Buy Zuari Agro; target of Rs 200: Edelweiss

Zuari Agro Chemicals’ (ZAC) Q4FY16 standalone revenue and EBITDA at INR 12.7bn and INR 0.3bn, respectively, came below our estimates, primarily owing to lower‐than‐expected volumes. Net loss for the quarter stood at INR 0.2bn. However, management is optimistic on FY17 on account of better monsoon. With government subsidy flowing in and effective implementation of gas price pooling policy, ZAC anticipates subsidy burden and debt to shrink in FY17. Further, normalised channel inventory, improved plant utilisation, better working capital management and lower interest costs are envisaged to drive future performance. Nonetheless, we expect fund raising of INR 4bn to remain an overhang on the stock in the near term.

ZAC’s FY13‐15 performance was impacted by multiple headwinds including liquidation of excess inventory, adverse weather conditions, currency depreciation, higher fertilizer prices, lower availability of raw materials and plant shut downs. We believe these were unusual events and expect a rebound in FY17/18. Hence, we maintain ‘BUY’ on attractive valuations with a target price of INR 200 based on 8x FY18E EPS. The stock trades at 10.4x FY17E and 6.9x FY18E EPS.For all recommendations, click here Disclaimer: