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Fertiliser Sector Update Sector Update Q2FY12 performance remains encouraging ¾ Q2FY12 results for agri-inputs universe (ex Tata Chemicals, October 25, 2011 results pending) has been encouraging with revenues and Company Reco CMP TP APAT above our est by 10% and 14%, respectively Chambal Accu 88 98 ¾ Companies’ fertiliser division performance has been Coromandel Buy 333 435 encouraging due to sharp increase in fertiliser prices despite Deepak Buy 165 250 140bps yoy / 80bps qoq decline in EBIT margins to 11.7% GNFC Buy 91 135 ¾ Chemical segment margins also remain robust with EBIT GSFC Buy 461 530 margins at 30% (+20bps yoy / 150 bps qoq) Rallis Buy 160 197 UPL Buy 142 215 ¾ Post the results we have upgraded earnings for DFPCL while Rallis has seen downgrade. Chambal (upgrade) has been Tata Chem Accu 312 400 adjusted for withdrawal of its shipping demerger Source: Capitaline, Emkay Research ¾ Managements outlook on agri business (fertilisers and agrochemicals) remain positive on account of encouraging outlook for Rabi crop and strong farm produce prices ¾ We expect that while rising input cost may put pressure on chemical segment margins in subsequent quarters global slowdown may also hurt demand ¾ Raw material availability for complex fertiliser remain our key concern while any further price increase in complex fertiliser prices may hamper fertiliser demand ¾ UPL and DFPCL are our top pick post the results along with GSFC (BUY on attractive valuations) and Coromandel (earnings momentum to continue) ¾ We also recommend BUY on Tata Chemicals pre results on expectation of strong Q2FY12 results Current Previous Earnings change Company CMP TP Reco Reco FY12 FY13 Chambal Fertilisers 88 98 Accumulate Buy 3% -4% Coromandel Int'l 333 435 Buy Buy NA NA Deepak Fertilisers 165 250 Buy Buy 6% 10% GNFC 91 135 Buy Buy NA NA GSFC 461 530 Buy Buy NA NA Rallis India 160 197 Buy Buy -10% -6% United Phosphorus 142 215 Buy Buy 1% 0% Tata Chemicals 312 400 Accumulate Accumulate NA NA Source: Emkay Research *Tata Chemicals will declare its results on 11th Nov, 2011 Rohan Gupta firstname.lastname@example.org +91 22 6612 1248 Balwindar Singh email@example.com +91 22 6612 1272 Emkay Global Financial Services Ltd 1 Fertiliser Sector Update Q2FY12 posted encouraging results with revenues / APAT higher by 10% / 14% from est Q2FY12 results for our universe (seven out of eight declared their Q2FY12 results) remain encouraging with revenues and PAT being 10% and 14% above our est on aggregate level (though Tata chemicals results are still awaited). Aggregate revenues increased by 14% yoy / 27% qoq. Topline surprise was mainly driven by higher than estimated fertiliser revenues. Aggregate Rs mn Q2FY12E Q2FY12A % Deviation % yoy % qoq Net sales 86069 94435 10% 14% 27% EBITDA 14498 15608 8% 12% 23% EBITDA % 16.8% 16.5% -32 -33 -56 Dep 2462 2465 0% 10% 8% Int 1615 1491 -8% 29% -10% OI 990 1113 12% -7% 13% PBT 9724 12764 31% 9% 31% APAT 8075 9174 14% 11% 34% Source: Emkay Research Higher fertiliser revenues drove topline Despite volume pressure in Q2FY12 which was mainly affected by lower trading of DAP and MOP, fertiliser revenues increased by 6% yoy and was above our estimates. Sharp increase in fertiliser prices has boosted fertiliser revenues. We will like to highlight that despite sharp increase in raw material prices, companies have been able to maintain their margins since fertiliser EBIT margins at 11.7% were down marginally by 140bps yoy / 80bps qoq. With companies’ ability to maintain margins despite sharp increase in raw material cost and currency depreciation, we believe that companies margins will remain protected under NBS. Aggregate EBITDA margins a tad lower by 30bps to 16.5% mainly due to higher fertiliser revenues Aggregate EBITDA margins at 16.5% were marginally lower by 30bps compared to our estimates mainly due to higher fertiliser revenues. Margins in fertiliser are comparatively lower than the chemicals. With sharp increase in interest rates aggregate interest cost increased by 29% yoy however it was 8% below our est while depreciation and other income did not show any significant difference from our est. Coromandel, GSFC gave positive surprises while Rallis disappointed In Q2FY12 Coromandel and GSFC posted strong results with PAT 33% and 19% above est. Coromandel results were mainly driven by higher fertiliser margins (13.8% actual vs est of 12%) while GSFC benefited from strong Caprolactam – Benzene spread resulting into EBITDA margins of 24% vs est of 19.9%. We maintain our FY12 est for both these companies (despites higher than estimated results) since we expect that benefit of higher margin for Coromandel is likely to be compensated by decline in complex fertiliser volumes while for GSFC, chemical spreads are likely to decline by Q4FY12. Rallis results disappointed on account of lower than estimated revenues and EBITDA margins and hence we have downgraded est for Rallis by 10% / 6% for FY12 / FY13. Deepak fertiliser and UPL are our top picks post the results Post the results we have upgraded our est for Deepak fertiliser by 6% / 10% for FY12 / FY13E mainly on account of strong performance of its fertiliser division. We remain positive on the stock post the results and expect company to benefit from ramp up of its TAN plant by Q4FY12. UPL management upgraded its revenues guidance for FY12 to 30-35% from previous 25- 30% on account of encouraging performance of all the territories. We have upgraded revenue est for UPL by 5% for FY12E and FY13E however have maintained earnings Emkay Research 25 October 2011 2 Fertiliser Sector Update estimate to factor some margin pressure. With strong valuations and earnings growth of 20%, we reiterate our BUY recommendation on the stock. Rs mn Revenues EBITDA EPS P/E(x) RoE (%) RoCE (%) Companies FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 Chambal Fert 51,240 51,398 8,181 8,030 9.0 8.9 9.8 9.9 20.6 17.4 14.2 13.7 Coromandel Fert 97,619 112,424 11,250 13,785 26.4 32.3 11.7 9.6 34.0 33.5 30.2 32.1 Deepak Fert 20,981 22,137 4,249 4,754 26.7 30.6 6.2 5.4 19.6 18.6 18.5 19.6 GNFC 32,425 35,825 6,217 8,269 19.3 25.7 4.8 3.6 13.1 15.4 12.8 15.7 GSFC 54,858 58,863 10,678 10,436 84.6 78.4 5.5 5.9 21.5 16.7 27.6 22.4 Rallis India 13,950 17,607 2,624 3,525 8.0 10.9 20.3 14.8 27.6 30.5 34.7 39.7 United Phosphorus 76,494 82,760 14,728 16,307 17.8 21.4 8.0 6.7 20.3 20.6 19.4 19.4 Tata Chem 110,853 115,367 21,541 22,912 32.2 36.3 9.7 8.6 12.6 12.5 15.5 16.5 Source: Emkay Research Implied growth for H2FY12 encouraging for Coromandel and Chambal Implied PAT growth for H2FY12, based on our FY12 est suggest strong growth for Coromandel at 86% yoy followed by 64% for Chambal. Though Coromandel’s growth is driven on account of low base, Chambal is likely to gain from higher IPP prices of urea in Q4FY12 results. Amongst other UPL is also likely to post 40% growth at PAT. H1 FY12 YoY Revenues EBITDA PAT Companies Chambal Fert 12% -9% -12% Coromandel Fert 9% 18% 20% Deepak Fert 37% 27% 30% GNFC 42% 145% 197% GSFC 4% 15% 24% Rallis India 29% 27% 11% United Phosphorus 33% 28% 1% Source: Emkay Research H2 FY12 YoY Revenues EBITDA PAT Companies Chambal Fert 7% 32% 64% Coromandel Fert 63% 82% 86% Deepak Fert 30% 20% 17% GNFC 4% 29% 9% GSFC 6% -26% -20% Rallis India 31% 36% 32% United Phosphorus 30% 36% 40% Source: Emkay Research Complex fertiliser sales down by 19% owing to lower imports while urea picks up by 11% yoy Complex fertiliser has witnessed 19% drop in sales volumes in H1FY12 to 12.5 mn mt on account of 31% drop in fertiliser imports (imported DAP, MOP and imported NPK) to 4.7 mn. On the other hand urea sales increased by 11% to 14 mn mt. Higher urea sales can also be attributed to significantly high price of complex fertiliser since DAP was sold at average prices of Rs 16500 / mt in Q2FY12 vs Rs 5310 / mt for Urea. Farmers paid Rs 10,200 / mt for DAP and Rs 5310 / mt for urea previous year in the same quarter. However the lower fertiliser sales volume of complex fertiliser was also affected due to lower availability of fertiliser in global market, primarily MOP, we expect that demand pressure in complex to continue in near future due to significantly high prices of complex fertiliser Emkay Research 25 October 2011 3 Fertiliser Sector Update prices. However drop in demand is likely to be compensated by lower imports and domestic manufacturing may continue to remain intact. Fertiliser sales volumes- mt H1FY11 H1FY12 H1FY12 Imported DAP 4,442,180 2,848,575 -36% MoP 1,962,941 702,326 -64% Imported NPK 468,192 1,220,297 161% Indigenous Dap 1,926,969 1,935,936 0% Indigenous NPK 4,261,197 3,939,464 -8% SSP 1,767,247 1,488,321 -16% Others 517,809 339,623 -34% Total decontrolled 15,346,535 12,474,542 -19% Urea 12,603,899 13,965,558 11% Source: Fertiliser Ministry, Emkay Research NBS saved government subsidy by ~30% and help protect companies’ margins Complex fertiliser players have witnessed stable margins despite severe input cost pressure along with currency depreciation which have pushed the raw material cost further. Thanks to NBS which has saved the government from any further increase in fertiliser subsidy. We estimate that under the old policy regime government subsidy would have gone up by 30% (~Rs 206 bn with current exchange rates). It has also helped the companies to protect their margins by passing on the incremental cost to the farmers. Chemical prices remain strong benefiting the producers from higher spreads Emkay Chemical index indicates that the prices of most of the chemicals remain strong with Q2FY12 average prices been higher by 21% yoy and 3% qoq. Spread remains encouraging for Caprolactam and Nylon thus benefiting GSFC. Though companies have been facing input cost pressure, mainly due to higher energy cost, however they have been able to pass on the cost push to the end consumers helping them maintain margins. Chemical index Index % YoY 140 40% 30% 130 20% 120 10% 110 0% -10% 100 -20% Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 90 -30% Emkay Chemical Index % YoY Source: Emkay Research Companies cautious about their margins and demand, however companies with diversified product portfolio to continue to protect their margins Companies like GNFC and Deepak fertiliser have cautioned about margin pressure if raw material cost escalates further. Companies have also outlined demand pressure if global slowdown continues however there has been no slack in demand so far now. We also believe that companies with basket of product products like Deepak Fertiliser continue to protect their margins through diversified product portfolio. Emkay Research 25 October 2011 4 Fertiliser Sector Update Q2FY12 performance Chambal Fertilisers ¡ Chambal’s Q2FY12 results were broadly in line with APAT of 841 mn, (-14%yoy) despite disappointment in shipping (EBIT loss of Rs 49 mn) and textiles (loss of Rs 90 mn) ¡ Manufactured fertiliser and trading business posted encouraging results with EBIT margins of 16.8% and 6% respectively and expected to remain robust ¡ Withdrawal of proposed demerger of shipping is the biggest disappointment and is expected to put pressure on company’s earnings due to adverse business environment ¡ Revise est to Rs 9.0/8.9 (from Rs 8.7/9.2) for FY12/FY13 resp. Trim target multiple and reduce target price to Rs 98 (from Rs 110) with downgrade to Accumulate (from BUY) Chambal Fertilisers Sep'11 Jun'11 Sep'10 YoY chg QoQ chg Sep-11E CMP(Rs) 88 Net Sales (Rs mn) 16,423 11,644 15,453 6.3% 41.0% 13711 Mkt Cap (Rs bn) 37 EBITDA (Rs mn) 2,045 1,796 2,253 -9.2% 13.9% 2011 Reco Accu EBITDA Margin (%) 12.5 15.4 14.6 -212 bps -297 bps 14.7% Target Price (Rs) 98 PAT (Rs mn) 841 729 982 -14.4% 15.4% 884 % Upside 11% EPS (Rs) 2.0 1.8 2.4 -14.4% 15.4% 2.1 Source: Emkay Research Coromandel International ¡ Q2FY12 APAT of Rs 2.6 bn, +17%yoy, was ahead of est driven by higher than estimated EBITDA margins at 13.8% (85bps yoy / 130bps qoq) ¡ Revenue growth of 5.7% yoy to Rs 27.2 bn despite 12% decline in volumes (emkay est) is led by higher fertiliser prices which were up by 30-40% yoy ¡ Volume growth to pick up in H2FY12 due to improved availability of phos acid from Tunisia and increased imports of MOP to facilitate higher NPK production ¡ Announced bonus debenture of Rs 15 / - for every one share, Maintain estimates of Rs 26.4/Rs 32.3 for FY12 & FY13 resp and maintain our BUY reco on the stock Coromandel International Sep'11 Jun'11 Sep'10 YoY chg QoQ chg Sep-11E CMP(Rs) 333 Net Sales (Rs mn) 27,241 17,665 25,761 5.7% 54.2% 24795 Mkt Cap (Rs bn) 94 EBITDA (Rs mn) 3,764 2,203 3,340 12.7% 70.8% 2975 Reco Buy EBITDA Margin (%) 13.8 12.5 13.0 85 bps 135 bps 12.0% Target Price (Rs) 435 PAT (Rs mn) 2,600 1,387 2,226 16.8% 87.5% 1960 % Upside 31% EPS (Rs) 9.3 4.9 7.9 16.8% 87.5% 7.0 Source: Emkay Research Emkay Research 25 October 2011 5 Fertiliser Sector Update Deepak Fertilisers ¡ Q2FY12 results were in line with estimates. Revenues Rs 5.8 bn, +39%yoy, was above est due to strong fertiliser revenues but APAT Rs 619 mn, +38%yoy, was broadly in line with est ¡ TAN demand remained sluggish due to Telangana stir & monsoon related floods. Margin pressures also intensified as company was unable to push cost related increases ¡ Strong results in fertiliser were driven by higher trading of specialty fertiliser resulting in fertiliser contribution to EBIT in H1FY12 increasing to 25% from 18% previous year ¡ Driven by strong performance of fertiliser, we raised our EPS to Rs 26.7/30.6 (previous Rs 25.2/27.9) for FY12/13, maintain target of Rs 250 and reiterate BUY Deepak Fertilisers Sep'11 Jun'11 Sep'10 YoY chg QoQ chg Sep-11E CMP(Rs) 165 Net Sales (Rs mn) 5,772 4,739 4,141 39.4% 21.8% 4566 Mkt Cap (Rs bn) 15 EBITDA (Rs mn) 1,059 1,129 800 32.4% -6.2% 1091 Reco Buy EBITDA Margin (%) 18.3 23.8 19.3 -96 bps -548 bps 23.9% Target Price (Rs) 250 PAT (Rs mn) 619 639 448 38.2% -3.2% 576 % Upside 51% EPS (Rs) 7.0 7.2 5.1 38.2% -3.2% 6.5 Source: Emkay Research GNFC ¡ Results were in line at the EBITDA level however higher other income and lower interest costs boosted APAT. Revenues grew by 27% yoy to Rs 10.2bn; PAT of Rs 808mn, 27% yoy ¡ Fertiliser segment reported revenues of Rs 6bn, 28% yoy higher than est driven by higher volumes of 263,000mt against est of 248,000mt. Margins were in line at 2.9% ¡ Chemical reported revenues of Rs 4bn, 26% yoy higher than est. Margins came in at 24% (-510bps yoy/ 700bps qoq). WNA- II plant commenced operations in July ¡ Maintain FY12E/FY13E estimates of Rs 19.3/Rs 25.7 with target price of Rs 135 GNFC Sep'11 Jun'11 Sep'10 YoY chg QoQ chg Sep-11E CMP(Rs) 91 Net Sales (Rs mn) 10,206 6,442 8,019 27.3% 58.4% 8135 Mkt Cap (Rs bn) 14 EBITDA (Rs mn) 1,479 925 1,153 28.3% 59.9% 1419 Reco Buy EBITDA Margin (%) 14.5 14.4 14.4 12 bps 13 bps 17.4% Target Price (Rs) 135 PAT (Rs mn) 808 417 639 26.6% 94.1% 713 % Upside 48% EPS (Rs) 5.2 2.7 4.1 26.6% 94.1% 4.6 Source: Emkay Research Emkay Research 25 October 2011 6 Fertiliser Sector Update GSFC ¡ GSFC continued strong show with Q2FY12 PAT at Rs 2.12 bn (+3% yoy on strong base) above our est driven by strong performance of fertiliser and chemicals ¡ Fertiliser EBIT margins at 15% (est 11%) and chemical margins at 34.3% (est 35%), driven by higher spread in caprolactam, supported PAT growth despite lower revenues ¡ Despite lower than est revenues, strong performance below the EBITDA line driven by lower than est interest, depreciation and higher other income boosted PAT ¡ With 48% of cmp in cash and equivalents and FY12 EV/EBITDA of 2.0x, P/E of 5x, stock offers attractive investment opportunity. Re-iterate BUY with TP of Rs 530 GSFC Sep'11 Jun'11 Sep'10 YoY chg QoQ chg Sep-11E CMP(Rs) 461 Net Sales (Rs mn) 12,641 12,077 13,007 -2.8% 4.7% 14410 Mkt Cap (Rs bn) 37 EBITDA (Rs mn) 3,031 2,738 3,172 -4.4% 10.7% 2870 Reco Buy EBITDA Margin (%) 24.0 22.7 24.4 -41 bps 131 bps 19.9% Target Price (Rs) 530 PAT (Rs mn) 2,128 1,773 2,070 2.8% 20.0% 1782 % Upside 15% EPS (Rs) 26.7 22.2 26.0 2.8% 20.0% 22.4 Source: Emkay Research Rallis India ¡ Q2FY12 PAT at Rs 585mn (flat yoy) were below est due to operating losses at Metahelix and lower standalone margins ¡ Cons revenues grew by 19% yoy to Rs 4.39 bn with EBITDA margins of 22.2% vs 24% previous year. Lower pest occurrence and delayed sowing affected revenue growth ¡ Thrust on revenue growth and aggressive products launch to put pressure on working capital resulting in higher interest ¡ Downgrade EPS estimates to Rs 8/10.9 (previous Rs 8.9/11.6) for FY12/13. Maintain BUY with revised target price of Rs 197 (previous Rs 209) Rallis India Sep'11 Jun'11 Sep'10 YoY chg QoQ chg Sep-11E CMP(Rs) 160 Net Sales (Rs mn) 4,395 2,975 3,680 19.4% 47.7% 4710 Mkt Cap (Rs bn) 31 EBITDA (Rs mn) 975 435 883 10.4% 124.2% 1130 Reco Buy EBITDA Margin (%) 22.2 14.6 24.0 -182 bps 756 bps 24.0% Target Price (Rs) 197 PAT (Rs mn) 585 231 587 -0.4% 153.1% 719 % Upside 23% EPS (Rs) 3.0 1.2 3.0 -0.4% 153.1% 3.7 Source: Emkay Research Emkay Research 25 October 2011 7 Fertiliser Sector Update United Phosphorus ¡ Q2FY12 results were above est driven by strong revenue growth of 41% to Rs 17.8 bn. APAT at Rs 1.6bn, +22% yoy were ahead of our est ¡ RoW (revenue growth of 105%yoy) & India (25% yoy) supported strong sales. Overall volume growth of 32% was a positive surprise ¡ Management upped revenue guidance to 30-35% (previous 25-30%) while EBITDA margins to come at 19-20% (from 20-21%) ¡ We have adjusted revenue est however maintain FY12/FY13 EPS est at Rs 17.8 / 21.4 and reiterate our BUY recommendation on the stock with price target of Rs 215 United Phosphorus Sep'11 Jun'11 Sep'10 YoY chg QoQ chg Sep-11E CMP(Rs) 142 Net Sales (Rs mn) 17,757 18,621 12,569 41.3% -4.6% 15742 Mkt Cap (Rs bn) 66 EBITDA (Rs mn) 3,255 3,449 2,326 39.9% -5.6% 2991 Reco Buy EBITDA Margin (%) 18.3 18.5 18.5 -17 bps -19 bps 19.0% Target Price (Rs) 215 PAT (Rs mn) 1,592 1,682 1,307 21.9% -5.4% 1433 % Upside 51% EPS (Rs) 3.6 3.6 3.0 21.9% -0.6% 3.3 Source: Emkay Research Emkay Research 25 October 2011 8 Fertiliser Sector Update Emkay Global Financial Services Ltd. Corporate Add: B – Ruby Mills Tower, 7th Floor, South East Wing, Senapati Bapat Marg, Dadar (W), Mumbai - 400028 India. 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