Q2FY24 Review: Chambal Fertilisers: Growth visibility remains limited

6 Nov 2023 , 11:38 AM

Chambal’s Q2 performance was below estimates due to lower volumes in Urea and P&K Fertilisers. While revenue declined ~37% YoY, Ebitda was up 38% due to favourable base (Q2’23 had one off adjustment worth Rs2.4bn). TAN project is on track to get commissioned in Oct’25 and the company is further evaluating entry into nitric acid value chain. These projects though bodes well, are not sufficient to provide growth visibility given that the benefits from Gadepan III will come to end in FY27. Analysts of IIFL Capital Services cut FY24- 26 revenue by 4-9% as they incorporate revised NBS subsidy, but leave their EPS estimates largely unchanged. Analysts of IIFL Capital Services TP, rolled forward to Dec’24 moves up to Rs310. 

Fall in both Urea and non-urea volumes: 

Urea volumes were lower by ~17% YoY while Non-urea volumes fell ~10% YoY, largely on the back of ~24% decline in DAP volumes. Management stated that it was able recoup most of the goods that got restricted during Q1’24 (due to floods and cyclones). Lower volumes coupled with lower gas prices resulted into revenue decline in Urea while decline in P&K fertilisers was largely due to lower volumes. The crop protection and speciality nutrient business did well and posted ~10% volume growth. 

Subsidy payments are not a concern now: 

Finance costs fell by ~46% YoY as the company turned net cash surplus of Rs21.3bn. Subsidy debtors have declined to Rs5.5bn from Rs16.4bn in Mar’23 and the company received Government subsidy of Rs97.7bn during 1H’24. Management guided to a capex of ~Rs19-20bn over the next couple of years. The company is making an investment of Rs3.5-3.7bn towards improving energy efficiency at Gadepan I and II plants and estimates savings of Rs1.0bn per year from these investments. Further energy saving schemes beyond three years are under examination.

Continue to lack growth visibility: 

While Urea business remains a cash cow, the benefits from Gadepan III will come to end in FY27. The growth coming from TAN will not be sufficient to fill the gap. The company is further evaluating entry into nitric acid value chain. Analysts of IIFL Capital Services await the capex announcements on this front. Given the lack of long-term growth visibility, they maintain their cautious stand and seek clarity on capital allocation strategies. Maintain ADD.