Elara Capital sees a 57% upside in this recently listed agrochemical player; here's why

Brokerage firm Elara Capital has initiated coverage on the stock of Paradeep Phosphates with a 'buy' call, pegging the target price of ₹66, implying a 57 percent upside from the stock's June 2 closing of ₹42.10 on BSE.

Shares of Paradeep Phosphates jumped 4.63 percent to ₹44.05 on BSE on June 3.

Paradeep Phosphates is India’s third-largest phosphatic fertiliser player and is set to scale up the capacity by 50 percent to touch 1.8mn MTPA by Q2FY23E.

Incremental capacity will enable the company to briskly the bridge domestic supply gap, thus, amass market share in its hinterland markets of East (market share 8 percent), West (9 percent) and South India (5 percent), the brokerage firm pointed out.

Not merely this, the current fertiliser shortage in India unbolts a massive window for the company in so much as enabling optimal 80-90 percent capacity utilisation by FY24E. Elara expects FY22-24E standalone volume CAGR of 14 percent to 1.73mn MTPA volumes by FY24E.

The brokerage firm highlighted that Paradeep Phosphates acquired Zuari Agrochemical’s (ZACL) Goa fertilizer plant for an EV of $280mn to expand its size/reach. The Goa plant has struggled with low utilization rates given lack of working capital. After coming under its fold, with adequate fund availability, utilization should rescale to optimal levels soon, which may improve financials by way of cost reduction and product quality enhancement.

Elara Capital underscored that Paradeep Phosphates enjoys a long-term agreement with the OCP Group (Morocco), a leading rock phosphate producer globally as also part of the promoter group. India imports most of its raw material for phosphatic fertilizer. Tie-up with OCP stabilizes the company’s current/future requirements of phosphatic fertilizers and raw material (rock, phosphoric acid and DAP).

After capex and inorganic growth, Paradeep Phosphates will unfurl as a 2.6mn MTPA phosphatic behemoth, second only to Coromandel International (CRIN) in the private sector, said the brokerage firm.

"While Paradeep Phosphates may witness sharper earnings growth than CRIN on volume growth/margin expansion, it may continue to generate significantly (50-55 percent) lower ROCE and ROE (on lower efficiency/leverage)," said Elara Capital.

Disclaimer: The views and recommendations made above are those of the broking firm and not of MintGenie.