During Q1FY13, Chambal Fertilisers (Chambal) posted an adjusted PAT of Rs795mn, ahead of their expectation, owing to higher‐than‐expected revenue. Despite a lower volume of urea and traded fertilisers, revenue and profit growth were strong because of a robust growth in non‐fertiliser trading, high trading margins and higher than expected realizations from urea. However, the persistent uncertainty over urea policies and lack of growth drivers in the short term coupled with a drag from non‐core businesses are likely to act as an overhang on the stock. Maintain ‘HOLD’.

Urea, traded goods lift profits; shipping drags

Chambal’s revenue grew 18.4% YoY (ahead of estimate) on account of IPP linked benefit for the urea manufactured from the de‐bottlenecked capacity during Q4FY12 and a strong growth in non‐fertiliser products trading. Management guided that ~Rs400mn benefit was realized during Q1FY13 owing to the IPP linked benefit. On the other hand, despite a 25% decline in traded fertiliser volume, firm growth in other traded products resulted in traded goods’ revenue growth of 4.7% YoY and PBIT margin increment of 410 bps to 13.9%. Shipping, however, continues to post weak performance.

Key highlights

- Management guided for de‐risking their business by substantially hiking its traded products, including a whole host of agri‐inputs (DAP, MOP, SSP, pesticides, seeds, zinc, micronutrients, bentonite sulphur etc), over the next few quarters.

- Chambal management expects the new investment policy for urea to be finalized by the government over the next 1‐2 months post which, Chambal would pursue its proposed Rs40bn brownfield urea project.

Outlook and valuations: Uncertain policies linger; ‘HOLD’

Among the non‐core businesses, while textile segment improves, software and shipping are likely to be drag on Chambal’s profitability for some more time. On the other hand, both the policies ‐ the urea pricing policy and the new investment policy for urea – are yet to be finalized by the government. Owing to policy uncertainty and overhang of the non‐core businesses, Edelweiss continues with their ‘HOLD’ recommendation with target price of Rs81 based on DCF. The stock is currently trading at 9.6x and 8.5x consolidated P/E of FY13E and FY14E, respectively.