Emkay Global Financial Services has come out with its report on agri inputs and chemical. The research firm says remain cautiously optimistic on the outlook for agri-input companies. Tata Chemicals and Deepak Fertiliser remain top picks due to attractive valuations.
- On an aggregate basis, we expect our universe to report topline growth of 11%yoy. However, due to continuing margin pressures we expect EBITDA to decline by 3% yoy. APAT for is expected to decline by 8% yoy.
- Fert revenues for our universe are expected to increase by 7% yoy driven by increase in trading volumes for GSFC & Chambal Fertilisers. GNFC’s fertiliser revenues are also expected to increase by 30% yoy driven by higher urea volumes.
- However, we expect Coromandel’s volumes to decline by 28% yoy due to high complex fertiliser prices. Aggregate fertiliser margins for our universe are expected to decline by 280bps yoy to 9.7% due to high input costs.
- Emkay Chemicals Index increased by 8% yoy during July/Aug’12 due to increase in prices for key chemicals however rupee depreciation has impacted costs.
- We expect chemicals revenues for our universe to increase by 21% yoy however EBIT is expected to decline by 6% yoy due to decline in margins.
- Steep increase in ammonia & propylene costs have impacted Deepak’s chemicals margins (down by 210bps yoy to 20.0%) while GSFC’s margins are expected to decline (1300bps yoy) due to decline in spreads. GNFC’s margins are expected to remain weak due to pressure on realizations. Agri-inputs consumption has remained under pressure over the last couple of quarters due to farmers’ strained cash flow position. This was further exacerbated by deficient monsoons during July/Aug ’12 which impacted sowing patterns. However, with the improvement in monsoons we expect agriinputs consumption to have improved.
- Initial apprehensions regarding the impact of deficient monsoons on rabi have subsided after pickup in monsoons during Sep’12. Current year's storage is nearly 87 % of last year's storage and 106 % of the average of last ten years.
- We remain cautiously optimistic on the outlook for agri-input companies. Improved rabi outlook, favorable base effect & the pick up in monsoons are likely to result in better performance from H2FY13. Tata Chemicals & Deepak Fertiliser remain our top picks due to attractive valuations.
Aggregate Q2FY13 Expectations:Expect aggregate revenues to increase by 11% yoy while APAT is expected to decline by 8% yoy:On an aggregate basis, we expect our universe to report topline growth of 11%yoy. However, due to continuing margin pressures APAT is expected to decline by 8% yoy. Topline growth of 11% yoy is driven by increase in chemicals revenues by 21% yoy. Fertiliser revenues for our universe is expected to increase by 7% yoy driven by increase in trading volumes for
GSFC & Chambal Fertilisers. Complex fertiliser consumption continues to remain weak due to high prices & the wide differential between urea & complex fertiliser prices. Delay in the onset of monsoons during June/July’12 further impacted agri-inputs consumption. However, situation improved in Sep’12 due to improvement in monsoons.
EBITDA margins expected to decline by 230bps yoy to 14.9%:Though we expect topline growth of 11% yoy however EBITDA margin is expected to decline by 230bps yoy to 14.9%. Fertiliser margin is expected to decline by 280bps yoy to 9.7% due to high input costs. Chemicals margins is expected to decline by 530bps yoy to 18.7%. Steep increase in ammonia & propylene costs have impacted Deepak’s chemicals margins (down by 210bps yoy to 20.0%) while GSFC’s margins are expected to decline (1300bps yoy) due to decline in spreads. GNFC’s margins are expected to remain weak due to pressure on realizations.
Coromandel, Deepak, GSFC expected to report weak results yoy:We expect
Coromandel, Deepak, GSFC to report weak results on a yoy basis for Q2FY13. We expect Coromandel’s revenues to decline by 10% yoy to Rs 24.5bn due to lower fertiliser volumes. Margins are likely to remain under pressure due to high input costs.
Deepak Fertilisers is likely to report muted results during Q2FY13 due to margin pressures in chemicals segment. TAN margins continue to remain under pressure due to high ammonia prices. Lower offtake of TAN due to monsoons & extended shutdown at IPA plant are also likely to pressurize earnings. Though near-term concerns persist, however longterm growth remains intact for Deepak Fertilisers. GSFC’s margins remain under pressure due to decline in caprolactam-benzene spreads. Current caprolactam-benzene spreads stand at $1190/mt compared to Q1FY13 average spread of $1350/mt & Q2FY12 average spread of $2370/mt.
Chambal Fertilisers revenues are expected to increase by 19% yoy to Rs 19.5 bn driven primarily by increase in trading volumes. However, shipping & textile segment would continue to report weak performance.
Though agrochemicals consumption was impacted initially during Q2FY13 due to deficient monsoons, however we believe agrochemicals consumption picked up during Sep’12 due to improvement in monsoons. We estimate Rallis’s consol revenue to grow by 7% yoy to Rs 4.5 bn for Q2FY13. Margins are likely to remain under pressure.
CHEMICALS:Expect chemicals revenues to grow by 21% yoy while EBIT is expected to decline by 6% yoy:We expect Q2FY13 chemicals revenues for our universe to increase by 21% yoy however EBIT is expected to decline by 6% yoy due to decline in margins. Aggregate chemicals EBIT margin is expected to decline by 530bps yoy. Steep increase in ammonia & propylene costs have impacted Deepak’s chemicals margins (down by 210bps yoy to 20.0%) while GSFC’s margins are expected to decline (1300bps yoy) due to decline in caprolactam-benzene spreads. GNFC’s chemicals margins are expected to remain weak due to pressure on realizations.
Emkay Chemicals Index increased by 8% yoy during July/Aug’12: Emkay Chemicals Index indicates increase in chemicals prices by 1% QoQ/8% YoY during July/Aug’12. Prices for key chemicals like caustic soda, phos acid, aniline, benzene, glycerine, IsoPropyl Alcohol, Methanol, Nitrobenzene, toluene witnessed increase in prices in the range of 10-30%. Though Emkay Energy Index (which comprises of gas, crude & naphtha ) declined by 4% MoM/9% YoY due to decline in input prices however the input index increased by 11% yoy when measured in rupee terms.
_PAGEBREAK_
AGROCHEMICALS-Improvement in monsoons during Sep’12 to support agrochemicals consumption:Though agrochemicals consumption remained weak during the first half of monsoons, however we expect agrochemicals consumption to have improved during Sep’12 as monsoons gathered pace. Delay in the arrival of monsoons, slow progress & lower intensity of monsoons had resulted into farmers delaying sowing patterns across many crops. Thus, agrochemicals consumption remained weak during July/Aug’12. However, as monsoons picked up pace during the second half of the quarter, agrochemicals consumption also improved.
OUTLOOK-Improvement in monsoons to benefit agri-inputs consumption:Agri-inputs consumption has remained under pressure over the last couple of quarters due to farmers’ strained cash flow position. This was further exacerbated by deficient monsoons during July/Aug ’12 which impacted sowing patterns & hence agri-inputs consumption. However, with the improvement in monsoons we expect agri-inputs consumption to have improved. Further, hike in MSPs of key crops have also boosted farmers’ sentiments.
Rabi outlook improves due to comfortable reservoir levels:Initial apprehensions regarding the impact of deficient monsoons on rabi season have subsided after the pickup in monsoons during Sep’12. Total live storage in 84 important reservoirs in different parts of the country, monitored by Central Water Commission (CWC) as on 27th Sep, 12 stood at 115.8 bcm (75 % of the storage capacity at Full Reservoir Level). Current year's storage is nearly 87 % of last year's storage and 106 % of the average of last ten years.
Base effect to play out from H2FY13 as last year’s rabi was impacted due to subdued farm economics:We expect H2FY13 to deliver relatively better performance as base effect plays out & yoy comparison becomes favorable. Last year’s rabi season was impacted due to subdued farm economics as prices of key crops had fallen below MSPs while costs remained elevated for farmers. Consequently, farmers’ cash flow was strained due to which agriinputs consumption suffered.
Prefer Deepak Fertiliser & Tata Chem on valuation parameters:We remain cautiously optimistic on the outlook for agri-input companies. Agri-input consumption has suffered over last few quarters due to strained farmers’ cash flows, deficient monsoons, weak crop prices. However, we believe situation has somewhat improved with the pick-up in monsoons. Rabi outlook has also improved due to comfortable reservoir levels. Deepak Fertiliser & Tata Chemicals remain our top picks in the sector based on attractive valuations. Though Ammonium Nitrate demand is witnessing sluggish growth due to lull in mining activities, however Deepak Fert is gaining market share gradually by replacing imports. Deepak is currently trading at 5.0x1 yr fwd earnings against its average of 7-8x 1 yr fwd earnings. Tata Chemicals Q1FY13 operations were affected by multiple factors however business has normalized from current quarter and would help company to report strong results in subsequent quarters. At CMP of Rs 327, Tata Chemicals is currently trading at 8.6x 1 yr fwd earnings against its historical average of 10-11x 1 yr fwd earnings.
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.
To read the full report click on the attachment 
Read More
