Khaitan Chemicals & Fertilizers Ltd. is India’s largest manufacturer of SSP fertilizers . It also manufacturers & sells Sulphuric acid which is a raw material for its fertilizer production. It operates six plants located mostly in Central India in the states of MP, UP, Chattisgarh, Rajasthan & Gujarat.
The Co. had a decent year 2019-20 with Sales at 437 Crs, a YOY growth of 17% with PAT of 15 Crs, a YOY growth of over 90%. Dividend has been increased from 5% to 20% . The good performance has continued in the current year as the fertilizer sector is relatively less impacted by Covid-19 since the movement & production of fertilizers have not been restricted by the Govt. Q1 Sales & PAT have come in at 129 Crs. & 6.98 Crs, showing a huge improvement over Q1 of last year at 106 Crs. & 2.35 Crs, a growth of 21% & 197% respectively. There are plenty of tail winds going for the Co. The current monsoons have being better than the 10 year average for the second year running. Besides, lower raw materials have helped improve the operating margins as can be seen in the data pertaining to the last five qtrs below. At the current run rate, the Co. could easily do Sales of about 500-550 Crs . in the current year, with PAT in the range of 30-35 Crs . The current market cap is only about 170 Crs . & looks attractively valued. The promoter holding is the maximum permissible 75% .
| (in Cr.) | Jun-20 | Mar-20 | Dec-19 | Sep-19 | Jun-19 | FY 19-20 |
|---|---|---|---|---|---|---|
| Income Statement | ||||||
| Revenue | 129.13 | 95.38 | 105.33 | 129.94 | 106.47 | 437.11 |
| Other Income | 0.14 | 0.08 | 1.70 | 0.20 | 0.28 | 2.27 |
| Total Income | 129.28 | 95.46 | 107.03 | 130.14 | 106.75 | 439.38 |
| Expenditure | -116.31 | -86.35 | -99.71 | -122.47 | -100.75 | -409.31 |
| Interest | -4.13 | -3.30 | -4.84 | -4.90 | -5.06 | -18.11 |
| PBDT | 12.97 | 9.11 | 7.31 | 7.67 | 6.00 | 30.07 |
| Depreciation | -2.06 | -1.72 | -2.28 | -2.16 | -2.35 | -8.52 |
| PBT | 10.91 | 7.39 | 5.03 | 5.50 | 3.65 | 21.56 |
| Tax | -3.94 | -1.42 | -1.91 | -1.94 | -1.31 | -6.48 |
| Net Profit | 6.98 | 5.98 | 3.12 | 3.57 | 2.35 | 15.08 |
| Equity | 9.70 | 9.70 | 9.70 | 9.70 | 9.70 | 9.70 |
| EPS | 0.72 | 0.62 | 0.32 | 0.37 | 0.24 | 1.55 |
| CEPS | 0.93 | 0.79 | 0.56 | 0.59 | 0.48 | 2.43 |
| OPM % | 10.04 | 9.55 | 6.94 | 5.90 | 5.64 | 6.88 |
| NPM % | 5.40 | 6.26 | 2.96 | 2.75 | 2.20 | 3.45 |
So what has brought about this change in fortune for the Co. & is it sustainable? The primary reason for the continued improvement in performance is due to the change in Govt policy in the distribution of subsidy. It has now kept the subsidy for the SSP sector separately within the overall Phosphates & Potassium segment. This has led to faster disbursement of subsidy & improved liquidity & made a material difference to the working of the SSP fertilizer companies.
The Govt. has further initiated the process of Direct Benefit Transfer , linked to Aadhar for payment of subsidy directly into the farmers accounts. This process should be completed sooner rather than later as is being done for various other Govt. subsidies. As & when that happens, it would be a watershed moment for the fertilizer sector as it would mean that these companies would get the full value of goods sold directly from the consumer & not wait for subsidy from the Govt. It could potentially re-rate the entire sector. The subsidy would be a matter between the Govt. & the consumer. The farmer will know the true value of what he is buying. The subsidy bill too would come down meaningfully as currently there is no incentive for manufacturers to produce efficiently & modernize their plants.
The combined production capacity of the Co. is about 11.13 Lakh MT. The production in 2019-20 has been to the tune of 4.36 lakh MT. The current capacity utilization is less than 50% leaving plenty of scope for growth with very limited future capex, if at all. The promoter Mr. Shailesh Khaitan has been judiciously building capacities over the last several years by taking over sick units & turning them around! Being the youngest of the Khaitan brothers from the family that owns Radico Khaitan , he understands the dynamics of wealth creation. The Co.’s recent decision to list on NSE could be a step in that direction.
Concerns : Fertilizers at the end of day is a commodity even though all manufacturers promote their brands. Another concern is the dependence of the sector on the vagaries of the monsoons, though for the present, agriculture is amongst the very few sectors of the economy that are doing well & is unaffected by Covid-19
Disc: Invested
