Chambal Fertilizers reports loss in Q3FY12

Chambal Fertilizers and Chemicals (CFCL) has reported a net loss of Rs 1.24 crore in the December quarter of 2011 as against net profit of Rs 107.42 crore in the same quarter of the previous year. The reason for this sharp decline in the bottom-line can be attributed to an exceptional deferred tax liability of Rs 92.93 crore arising out of a change in the tax structure in its shipping business.

The company has shifted from tonnage tax regime for its shipping business (under which it paid a fixed sum of annual tax) to normal tax regime which is based on profitability. Judging by the steep losses that CFCL has been reporting in the shipping business, the company expects this move in tax structure to reduce its effective tax outgo.

If we adjust for the exceptional deferred tax liability, the PAT stands at Rs 91.68 crore, lower by 15 per cent as compared to the profits of Q3FY11. Thus we can see that the business of CFCL itself has been impacted on account of a rise in input cost and losses reported by the beleaguered shipping and textile businesses. The shipping and textile business continues to plague the overall business environment of CFCL by reporting another quarter of losses at the EBIT level.

The company’s shipping business posted a robust 47 per cent (YoY) growth in revenues at Rs 103.1 crore despite a weak business environment. However, on the EBIT level it reported a loss of Rs 3.35 crore, 114 per cent lower than last year’s profit of Rs 23.55 crore. The company’s textile business too has reported an EBIT loss of Rs 1.88 crore, 117 per cent lower than last year’s profit of Rs 10.74 crore. In fact, the textile business has reported a 16 per cent drop in its top-line to stand at Rs 83.83 crore as against Rs 99.65 crore in last year’s December quarter.

The only heartening respite came from CFCL’s robust top-line growth of 32 per cent at Rs 1,783.72 as against Rs 1,352.71 crore last year same period. It was majorly fueled by a good performance in the traded and manufactured fertilizer business which together contributed around 90 per cent of the revenues. While the manufactured segment reported an 18 per cent (YoY) growth in revenues at Rs 808.04 crore, the traded segment posted a whopping 58 per cent (YoY) growth in revenues at Rs 788.74 crore.

On the EBIT level, the performance of the manufactured fertilizer segment disappointed as a result of 225 bps drop in margins (14 per cent) led by high raw material costs and certain forex losses. The EBIT performance of the traded goods were a positive surprise as it reported a 45 per cent (YoY) growth in EBIT profit at Rs 48.23 crore and also managed to keep margins intact at 6 per cent.

Finally, the company’s EBIDTA came is at Rs 213.68 crore, 11.5 per cent lower than last year’s figure of Rs 241.41 crore. Consequently the EBIDTA margins now stand at 12 per cent. Going forward, looking at the gloomy scenario of the shipping sector, we expect CFCL’s shipping business to continue its laggard performance. In fact the change in tax structure will also lead into the next quarter, where the company will have to make another exceptional provision of Rs 92.9 crore. Hence this will hurt CFCL’s financial performance in Q4. As for the fertilizer business, we expect the company to continue its robust top-line performance into Q4. However, the real challenge is posed at the net level where the company will have to cut out some strategy to create shareholders’ wealth. We advice our reader’s to stay away from the counter in the short to medium term.