Domestic brokerage firm Prabhudas Lilladher believes the domestic fertiliser industry is well poised for structural growth due to a renewed emphasis towards food security.
"As we slowly emerge out of the Covid-19 pandemic, the need to secure food supply is set to be the top priority of every nation. Consequently, we believe the domestic fertilizer industry is well poised for structural growth, led by a renewed emphasis towards food security in current times of shortage and global supply chain upheaval," said Prabhudas Lilladher.
The brokerage firm added that "the domestic agri-input industry holds immense growth potential given (a) rising domestic demand, (b) a tighter global supply scenario from China (China controls nearly 40% of the global phosphate exports), (c) balanced plant nutrition (NPK ratio 4:2:1 versus 7:3:1 currently) through higher agri-input penetration, (d) higher usage of specialized nutrients led by a change in dietary preferences, and (e) continued emphasis on improving farm productivity and farm income."
Prabhudas Lilladher has initiated coverage on two fertilizer companies: Coromandel International (CRIN) and Chambal Fertilizers (CHMB) with a positive view underpinned by (1) their strong focus on core business areas, (2) compelling valuations and (3) better product offerings among Indian peers.
"Both CRIN and CHMB are well placed to capitalize on long-term growth opportunities, given their dominant market share of more than 50% in home markets," said Prabhudas Lilladher.
CRIN is India’s largest private phosphatic fertilizer manufacturer with a leadership position in water soluble fertilizers (WSF) and speciality nutrients, besides a growing presence in the agrochemicals segment.
The brokerage firm believes CRIN is well poised for growth in the agri-input segment given (1) its dominant market share of 18%/16% in the Phosphatic/SSP fertilizers segment, (2) its focus on backward integration and value addition to propel margins, (3) new product launches to boost CP business growth, (4) India’s largest rural retail initiative (Mana Gromor stores) that provides a comprehensive solution to farmers, and (5) FCF generation of ₹35bn over FY23-25E with the finest return profile (healthy RoE/Pre-tax ROCE of 27%/37% and net cash balance sheet in FY22.
"We estimate revenue/EBITDA/PAT CAGR of 1%/9%/10% over FY22-25E, led by improvement in margins (tepid revenue growth due to high base in FY22). The implied P/E and EV/EBITDA with SOTP valuation come at 18 times and 12 times, respectively," said Prabhudas Lilladher.
Talking about another fertiliser stock, Prabhudas Lilladher said CHMB is the largest private urea producer in India with nearly 12-13% (3.4mn mt of urea capacity) domestic market share.
"We believe the urea business will likely remain a cash cow for the company led by (a) steady contribution to revenues /EBITDA (contributing nearly 70%/75% to overall FY22 Revenue/EBITDA), and (b) unlikely expansion plans in urea business in near to medium term," said the brokerage firm.
Prabhudas Lilladher expects revenue/EBITDA/PAT CAGR of 5%/6%/8% over FY22‐25E for CHMB, largely driven by (a) continued utilization of urea plants particularly the Gadepan-3 plant (already at optimum capacity) (b) improved marketing margins and c) contribution from industrial chemicals business (revenue/EBITDA of ₹8.4bn/ ₹1.8bn by FY25E.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
