Hold Nagarjuna Fertilisers; target of Rs 45: PINC Research

“Nagarjuna Fertilisers' (NFCL) Q3FY11 results were better than our expectations as net sales doubled to Rs 8.5 billion (+40.0% YoY) on the back of higher trading volume. Higher trading led OPM to contract by 113bps to 13.3% despite improved margins for manufactured Urea. Lower depreciation (-39% YoY) and effective tax rate (32.1% against 54.1% YoY) resulted in net profit to surge by 175.1% to Rs 334 million (PINCe Rs 207 million).”

“Trading revenues has increased significantly in FY11 (import of DAP and MOP). For Q3FY11, trading is contributing around one-third of revenues. As we have been saying, unlike complex fertiliser, decontrol in Urea is difficult currently with the heterogeneity involved in the sector. We expect this to happen only after 2 years once all players switch to gas. However, in the forth coming budget we expect increase in Urea fixed cost subsidy for all the players (~Rs 350/ MT) on the back of cost escalation over the year and a price hike of 5% at farm gate level. Nagarjuna Fertiliser holds 51% stake in Nagarjuna Oil Corporation Limited. This is a 6million MT p.a. refinery coming up at Cuddalore, Tamil Nadu and is expected to be commissioned by FY13. Total capex for this project is Rs 70 billion. NOCL is contributing Rs 9 in our target price with a GRM of USD 6.5/ bbl against management guidance of USD 8.5/bbl.”

“At CMP of Rs 30, NFCL is trading at P/E & EV/EBITDA of 8.3x & 12.2x respectively for FY12 estimates. Availability of natural gas coupled with benefits from revamping should enhance net profits by 3.7x in FY11 from FY09. We maintain our earning estimates for FY11 & FY12, and SOTP target price is Rs 45 (10x P/E FY12E EPS for fertiliser business and Rs 9 for NOCL). However, we maintain our ‘HOLD’ recommendation due to huge capex involved in the refinery business and ambiguity on equity structure post proposed amalgamation of different group companies,” says PINC Research report.

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