Q4FY23 Review: Chambal Fertilisers: Sharp NBS rate cut leads to inventory loss

30 May 2023 , 01:09 AM

Chambal reported a disappointing Q4. One-time inventory loss of ~Rs1.7bn in traded fertilisers and declining prices of Ammonia, weighed on margins. Analysts of IIFL Capital Services cut FY24-25 Ebitda by ~5- 7% as they tone down their margins post the correction in ammonia prices and volume growth for traded fertilisers. However, the impact on EPS is restricted to ~2-3% due to reduced finance costs.

Growth in Traded Fertilisers likely to moderate: 

Despite growing ~56% in FY23, management guided that the company is targeting flattish volume growth in Traded Fertilisers in FY24. Sales volume is a function of government target and consumption patterns, mgmt stated. However, Crop Protection is likely to continue growth momentum on the back of the seed-to-harvest program. Falling ammonia prices are likely to have an impact on consolidated margins.

Sharp fall in finance costs: 

Finance costs in Q4 fell ~44% on the back of increased subsidy payout from the central government since Nov’23. The company’s net debt including investments, has fallen to ~Rs14bn (vs ~Rs68bn in Sep’22). Subsidy receivables have reduced by ~Rs28bn during the quarter and are at just ~22 days. Management expects subsidy receivables to be moderate in the coming quarters, given the falling gas prices and reduced NBS rates.

Base gets difficult: 

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 growth coming from TAN. Given the lack of long-term growth visibility, we maintain our cautious stand. Clarity on capital allocation strategies awaited still. Analysts of IIFL Capital Services find the current valuation of 9x FY24 PE to be fair. Maintain ADD.