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Chambal Fertilizers Equity Research

HomeCompanyChambal Fertilizers Equity Research

Date of Research – 13 January 2016

Price – Rs. 62.50

About the Company

Incorporated in 1985, Chambal Fertilisers and Chemicals Limited (“Chambal Fertilisers” or the “Company”) engages in the manufacture and sale of fertilizers primarily in India. It was promoted by Zuari Industries Limited in the year 1985. The Company operates in four segments: Own Manufactured Fertilizer, Trading, Textile, and Shipping.

Agri Business Division: The Company’s two nitrogenous fertiliser (urea) plants are located at Gadepan in Kota district of Rajasthan. The two plants produce about 2 million metric tonnes of Urea per annum. The first plant was commissioned in 1993 and second plant in 1999.

Chambal Fertilizers caters to the need of the farmers in eleven states in northern, eastern, central and western regions of India and is the main fertiliser supplier in the State of Rajasthan. The Company has a vast marketing network comprising 13 regional offices, 1,700 dealers and 20,000 village level outlets. The Company dealers provide Urea and other agri-inputs like DAP (Di-Ammonium Phosphate), MOP (Murate of Potash), SSP(Single Super Phosphate), pesticides and seeds. Most of these products are sourced from reputed suppliers and sold under the ‘Uttam’ umbrella brand.

Textile division: Birla Textile Mills (BTM) is the textile division of Chambal Fertilizers, located at Baddi, in Solan district of Himachal Pradesh. The product includes cotton and synthetic grey and dyed blended yarns for the domestic and world markets. It exports around 25% of its aggregate production to countries in Europe and Asia.

Shipping division: In 2004, Chambal Fertilizers entered into the energy transportation sector and acquired India Steamship Company Limited, one of India’s oldest shipping companies. It operates 5 Aframax tankers with a combined capacity of over 5,00,000 DWT.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 8,202.00 8,910.57 9,737.74 10,527.32  7,573.62 
Expenses 7,517.80 8,236.67 9,003.93 9,668.26  6,794.73  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 684.20 673.90 733.82 859.06  778.89  
Depreciation 267.06 282.37 216.49 201.47  92.20  
Finance Costs 138.25 207.43 163.18 146.70  253.95  
Other income 81.02 104.98 105.08 94.12  137.00  
Exceptional items (11.96) 279.43  4.11  
PBT 371.85 289.08 459.23 325.58  565.63  
Tax 159.73 54.57 179.72 177.13  185.52  
PAT (before Minority Interest and share of Associates) 212.13 234.52 279.52 148.45  21.15  
Profit/ (loss) attributable to Minority Interest (26.39) (9.61) (15.09) (67.64)  358.96  
Share of profit / (loss) of Associates –  – 
Consolidated Profit / (Loss) for the year 238.52 244.12 294.61 216.09  358.96  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 8.34 7.56 7.54 8.16   10.28 
Net Profit Margin Ratio 2.59 2.63 2.87 1.41   4.74 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 416.21 416.21 413.95 413.95 416.21
Reserves & Surplus 1,284.95 1,284.95 1,642.37 1,837.15 1,955.01
Net worth (shareholders funds) 1,701.16 1,701.16 2,056.33 2,251.11 2,371.22
Minority Interest 66.41 66.41 71.51 54.77
Long term borrowings 1,186.02 3,474.45 1,019.43 781.87 708.35
Current liabilities 3,406.50 1,312.09 4,447.35 4,107.72 5,247.28
Other long term liabilities and provisions 48.16 240.20 29.38 15.12 9.59
Deferred Tax Liabilities 386.05 418.81 427.70 398.43
Total Liabilities 6,794.30 6,794.30 8,042.81 7,638.29 8,734.86

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 3,082.74 3,082.74 3,084.57 3,067.43 2,739.25
Noncurrent Investments 0.09 0.09 0.11 30.11 30.03
Current assets 3,567.46 3,226.17 4,755.10 4,430.47 5,344.01
Long term advances and other noncurrent assets 142.98 485.30 201.47 110.28 621.18
Deferred Tax Assets 1.03 1.56 0.39
Goodwill on consolidation (net)
Total assets 6,794.30 6,794.30 8,042.81 7,638.29 8,734.86

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 28.46 11.64 21.41 23.77 27.90
ROE / RONW 9.31 9.30 11.87 13.09 6.26

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 8,202.00 8,910.57 9,737.74 10,527.32  7,573.62 
Growth (%) 8.81 % 8.64 % 9.28 % 8.11 %  (28.06 %) 
PAT (Rs. Cr.) 212.13 234.52 279.52 148.45   358.96  
Growth (%) 64.62 % 10.55 % 19.19 % (46.89 %)  141.81 % 
Earnings Per Share – Basic (Rs. ) 5.73 5.87 7.08 5.19  9.15 
Earning Per Share – Diluted (Rs. ) 5.73 5.87 7.08 5.19  9.15 
Price to Earnings 8.72 7.25 8.81 10.57  13.43 

Dividend History

The Company has maintained an average dividend yield of 3.33 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Chambal Fertilizers’s average current ratio over the last 5 financial years has been 1.33 times.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Chambal Fertilizers’s average long term debt to equity ratio over the last 5 financial years has been 0.85 which indicates that the Company is operating with a considerable level of debt and may face some difficulty to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Chambal Fertilizers’s average interest coverage ratio over the last 5 financial years has been 5.07 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Chambal Fertilizers reported a promoter holding of 57.80 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 19.77 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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