natural gas grid connected Urea manufacturing plants for the purpose of manufacturing of Urea. This pooling gave a level playing field and have augured well for the Urea Industry and enabled the Urea manufacturers to produce upto the maximum level.
No new capacities were added during last 16 years except revamp of few existing plants. This has resulted into increasing dependence on imports. India imported around 8.47 million MT of Urea during the year 2015-16, constituting about 26.50% of the total urea consumption in the country.
Around 57% of total consumption in the country of DAP is met by imports. The demand of MOP in the country is entirely met out of imports. However, demand fluctuation due to monsoon variations, volatility in the global prices of these fertilisers and variation in the foreign exchange rates are the challenges to be looked upon in this industry.
The insecticides market is dominated by MNCs and the products are either manufactured by them or they supply the basic ingredients to domestic manufactures for production of fi nished products. The seeds and micro-nutrients market is fragmented with many small manufactures. These products are sourced from domestic manufacturers with tight controls on quality parameters.
Business Analysis
The Fertiliser and other Agri-inputs Division registered an increase in the turnover mainly on account of higher sales of products like imported fertilisers and own manufactured Single Super Phosphate.
Urea – There is likelihood of capacity addition of Urea in the country after few years including from the new Urea project of the Company. The Company’s Urea Plants – Gadepan – I & II were operated efficiently during the year and has achieved best ever energy consumption. The traded products continued to make significant contribution to the bottom-line of the Company.
SSP - Company also manufactures Single Super Phosphate (SSP) at its manufacturing Unit at Gadepan with an installed capacity of 180,000 MT per annum. The SSP market is very fragmented with many small players. The Company also sourced SSP manufactured by other parties.
DAP-The Company started importing rapidly after implementation of Nutrient Based Subsidy Policy by the Government of India and supplies Di-ammonium Phosphate (DAP), Muriate of Potash (MOP) and NPK Fertilisers in its marketing territory. The Company has established reliable supply channels in the international market to source quality products. It has strengthened its marketing network to seize the opportunities available in DAP and MOP segments.
Other Agri Inputs - The Company also deals in other agri-inputs like sulphur, micro-nutrients, insecticides, herbicides, fungicides, seeds, etc. with a large portfolio of products. The Company sources the products from reputed manufacturers and is known for quality products in the market.
The Shipping Division has also registered higher turnover mainly on account of better realisations from own vessels and achieved much better performance in comparison to previous year. The Approval of the shareholders of the Company was taken during the year for sale of one or more than one or all five ships/ vessels or the entire shipping business of the Company. Profit this year was lower due to high provision of loss in Shipping division. Although, the current scenario seems to be stable, the outlook for shipping business is only seen as moderate in the mid-term and not very positive in the long term.
Expansion Plans
The commercial production of Urea from Gadepan – III Project is scheduled to start in January 2019 and till Oct ’17 it is progressing on expected lines. This project will be a stepping stone in the journey of growth of Company as there will be an increase of about 63% in the present Urea production capacity of the Company costing USD 900 million with 1.34MT capacity.
Total capacity as of now =2.14 MT
Financials
41,62,07,852 shares of Rs 10 each resulting in equity capital of 416.2 crores of share capital.
Promoters shareholding – 57.13%
Increase in salary of promoters and other KMP are in line with profits of company.
Particluars Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Trailing
Sales 2591.31 2720.13 4595.54 3574.5 4654.11 6461.65 7340.82 7981.89 8882.14 9536.3 8571.15
Expenses 2136.23 2278.4 4047.04 2938.01 3928.46 5674.26 6627.63 7367.04 8285.57 9171.77 8119.18
Net profit 151.13 203.8 230.56 249.05 325.18 247.29 305.61 303.07 236.78 86.3 75
EPS 3.63 4.90 5.54 5.98 7.8 5.94 7.34 7.32 5.72 2.1 1.80
Dividend 1.80 1.80 1.80 1.90 1.90 1.90 1.90 1.89 1.90 1.90
Subsidy pending (more than 6 months) & less than 6 months are 557 crores and 2536 crores respectively as on March 16 which when received can help it to repay debt. Interest of 146 crores can result in increase in Profit before Tax and Exceptional Items by 24% and PAT by 50% or around Rs 3.5 per share.
Exceptional Items - During the year under review, the Company has made a provision of Rs. 296.19 Crore on account of impairment in the value of its investment in CFCL Technologies Limited, Cayman Islands, a subsidiary of the Company.
Also Company has made a provision for impairment loss of Rs. 111.99 Crore as a result of sale transaction of the vessel - Ratna Puja. In view of this, the Profit after Tax during the year under review was much lower in comparison to the previous year.
In Q2 FY17 ,EBITDA margin has improved from 9.2% to 12.47% y-o-y. Also shipping EBITDA has increased but this segment is on closing down process gradually reflected in decline in revenues.
Segmental Breakup
(In crores) H1 FY17
Fertiliser & Other Agri Inputs Shipping
Revenue 3959.68 180.56
EBITDA 493.8 63.27
Also loan increased due to new project of urea plant being in process and still non receipt of subsidy leading to increase in WC loan.
The employee strength of Fertilisers and other Agri-inputs Division was 917 as on March 31, 2016.
Investment Thesis
If India’s GDP increases ,it need to be backed by agriculture as we are still an agrarian economy and productivity is one of the lowest in agriculture industry in India.
**Fertiliser Industry - Less quality competition due to unattractive for private companies as more regulated, rain dependent and government interference becoming key characteristics for industry. **
But structural changes happening in industry now with new govt. having increased focus on agriculture, more awareness of farmers and advancement in technology, increasing yield production have become first priority which will help fertilisers companies to lead front ended.
Good monsoon this year had added to advantage as it will help in bringing revenue growth by more demand of fertilisers and other crop solutions as it is rightly positioned to take advantage of favorable external demand.
Also efficiency of retail outlets is being increased which results in increasing contribution of non fertilisers segment to both revenue and margins.
Direct benefit transfer and recent demonetization which is making farmers to go digital will help it to receive whole amount at a go and also hassle free payment . Govt. is to start pilot testing in fertilisers for DBT now in some identified districts in which as soon as farmer purchases fertiliser bag , he should identify himself through Aadhar card and then his fertiliser requirement would be displayed (not mandatory to follow) and then subsidy would be deposited in manufacturers bank account on real time basis (currently on weekly basis).
Also on corporate governance front, no negative points have been found out. In fact some of positives are company started giving investor presentation.
Also it is expected that subsidy clearance would be more fast now and also reduced which will help in reducing working capital requirements and debt of this company boosting company ROCE and ROE.
Valuation – On conservative side (no growth situation)
Sales =2*H1 17 i.e. 8168 crores(taking total shipping revenues to be 250 crores)
EPS = 2*H1 17 i.e. 12
Interest cost = 7 if annualised from half year
**So, if half loan (which could be done by receiving subsidy arrears of earlier years) is paid EPS for FY17 =12+3=15, so at CMP we are getting it a P/E of 15. **
In FY16 ,we saw very less profit due to various discontinuing operations and exceptional items , if even we take closure or some more exceptional items in shipping segment ,EPS still should come near to 8-10 and adding interest will still give stock available at 5-7 PE.
Competitive Advantage – Switching costs to some extent as farmers would be reluctant to change their buying point due to fear of quality change which could damage crop. Relationship building with farmers.
Geographical reach making them diversified and sustain weaker demand in some areas.
Risks and Concerns
The Fertiliser Industry is highly dependent on the Government policies and changes in such policies may sometimes adversely affect the Company. The subsidy is major component of revenue of the Company and delay in payment of subsidy by the Government creates stress on the working capital and increases the finance cost of the Company.
During last few years, the Government has resorted to under-provisioning of fertilizer subsidy in the union budget. The subsidy provision lasts only for first few months of the Financial Year and the fertiliser companies have to wait for long for release of subsidy thereafter. This is a concern area which is adversely affecting the bottom-line of the fertiliser companies.
The variations in demand of DAP and MOP due to change in monsoon patterns, volatility in foreign exchange rates and prices of the products in international markets and interest burden due to delay in payment of subsidy may impact the profitability of the Company.
Disclosure - Added a tracking positon recently and tracking whole sector including peers like Coromandel, GSFC etc. Would request other Vp members to give their feedback.