Chambal Fertilisers & Chemicals Ltd - GEPL Capital

Q3FY12 – Tread with caution, tax regime change to drag margins for a while

Chambal Fertilisers reported a 32% rise in net sales for Q3FY12 at Rs.17,966 mn against Rs.13,581 in Q3FY11 due to stellar performance of its manufactured and traded fertiliser business. The shipping division, though loss making in this quarter registered a 47% Y-o-Y growth in top line.

EBITDA declines by 11% from Rs.2,293 mn in Q3FY11 to Rs.2,051 mn in Q3FY12 owing to a steep increase in raw material cost and other expenditure. Consequently, EBITDA margins declined to 11% in Q3FY12 from 17% in Q3FY11.

The company reported a net loss of Rs.12 mn in Q3FY12 against a profit of Rs.1,074 mn in Q3FY11. This was due to exceptional deferred tax of Rs.9,293 mn which arose due to company policy of changing from tonnage-tax regime for its shipping business to a normal tax regime. Excluding the effect of regime change, the net profit for the quarter would have been Rs.917 mn, a decline of 15%. This decline can be attributed to the 79% decline in profits of the textile division.

Result Highlights

Fertiliser business continues to remain strong

Manufactured fertiliser segment reported an 18% Y-o-Y growth in topline; however, it reported reduction of 11% Y-o-Y at EBITDA level due to higher raw material costs. Traded fertilisers reported a huge 58% Y-o-Y increase. Company expects demand for urea to remain stable as farmers are increasingly moving from Diammonium Phosphate (DAP) and Muriate of Potash (MoP) to urea owing to steep rise in cost of phosphatic fertilizers.

Shipping and textile divisions continue to suffer losses

Both divisions reported losses owing to adverse business environments. However, the management stated that shipping showed slightly better rates at the end of the quarter. The company is looking at entering into contracts with big global players; however, there is no clarity on the matter as yet.

Change of regime could be an indication of worse times for the shipping business

The company has decided to move from a tonnage tax regime to regular tax regime. This would make it liable to pay taxes only on the profits it makes. Management stated that this was as per permitted laws and the new regime would stay this way for the next 10 years. However, all this points to the fact that Chambal foresees shipping business to remain under pressure going ahead.

Valuation & Viewpoint

At the CMP of Rs.77, Chambal is trading at 9x its FY13E consensus estimated earnings. Since the stock has corrected by about 13% in the past 3 months, it appears to be at attractive valuations. However, outlook on the shipping business looks quite negative. Chambal could benefit from higher than cut off production of urea. The new urea policy could also have a positive impact on the company. Hence, we maintain that though near term concerns could linger for a couple of quarters, the company could generate good value for investors with a long term outlook.

Source : Equity Bulls

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