Liberty Phosphate The Journey has Just Begun

Stock Opportunities
21

Excerpt from HDFC Securities Report

Concerns

â Approximately 50% of rock phosphate requirement for production of SSP is imported. Global rock phosphate prices increased by~27% in FY12 from $160.4/MT to Rs. 204.87/MT. While raw material prices have stabilized a little now, and LPL was able to passon most raw material price hikes forward, fluctuating prices remain a concern. Raw material expense for LPL increasedsignificantly in FY12 reflecting the high global raw material prices.

â Import of rock phosphate exposes LPL to forex risk. The company reported a Rs. 1.8 cr forex profit in Q4FY12 due to its hedgingstrategies. However, in FY12, forex loss was Rs. 3.7 cr. LPL has negligible earnings in forex and high expenses in forex resultingin a large exposure to global currencies (largely the USD).

â Agricultural productivity could be a concern as a poor crop could leave little income in the hands of the farmer who in turn wouldnot want to buy expensive fertilizers.

â Urea prices are still cheaper than those of SSP. While the government has been discussing the feasibility of applying the NBS tourea as well, it has been unable to make any substantial move in the direction. Decontrolling urea prices will be very beneficial toSSP manufacturers, as Urea prices will increase, reducing its cost attractiveness.

â The fertilizer industry is always prone to government intervention since farmers are the end users. Any unfavorable interventioncould wipe out profits.

â With a lot of new large players having plans to set up SSP units and existing companies in expansion mode, there could be anoversupply situation in the industry over the next few years leading to a drop in profitability over the medium term.

Earnings Scenarios

Assuming a ~30% increase in revenue in FY13 from increased utilization and added capacities, we believe the net margins can varybetween 6.5% (in a worst case scenario due to increased raw material prices, low subsidy and inability to forward to cost to thecustomer) and 10.5% (in a best case scenario due to low raw material prices and high finished goods prices â and anyway lower than10.6% earned in FY12). A brief scenario analysis is shown below:

Scenario Worst Average Best

PAT 39.9 52.2 64.5

NPM (%) 6.5 8.5 10.5

EPS 27.7 36.2 44.7

P/E 2.8 2.2 1.8

It is evident from the scenario analysis that even in the worst-case scenario LPL is still trading below 3x FY13 (E) earnings. Downwardvolatility in margins and earnings could have a negative psychological impact on investors however, from a price perspective LPL istrading at a very low valuation. And if dividend payout is raised sharply (normally decided in early August every year) then reratingprocess could gather momentum.

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I think most issues are covered in a way in these reports…and Liberty Phosphates comes away looking a favourable bet for FY13 - odds seem to be stacked in favour.

The only thing remaining is a proper peer comparison of Production/Growth/Valuations among Peers - that will nail the case for LPL.

The other thing I would like to do, asap - is a proper scan on Govt. Policy on SSP Subsidy vs other fertilisers… That can change the equations drastically.

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Donald,

You will be surprised…someone has done as complete a job on Liberty Phosphates as can be:). You must identify and invite this blogger to ValuePickr…just have a look…

Liberty Phosphate - Buy - Initiating coverage

Some excerpts:

India SSP Single Super Phosphate Fertilizers Macro

  • Liberty is one of the top 3 SSP Single Super Phosphate Fertilizers in India. ( other two are Rama Phosphates & Khaitan Chemical & Fertilizers)

  • New subsidy scheme by govt. NBS led to a turnaround in SSP.

  • Price wise -SSP is very competitivevs Rs 6 per Kg vs cheapest ( and most subsidized) Urea price of ~ 5 per Kg.

  • SSP has the lowest govt. subsidyper MT of Rs 3,673 per MT = 67% lower vs average subsidy for other fertilizers of Rs 11,300 per MT.Latest subsidy list for FY13 here ( SSP in row no. 7)

  • India Govt. is reeling under subsidies and wants to discourage over-usage of Urea.Any hike in Urea will benefit SSP.

  • In latestbudget ,in Mar 2012, FM also clearly says govt. will encourage use of SSP.Summary news here

  • SSP fertilizer use is 5% of total vs >50% of Urea but SSP usage is growing at a very fast pace.

  • Leading players such as Tata Chemicals,Coromandel are also entering SSP space.

  • Due to increase in imported inputs costs,other fertilizers prices have gone up by 2x-3x leading to difficulty for farmers and thus benefiting relatively cheaper SSP.News hereand hereDifficulty faced by farmers

  • Robust Demand for SSP is evident by recent fertilizer consumption report by Prabhudas Lilladher for the periodApr11-Feb12:- Overall fertilizer sales volume has shown growth of mere 0.3% YoY due to (- 8.7%) YoY decline in non-urea fertilizers volume excluding SSP. Urea grew by +4% YoY,SSP grew up +37% YoY.PL Report

  • HDFC Sec also has aSSP macro update. (Opens in pdf )
    Risk factors

  • This sector has government / regulation risk.So one has to be careful

  • Due to rising subsidy pressure,govt has reduced subsidy from this year FY13 by 31% for SSP. This is negative as then the only way to maintain margins would be to increase the price. ( But given the next expensive fertilizer is DAP that is already highly priced at Rs 19 per Kg vs ~5 for Urea and ~6 for SSP, it seems SSP has a good chance to grab market share from DAP)

  • A further worse scenario could also happen - that is alongwith reduced subsidy, input prices go up.( as of now this seems less likely as commodities are falling)

  • Lots of big players entering this SSP fertilizer segment - which might lead to lower margins

  • Since subsidy from next quarter is going to be 31% lower, good Q4 FY12 results - could also have resulted from some channel push factor that could have pulled forward the future demand. ( As of now other SSP peers Rama Phosphates & Khaitan haven’t declared their results)

  • Forex - Most SSP use forex to import raw material rock phosphate and they have neg. exports so a falling rupee will affect margins negatively.

  • So starting from Q1 FY13 - will be the true test to see to what extent margins would be hurt. And stock prices might remain muted till market sees evidence of results under the new reduced subsidy regime.

Valuation Rationale

  • Comparison of Liberty Phosphate with peers such as Tata Chemicals,Rallis India,Coromandel International,Chambal Fertilizers & Khaitan Chemical & Fertilizers
  • Have compared recent EBITDA growth for FY12 ( where FY12 where not avail. have taken 9 months FY12 vs 9mFY11).One can cleary see in the Table comparison below - row 10 -Liberty Phosphate has shown the highest EBITDA growthbut trading at lowest valuations.
  • At cmp of 77 ,Liberty Phosphate is trading at market cap of 111 crores,FY12 PE & EV/EBITDA of 2.2x.
  • I also doubtfew companies would match Liberty `s tax rate of 32%. (I.e EPS can be booster by lower tax rate)
  • A 100% rally from these levels i.e 2x target would results in increase in Liberty Phosphate valuation to PE & EV/EBITDA of 4.4x vs peer avg. of 13x and 7.4x respectively. i.eeven after 2x rally,Liberty Phosphate would still at a big discount to peers.
  • Comparison shows that Liberty is trading at an UNJUSTIFIED ~83% discount on PE basis,~70% discount on EV/EBITDA & EV/Sales basis despite having superior fundamentals such as in line EBITDA OPM% margins ,highest RoE,highest growth numbers and lesser leverage.
  • Ultimately the bullish case comes down to a bet that SSP demand will continue to grow at rapid pace due to competitive pricing ( and hopefully with decent margins)
  • Table comparison below. ( click to zoom)
    null
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Omg! this is so cool…and completely in line with ValuePickr style ( comprehensive look, not over the top, figures and facts complete with references…macro and micro)…amazing!

Anyone knows of this good samaritan? Please invite. Will try and locate him from my end.

Now back to studying more …

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Yeah, saanpaurseedi does good work…i keep interacting with him frequently on twitter. Will invite him to valuepickr :slight_smile:

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Regarding the competitors, Khaitan Chemicals, Jubilant & Rama Phosphate are standalone major competitors but they haven’t been able to report that good a performance like Liberty. Most of them have got affected due to forex loss etc.

On the negatives:

In FY 12 results, there is some issue of subsidy on opening raw material which the GOI had reduced or something but the industry hasprotestedthe same. Most of the players have already accounting this subsidy and hence the profits are higher by 20-30%.

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Large players entering the space could indicate good times ahead:

Coromandel International, a part of the $3.8 billion-Murugappa Group, received approval to set up a green field 800 tonnes perday single super phosphate (SSP) plant including 400 tones per day granulator plant in the state of Punjab. The estimated costof the project is Rs. 116 cr.

Chambal Fertilisers & Chemicals received approval for setting up single super phosphate (SSP) plant at Dahej, Bharuch districtin Gujarat, with an annual capacity of 5 lakh MT, at a project cost of approximately Rs 122 crore. Further, the company is alsosetting up a SSP Plant at its existing factory premises at Gadepan, Kota district in Rajasthan with an annual capacity of 2 lakhMT at a project cost of approximately Rs 32.50 crore.

Rashtriya Chemicals and Fertilisers (RCF), one of the biggest public sector fertiliser companies in India, has also made a forayinto the single super phosphate (SSP) fertiliser sector. In October 2011, RCFâs CMD inaugurated a 60,000 MT SSP plant atUdaipur. As per reports, RCF plans to have a total cumulative capacity of one million tonnes of single super phosphate (SSP).

RCF is also said to be looking for joint venture partners for the same.

Besides just the fertilizer giants entering the space, Liberty Phosphate too is adding capacities. The companyâs total capacity isexpected to increase from the present 5,62,000 MT to 9,24,000 MT per annum.

The entry of leading fertilizer companies indicates good times for the industry. The plants of Coromandel and Chambal will stilltake a few quarters to be set up and the existing players could benefit significantly till then.

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Positive outlook for the fertilizer industry in the Budget for 2012-2013:

Finance Minister Pranab Mukherjee in his budget speech for FY13 made announcements that are likely to benefit fertilisers andagriculture related companies. The provision for fertiliser subsidy was reduced to Rs. 60,794 crore from Rs. 67,199 cr in FY12.

The government announced that investment -linked deduction of capital expenditure incurred is proposed to be provided at theenhanced rate of 150% as against 100% at present for fertilizer. It exempted 5% customs duty on import of equipment for initialsetting up or substantial expansion of fertilizer projects for a period of three years.

The finance minister in his speech also saidthat the focus would now be to encourage the use of SSP more because for the government that subsidy is easy to control andgood for the crops as well. Basic customs duty on a few soluble fertilizers and liquid fertilizers, other than urea, has beenreduced from 7.5% to 5% and from 5% to 2.5% respectively. Also, complete exemption from basic customs duty will be providedto new fertilizer projects, a move that will encourage new entrants and push existing players to set up new plants.

Source: HDFC- Fertilisers-SSP Report)- April 2012

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Hi guys,

I think this is a good stock to have a punt but don’t bet the house! Generally fertilizer companies tend to compete on price rather than having a strong brand as the farmers are quite price concious in most areas of India. Lot of regulatory uncertainty with respect to the government’s fertilizer policy, weakening rupee and capacity expansion by new and existing players who will most likely compete on price. If raw material prices increase I’m not sure if companies will be able to pass it on entirely and margins might take a hit.

I do not really see a sustainable competitive advantage for this company in the long run i.e. strong brands etc. I would certainly not recommend this over a 3-5 year investment horizon. Like the Saanp aur seedi analysis one should probably consider Q1 2013 results when the impact of a falling rupee, lower subsidy etc would have come in and then take a short-term position as the stock gets re-rated. Once capacity expansion comes in I would expect margin contraction for the whole industry.

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NBS FY10 FY11 FY12 Reduction %
Subsidy 16-Mar-2010 9-Mar-2011 29-Mar-2012 for FY13E
SSP 4400 4891 3673 24.90%
DAP 16268 18474 14350 22.32%
MOP 14692 14777 14400 2.55%

The 25% reduction in SSP subsidy needs to be factored in while thinking about FY13 results. and say a 10% rise in imported RM on account of forex

31

Looking good for an entry to my Short Term Portfolio. (6-9 months to a year). Need to look at Peer Comparisons more closely…the direct SSP guys…and I will take a call.

And as per SaanpaurSeedi/Subbu analysis …would look to take a fresh call post Q1 results!

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Anyone here from Udaipur or know someone who is from Udaipur? We should try to find out where the promoters live (people in Udaipur have a big tendency of spending on havelis and such) and whats their repo in the society? (quite a lot of people are crorepatis there but most are down to earth). Idea is, Udaipur is a small town and it shouldnt be difficult to find how the promoters are. I would be willing to put my money with them if there are no major red flags.

33

Almost all the aspects covered so far…I had mentioned briefly the SSP peers capacity aspect in Jubilant Ind. thread… Khiatan is the largest, while Rama is the most efficient… Liberty is the second largest player…

Govt. has shown its intent to focus on promoting domestic SSP fertilizer industry and it augurs well for the sector…Top fertiliser companies either foraying or incresing their capacities of SSP is a good signal…

However, although I have not looked at the company in much detail, still, in general sense, I believe pure SSP players will contnue to trade at lower multiples because of the huge capacities and the extent of competition in the sector…On ground use, when I had interacted with few guys while researching for Jubilant, I had found that SSP is preferred for its low cost but DAP is the most preferable fertilizer because of its efficiency…

Rgds.

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Liberty Phosphate


Q4FY12 Q3FY12 Q2FY12 Q1FY12 FY12 Q4FY11 Q3FY11 Q2FY11 Q1FY11 FY11 Growth
Sales 149.57 108.56 110.39 105.37 473.90 66.01 83.34 89.80 127.36 366.50 29.30%
PBIDT (Excl OI) 24.50 22.31 18.07 18.61 83.49 15.83 16.93 13.95 12.74 59.44 40.46%
PAT 16.69 12.57 10.68 9.95 49.89 8.81 9.96 7.72 5.94 32.44 53.80%
OPM% 16.38% 20.55% 16.37% 17.66% 17.62% 23.98% 20.31% 15.53% 10.00% 16.22%
NPM% 11.16% 11.58% 9.67% 9.44% 10.53% 13.35% 11.96% 8.60% 4.67% 8.85%

Rama Phosphate

Sales 185.00 135.58 124.74 109.45 554.77 65.42 89.13 85.66 116.78 356.98 55.40%
PBIDT (Excl OI) 9.39 15.33 18.12 19.43 62.27 3.47 10.06 14.94 16.80 45.26 37.57%
PAT 3.25 9.42 10.12 10.82 33.60 0.86 7.19 17.08 14.43 39.55 -15.05%
OPM% 5.08% 11.31% 14.53% 17.75% 11.22% 5.31% 11.28% 17.44% 14.38% 12.68%
NPM% 1.75% 6.95% 8.11% 9.88% 6.06% 1.32% 8.06% 19.94% 12.35% 11.08%

Khaitan Chemicals

Sales 189.31 165.72 182.25 107.97 645.26 139.07 96.72 99.14 122.50 457.43 41.06%
PBIDT (Excl OI) 12.54 10.34 20.98 18.60 62.47 12.83 13.95 18.51 24.20 69.49 -10.11%
PAT 2.35 1.18 9.51 8.70 21.74 2.83 5.76 8.94 13.93 31.46 -30.88%
OPM% 6.62% 6.24% 11.51% 17.23% 9.68% 9.23% 14.42% 18.67% 19.76% 15.19%
NPM% 1.24% 0.71% 5.22% 8.06% 3.37% 2.04% 5.96% 9.01% 11.37% 6.88%

Some of you may baulk at so much of data...but some interesting patterns, above!
a) some 8 qtrs back...Q1FY11, Khaitan Chemicals had the best margin profile of the 3, both OPM and NPM in double digits
b) by q4FY12, the situation has completely reversed, Khaitan Chemicals, has the worst profile, OPM and NPM in single digits....holds true for the full year FY12 as well
c) Liberty Phosphates had the worst margin profile 8 qtrs back, and has the best now in Q4 FY12 and for the full year FY12
d)Its clear Khaitan & Rama have pursued growth at a huge cost to profitability - and registered degrowth at PAT levels, Khaitan has degrowth at EBITDA levels too
e) Liberty seems to have followed a very prudent moderate growth track...and yet when it ramped up in Q4FY12, managed a very creditable 16%+ OPM. At similar sales levels the others had single digit or barely double digit OPMs
Like Ayush and others who have followed the business/peers to comment on:
a) apart from following a more prudent growth track, Liberty enjoys better RM linkages and hence lower RM costs - this can be established by more data:)
b) if that's not the case - then Liberty enjoys a better Marketing & distribution set up that is able to push Liberty brand(s) at higher margins
Or, is it a combination of both??
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a) apart from following a more prudent growth track, Liberty enjoys better RM linkages and hence lower RM costs - this can be established by more data:))

b) if that’s not the case - then Liberty enjoys a better Marketing & distribution set up that is able to push Liberty brand(s) at higher margins

Or, is it a combination of both??

Not sure about the first aspect as haven’t studied the company in detail… however, based on the industry knowledge I have based on my other researches, (b) is highly unlikely as SSP is not a segment wherein any one company in a particular region can keep operating at higher margins as there is stiff competiton from both organised as well as unorganised segment as also from other alternative products…competition will catch up very fast in case they see any company operating at higher margins…Will be better to understand and analyse the expenditure data of each of the 3 companies in case it throws up anyspecific answer asto if any particular expenditure is missing or well controlled by liberty than peers.

Rgds.

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Bear with 1 last dose of data...


 Liberty Phosphate


Q4FY12 Q3FY12 Q2FY12 Q1FY12 FY12 Q4FY11 Q3FY11 Q2FY11 Q1FY11 FY11 Growth
Sales 149.57 108.56 110.39 105.37 473.90 66.01 83.34 89.80 127.36 366.50 29.30%
PBIDT (Excl OI) 24.50 22.31 18.07 18.61 83.49 15.83 16.93 13.95 12.74 59.44 40.46%
Raw Mtrl 89.61 67.71 59.00 49.56 265.88 33.18 47.81 49.89 45.45 176.33
Sell&Dist 22.16 9.27 14.40 11.35 57.19 8.75 6.56 9.68 12.37 37.36
PAT 16.69 12.57 10.68 9.95 49.89 8.81 9.96 7.72 5.94 32.44 53.80%
OPM% 16.38% 20.55% 16.37% 17.66% 17.62% 23.98% 20.31% 15.53% 10.00% 16.22%
NPM% 11.16% 11.58% 9.67% 9.44% 10.53% 13.35% 11.96% 8.60% 4.67% 8.85%
RM/Sales 59.91% 62.37% 53.45% 47.04% 56.11% 50.27% 57.37% 55.56% 35.69% 48.11%
Sell&D/Sales 14.81% 8.54% 13.05% 10.77% 12.07% 13.25% 7.88% 10.78% 9.71% 10.19%

Rama Phosphate

Sales 185.00 135.58 124.74 109.45 554.77 65.42 89.13 85.66 116.78 356.98 55.40%
PBIDT (Excl OI) 9.39 15.33 18.12 19.43 62.27 3.47 10.06 14.94 16.80 45.26 37.57%
Raw Mtrl 131.53 113.69 66.81 54.83 366.85 61.12 75.60 43.79 55.42 235.93
Sell&Dist 12.98 8.89 7.22 9.01 38.10 7.30 6.89 6.38 7.33 27.89
PAT 3.25 9.42 10.12 10.82 33.60 0.86 7.19 17.08 14.43 39.55 -15.05%
OPM% 5.08% 11.31% 14.53% 17.75% 11.22% 5.31% 11.28% 17.44% 14.38% 12.68%
NPM% 1.75% 6.95% 8.11% 9.88% 6.06% 1.32% 8.06% 19.94% 12.35% 11.08%
RM/Sales 71.10% 83.85% 53.56% 50.09% 66.13% 93.43% 84.83% 51.12% 47.46% 66.09%
Sell&D/Sales 7.02% 6.55% 5.79% 8.23% 6.87% 11.16% 7.73% 7.44% 6.28% 7.81%

Khaitan Chemicals

Sales 189.31 165.72 182.25 107.97 645.26 139.07 96.72 99.14 122.50 457.43 41.06%
PBIDT (Excl OI) 12.54 10.34 20.98 18.60 62.47 12.83 13.95 18.51 24.20 69.49 -10.11%
Raw Mtrl 138.88 158.25 87.84 68.89 453.86 108.64 91.28 70.90 45.58 316.40
Transport 9.18 7.96 11.42 7.06 35.62 7.22 5.01 6.53 5.00 23.76
PAT 2.35 1.18 9.51 8.70 21.74 2.83 5.76 8.94 13.93 31.46 -30.88%
OPM% 6.62% 6.24% 11.51% 17.23% 9.68% 9.23% 14.42% 18.67% 19.76% 15.19%
NPM% 1.24% 0.71% 5.22% 8.06% 3.37% 2.04% 5.96% 9.01% 11.37% 6.88%
RM/Sales 73.36% 95.49% 48.20% 63.80% 70.34% 78.12% 94.38% 71.52% 37.20% 69.17%
Transport/Sales 4.85% 4.81% 6.27% 6.54% 5.52% 5.19% 5.18% 6.59% 4.08% 5.19%

Check the RM/Sales rows. Its evident that Liberty Phosphates (56% of Sales) enjoys a tremendous advantage over immediate competitors Rama Phosphates (66%) and Khaitan Chemicals (70%).

That's a whopping 10% differential.And can only be attributed to long-term raw material tie-ups with suppliers (domestic & abroad). This also allows them to spend more on selling and distribution overheads - a clear 5% higher spend!

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That Liberty Phosphates had better RM linkages - found mention in one of the reports, in discussions above.

Now for the million dollar question:

Why does a company with the highest growth and profitability record (and expansions underway) with the best margins, with some seemingly competitive advantage - not even command the valuation its lesser peers get? The promoters have also been buying consistently - not seen in case of the other two. It looks like its good for 2 years, at the least!

Big expansions by new competitors are in the offing yes, but atleast 1-1.5 years away; they will also be subject to the same RM issues, most probably!!

Just what is the overhang on the stock??

Can the skeptics take over, please?? There must be some reason!??

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Donald, some points I could come out with

1.)

Check out:

http://www.watchoutinvestors.com/search_new.asp

there have been several instances of Debt recovery cases against the promoters, RR Dhanani and YR Dhanani. Also there are several other Fertilizer companies mentioned there, including Liberty fertilizers which is a subsidiary of Liberty Phosphate. So history does not seem to be good. Also consider the high current debt levels.

2.)

Last year they have sought permission from shareholders for diversification into unrelated activities. What could be the motivation for that?

The promoters seem to be trading in the shares as historically their stake has been varying. increasing and reducing more or less in correlation with the net profits.

Also why do we see pledged shares when they are able to raise the stake. Is pledging done only for the purpose of increasing stake?

The share capital includes 5 cr of preference shares (8% cumulative) and also considering the debt, the P/E multiple would be actually much more 2 times as it seems.

There is risk ofdilution of equity as the authorised capital has beenincreased in the previous financial year as per AR 2011.

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Hi Akbar,

Thanks for bringing out the concerning points. I did a search on the above website and came across one case in the name of Liberty Fertilizer in the year 2004 for about 6 Cr. The rest of the cases in individual name seem to be clubbed cases for the recovery purpose and a fresh case in 2005 towards default on somestatuarydues.

Yes, this is concerning. At the same time, we should also see that the industry has turned around only over last 3 years due to the new GOI subsidy policy. Before this the financials were nothing to talk about.

Will try digging out more.

Thanks & Regards,

Ayush

40

Thanks Akbar,

Indeed a few points to think about.

1). I too looked at the defaults and find almost all are the clubbed debt recovery proceedings including the one against Liberty Phosphates implicating the promoters. I tend to agree with Ayush’s observation here.

2). Noticed the promoter shareholding fluctuation in FY11. From 3q to 4Q fy11 promoter holding had fallen from 49% to 47% but they were quick to increase in Q1 FY12 and ever since they have been consistently upping the stakes… going upto 52% IN Q4 FY12. additionally the Pledged shares at 4.85% …has remained constant. Have you noticed any other variations in shareholding in the last few years?

3). Agree on rising debt. from the 45% rise in interest costs, assume Debt position would be ~100-110 Crs.Interestingly the Q$ results do not include BS details, why?

4). Can you elaborate on your point 4 -to get an actual feel?

Thanks lets check for more.

-Donald