Buy This Small Cap Fertilizers Stock For Robust 41% Returns, Suggested By Prabhudas Lilladher

Prabhudas Lilladher has given a "buy" call to Chambal Fertilizers & Chemicals Limited for 41% potential upside from its current level in 12 months with a target price of Rs 410 per share. This is a small-cap Fertilizers sector company with a market capitalisation of Rs 12,080.43 crore. One-time loss of INR 2.4bn in the P&K fertilizer business. TAN project deferred by almost a year; likely to come up by 1HFY26.

Stock Outlook & Returns

The stock's current market price (CMP) on NSE is Rs 291.60 per share, trading 1.82% up from its previous close. The stock opened at Rs 287 per share. Its 52-week high level is Rs. 516 recorded on 19 April 2022, and its 52-week low is Rs. 260.80 recorded on 1 July 2022, respectively.

In a week, the stock fell, giving negative returns of 6.08%. The stock has fallen 10.68% in a month, and 15.09% in three months, respectively. In the past 1 year, the stock has fallen 15.68%. In 3 years 81.29% and in 5 years 108.26% positive returns, respectively.

Decent volume growth in both the segment; marred by lower margins

While CHMB posted a solid growth in fertiliser volumes (Urea and P&K sales volume were up 10%/28% YoY to 1.0/0.44mn mt respectively) and agrochemical revenues (up 61% YoY), however, EBITDA was impacted by Rs2.4bn of one-off adjustments largely due to the government recognizing subsidy payable amount lower than that specified by the NBS policy on the inventory as at Mar-22. The company has revised its TAN expansion plans and is now estimated to spend Rs16.45bn (Rs11.7bn earlier) to build 0.24 mn mt (0.22 mn mt earlier) and is expected to be commissioned in the next 34 months. Management alluded that they would ramp up their excess ammonia capacities over the next 24 months to meet their ammonia requirement in the TAN project.

Higher subsidy outstanding resulted into stretched working capital and increase in interest cost

Amid a rising raw material cost scenario coupled with delay in subsidy receipts from the Govt. has in turn resulted into higher working capital requirement and increase in interest cost for CHMB. Subsidy outstanding as on 30th September'22 stood at Rs79bn up 190% YoY while market receivables remained slow at Rs2.5bn up 46% YoY. Although the subsidy receipts during 1HFY23 stood at Rs79.9bn up 66% YoY however it was not sufficient enough to compensate the increase working capital requirements resulting into net debt was up 151% YoY to Rs 68bn.

Subsidy one-offs spoils the overall performance, Buy for target price Rs 410 per share

"We trim our EPS estimates for FY23 by 8% citing Rs2.4bn of subsidy one-off provision from the carry over inventory of last year and higher interest cost led by higher subsidy receivable. While, we reduce our estimates for FY24/25E by 4%/14% respectively due to the delay in TAN project by almost a year (likely to be commissioned in 1HFY26) and limited growth in the existing business. Maintain BUY rating on the stock with a revised TP of Rs410 (earlier Rs480) based on 10X FY25 EPS," the brokerage firm.

according to the brokerage, Chambal Fertilisers (CHMB) reported results below our and consensus estimates primarily led by a) one-time loss of INR 2.4bn in the P&K fertilizer business; b) incremental interest cost of Rs0.6bn due to increased subsidy outstanding from the Govt. and c) lower than expected share of profit from JV (down 58% YoY to Rs 340mn).

Key highlights are:

1) Urea and P&K sales volume were up 10%/28% YoY to 1.0/0.44mn mt respectively;

2) Interest cost up 242% YoY led by stretched working capital due to higher subsidy outstanding;

3) capacity increased for upcoming TAN (0.24mn mt from 0.22mn mt earlier) and NA (0.21mn mt from 0.18 mn mt earlier) project; likely to come-up in 1HFY26;

4) Capex for TAN project now stands at Rs16.45bn as against Rs11.7bn earlier.

Disclaimer

The stock has been picked from the brokerage report of Prabhudas Lilladher. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.