Brokerage firm Elara Securities (Elara Capital) has maintained a buy call on the stock of Chambal Fertilisers, raising the target price to ₹459 from ₹432 earlier, implying a 45% upside from the stock's September 26 close of ₹317.10 on BSE.
The stock is down 20% year to date (YTD). It hit its 52-week high of ₹515.95 on April 19, 2022, but witnessed profit booking after that. On July 1, 2022, it hit its 52-week low of ₹260.75 on BSE. At present, the stock is 22% up from its 52-week lows.
Elara pointed out that Chambal Fertilisers plans to set up a 700metric tonnes per day (MTPD) Technical Ammonium Nitrate (TAN) plant, which should be its next growth driver from FY25 onwards. At present, India imports TAN due to a demand-supply mismatch.
"Taking into account Scenario I of (a) current raw material prices prevailing into the future, and Scenario II of (b) a 30% price dip in the raw material basket for Elara Fertilizer universe each year through FY24E and FY25E, the TAN business may incrementally contribute nearly ₹950mn (Scenario I) and nearly ₹450mn EBITDA (Scenario II), respectively, in FY25E-26E each," said Elara.
Along with the TAN plant, Chambal Fertilisers will also set up 600MTPD Weak Nitric Acid (WNA) and 150MTPD Concentrated Nitric Acid (CNA) plants. TAN is a key ingredient in pharmaceuticals, mining, power, construction and steel industries, Elara highlighted.
In India, TAN is primarily used to manufacture explosives for mining. Coal mining, limestone for cement manufacturing, iron ore mining and stone quarrying require controlled blasting, thus the need for TAN-based explosives.
Chambal Fertilisers’ organic earnings growth is expected to be flat till FY24. FY25E onwards, TAN should likely contribute 17-30% to the then EBITDA, depending on the trajectory of the commodity prices. For projecting
Chambal Fertilisers’ future financials, we have assumed a 30% decline in commodity price in FY24E and FY25E each as our base case.
"Media reports also indicate inorganic growth opportunities that CHMB may pursue. If these fructify (at reasonable valuations), and with investment in TAN capacity, Chambal Fertilisers’ cash deployment challenges may ease (expected to generate ₹78bn FCF through FY23E-26E)," said Elara.
"We are introducing FY25 estimates and rolling over our earnings to September 2024E. We maintain a 'buy' with a raised target price of ₹459 (from ₹432), valuing the stock at 11 times (unchanged) September 2024E EPS of ₹42," said Elara.
According to a MintGenie poll, 3 analysts have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.