Q1FY24 Review: Chambal Fertilisers: Steady quarter

9 Aug 2023 , 11:36 AM

Chambal’s Q1 performance was largely in line with estimates. While revenue declined ~23% YoY, the company showcased ~7% growth in Ebitda; indicating that operating margins remain steady. Analysts of IIFL Capital Services cut FY24-26 revenue by ~7% as they reduce their subsidy estimates, but leave their EPS estimates largely unchanged. Analysts of IIFL Capital Services TP, rolled forward to Sep’24 comes down to Rs295 (8x Sep’25 PE). 

Steep fall in non-urea volumes: 

Non-urea volumes fell ~29% YoY, largely on the back of ~17% decline in DAP volumes. Management stated that movement of material was restricted during the quarter (due to floods and cyclones); expects half of the lost volumes to be caught up in Q2FY24. While key input prices have continued to fall, management does not anticipate the government to cut subsidy in a retrospective manner during Rabi. 

Subsidy payments timely: 

Finance costs fell by ~18% sequentially, despite ~Rs15bn increase in net debt. Subsidy debtors have increased by ~9bn QoQ. Government subsidy receivable has increased from ~Rs16.4bn as at Mar’23 to ~Rs26bn as at Jun’23. However, management stated that the disbursement in July was healthy and most of the borrowing of the short-term borrowing has been repaid. Management guided to a capex of ~Rs19-20bn over the next couple of years. The company will focus on improving efficiency at Gadepan I and II, grow the Crop Protection and Specialty Nutrients business in an asset light manner and increasing presence across the nitrate value chain. 

Lacks growth visibility: 

While Urea business remains a cash cow, the base for Ebitda growth (adjusting for inventory loss) gets difficult given the falling ammonia prices. However, reduced finance costs could drive bottom-line growth in FY24. Benefits from Gadepan III come to end in FY27 and could negate the growth coming from TAN. Given the lack of long-term growth visibility, Analysts of IIFL Capital Services maintain their cautious stand. Clarity on capital allocation strategies is awaited and prompts the reduction in valuation multiple from 9x 1YF to 8x. Maintain ADD.