Prefer Chambal, Deepak Fert, UPL in fertilizers pack Emkay

“Though Q3FY12 results for agri-inputs (fertiliser & chemicals) were broadly in line with our expectations, it witnessed moderation in topline growth and margin pressure. Aggregate revenue (Emkay universe) increased by 31%yoy (higher fertiliser prices) but due to 220bps contraction in EBITDA margin, aggregate APAT declined by 2%. Fertiliser segment witnessed moderation in growth with complex fertiliser / urea sales growth of 5%/flat in Q3FY12 as against -4%/10% YTD. Sharp increase in complex fertiliser inventory (increase in inventory of Rs 24bn vs Rs 5bn decrease last year) is likely to put pressure on margins in Q4FY12 / Q1FY13. Agrochemical companies’ revenue growth moderated in Q3FY12 at 5.4%yoy (9% H1FY12) along with margin pressure, PAT declined by 38%yoy (-8% in H1FY12). Chemical segment witnessed margin pressure despite price increases. EBIT margins dropped to its lowest level to 18.7% due to higher input cost driven by currency depreciation. Companies’ management have mentioned about pressure on farm income in the current quarter however expect a strong Rabi crop followed by good monsoon. We maintain our cautious outlook for Agri input companies shared in our report “Rural steroid is ebbing – Underweight Rural exhilarants” prefer Urea players over Complex fertilizer and agrochem exports over domestic.”

“In Q3FY12 Chambal and Deepak posted strong results with PAT 38% and 12% above our est. Chambal’s positive surprise was led by strong EBITDA margin of 11.4% which was above our est of 10.2% driven by higher trading margins & lower than expected losses in textiles and shipping division. Deepak reported strong results driven by higher fertiliser trading. GNFC results were operationally in line however lower interest costs & depreciation led to PAT above est. However, Coromandel disappointed due to lower EBITDA margins of 9.2% against est of 11% driven by higher trading which carries lower margins. UPL’s Q3FY12 revenues / EBITDA were above est driven by currency impact however higher tax outgo squeezed APAT and resulted in bottomline below our estimates. Tata Chem reported in line results. US subsidiary reported strong results driven by higher topline. However, European business disappointed due to lower margins. Standalone performance remained strong. Rallis reported bottomline marginally above est driven by better than expected margins. However, Rallis’ standalone topline growth (also includes revenue contribution from Dahej) slowed down to 14.2% which is the lowest in last 7 quarters.”

“On a YTD basis (Apr-Dec’11), complex fertiliser sales have declined by 4% yoy to 21mn mt on account of 20% decline in imported fertilisers (imported DAP, MOP and NPK to 9 mn mt) & widening disparity in prices of urea as compared to complex fertilisers . While complex fertiliser sales have declined, urea sales increased by 10% yoy to 22mn mt during the same period. Sharp rise in cost of imported raw materials, rupee depreciation, other input costs have resulted into complex fertiliser prices spiraling by average 50-60% in the last couple of quarters. For ex- DAP which used to sell at Rs 12,000/mt at the beginning of FY12 is currently quoting at Rs 18,500/mt. On the other hand, urea prices have remained stagnant at Rs 5310/mt since last 18 months resulting into farmers resorting to using more of urea and cutting down on the consumption of complex fertilizers. Complex fertiliser sales also suffered in H1FY12 due to delay in the fixation of subsidy for imports resulting into companies undertaking MoP import holiday during H1FY12. However, increase in indigenous production of complex incl. SSP has helped to offset part of the volume decline.”

“We maintain our cautious outlook for Agri input companies shared in our report “Rural steroid is ebbing – Underweight Rural exhilarants” due to pressure on farm income driven by lower crop prices. In our report dated 28th Dec, we have mentioned about our preference of Chambal fertilizer (Urea player) over Coromandel Int. (Complex fertiliser) due to uncertainty and margin pressure in complex fertiliser while urea players are likely to gain from higher international prices and also policy outcome on new investment. We have also mentioned about our preference of United Phosphorous (Export based global agrochemical player) over Rallis India (Domestic player) and continue to maintain that.”

“Post the results, Chambal Fert, Deepak Fert & UPL remain our top picks. Chambal is likely to benefit from IPP linked production in Q4FY12 due to higher production achieved above cut-off. Deepak’s diversified product portfolio would help the company to maintain its growth in near future. Though Ammonium Nitrate demand is witnessing sluggish growth due to lull in mining activities, however company is gaining market share gradually by replacing imports. On the other hand, UPL’s diversified product portfolio would help the company to tide over slowing growth in domestic agrochemicals markets. UPL is currently trading at 8x 1year fwd earnings, compared to average of 13x enjoyed historically,” says Emkay Global Financial Services research report.

Promoters who have pledged maximum shares in their company

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.