Buy Zuari Agro Chemicals; target of Rs 278: Edelweiss

Edelweiss's research report on Zuari Agro Chemicals

Zuari Agro Chemicals’ (ZAC) Q2FY17 standalone revenue and EBITDA at INR10.5bn and INR0.7bn, respectively, surpassed our estimates, primarily owing to better-than-expected volumes. However, revenue fell 20.6% YoY due to dip in realisation led by cut in subsidy rates. Despite this, gross margin jumped 400bps on fall in input prices. ZAC is optimistic on upcoming rabi season due to better monsoon. We are raising our target multiple to 10x (earlier 8x) as: 1) good monsoon, post 2 consecutive droughts, will support near-term growth; and 2) receipt of government subsidy has led to fall in receivables and debt, thereby improving financials. Further, effective implementation of gas price pooling policy, normalised channel inventory, improved plant utilisation, better working capital management and lower interest costs will drive performance. Maintain ‘BUY’ with revised target price of INR278 (INR218 earlier).

ZAC’s FY13-15 performance was marred by multiple headwinds. We believe these were unusual events and anticipate a rebound in FY17/18 owing to better monsoon and release of government subsidy. Hence, we raise target multiple from 8x to 10x. We maintain ‘BUY’ on attractive valuations with revised TP of INR278 (INR218 earlier) based on 10x FY18E EPS. The stock trades at 13.9x FY17E and 8.6x FY18E EPS.