Chambal Fertilisers: Q3 Results Analysis

We had yesterday reported on the Q3FY12 results announcement of Chambal Fertilisers and Chemicals (CFCL). The company reported a net loss of Rs 1.24 crore as against net profit of Rs 107.42 crore in Q3FY11 on the back of an exceptional deferred tax liability of Rs 92.93 crore arising out of a change in the tax structure in its shipping business.

Today, the million dollar question in investors’ mind is about what should be done of the stock? Should one buy, hold or stay away from the counter? Well, before we answer the question, let’s just briefly analyse the woes faced by CFCL and their possible implications.

A majority of the problems encountered by CFCL are in its non-core businesses which comprise shipping and textile. Both these segments are currently reporting losses as a result of the weak business environment. Judging by the generally pessimistic outlook for the shipping sector, we expect the sluggish performance to continue in the future. The change in tax structure can also be interpreted as the management’s negative outlook on the sector.

The core fertiliser manufacturing and trading business seems to be doing well though. Despite a drop in the manufactured fertiliser volumes, the company recorded a decent 18 per cent (YoY) growth in manufacturing revenues led by higher realisations on account of the government subsidy. The company is also likely to enjoy benefits of higher urea production above the cut-off in Q4. The fertiliser trading business has been very robust, registering a 58 per cent (YoY) growth in revenues in Q3FY12. The company has also been able to maintain stable margins in this segment by adopting a better trading product mix and some good strategic hedging positions.
 
However, given the laggard performance of its non-core businesses, most of the benefits from the core business are likely to be wiped off. A higher share of the low margin yielding trading business will lead to erosion at the EBIDTA level. Lastly, the government’s ad-hoc and uncertain stand with respect to urea pricing or the new investment policy continues to be an overhang on the stock. In our latest interaction with the management, we learnt that they also expected a cut-back in complex fertiliser subsidies in the coming budget. In the wake of all these headwinds and no clear outlook from the management, we would advise our readers to stay away from the counter.