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You are here : IndiaNotes >> Research & Analysis >> Companies >> Chambal Fertilisers & Chemicals Ltd. >> Research

Positional Call: Buy Chambal Fertilisers for a period of 3 months; Upside 25%

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Largest private urea manufacturer with robust distribution network and has planned a well timed capex to bridge structural demand supply gap in the industry.

With no new capacity addition during the last 2 decades , India is now a urea deficit market where it produces 24 Mn MT against demand of 32 Mn MT. With a view to bridge this gap & government’s favorable New Investment Policy, Chambal is setting up a 1.34 MTPA Brownfield ammonia-urea plant at Gadepan, Rajasthan at a capex of USD 917 Mn of which USD 711 Mn will be funded through debt, is expected to commission by [anuary 201 9. With this expansion, existing capacity of Urea will increase from 2.01 MTPA to 3.35 MTPA, further strengthening Chambal’s leadership position in the industry.

Long-term gas supply contract with GAIL - Ensure availability of gas for existing and new unit

Company has entered into a long term natural gas purchase agreement with GAIL for supply of 24,955 bn British Thermal Units annually. The supply of gas will commence on April 1, 2018 and will last for nine years. The gas can also be used in existing plants Gadepan l & Gadepan ll. Rationale of long term tie-up of natural gas is that there is acute shortage of gas in the industry. The average supply of domestic gas came down from 25.8 mmscmd in F Y16 to 21.1 mmscmd in F Y] 7. Thus, share of domestic gas in total gas supply for fertilizers was reduced from 58.9% to 48.0% during the period.

Government regulations - Augurs well for company

- Fertilizer industry is highly regulated & with an aim to boost investments, GoI has initiated policy steps that could structurally improve fertilizer industry’s dynamics with schemes like gas price pooling, DBT, NPS 111, Modified NPS 111, New Investment Policy, and New Urea policy. The policy aims to reduce the import of fertilizers components and make India self sufficient. 3 Under DBT, government aims to transfer the subsidy amount directly to manufacturers and importers on the basis of actual sales made by retailers to beneficiaries. Currently, pilot projects are being conducted and pan-India DBT rollout will take some time. Post DBT implementation, companies across sector are likely to benefit in terms of better working capital cycle. 3 Under Gas Pooling policy, GOI proposed pooling of Domestic Gas with Re-Gasified LNG which is imported. This would help provide natural gas at uniform delivered price to all Natural gas grid connected Urea manufacturing plants. The new gas pooling policy encourages production above cut-017r which is beneficial for Chambal as it enjoy strong energy efliciency at its plant.

Lower raw material prices could help margins expansions going forward

Fertilizer sector was favorably impacted by lower raw material prices in FY17 leading to margin expansion in FY17. Lower interest expense driven by lower working capital borrowings coupled with declining interest rates provided further support to profitability in FY17. Given the subdued raw material prices (Gas) and satisfactory progress of monsoon, urea players could see stable profitability in FY18.


Recent favorable changes in policies, expected commissioning of new capacity in [an 2019, increased focus on agriculture and food production , business reorganization coupled with better than average monsoon is one of the reasons to boost demand of urea would enabled Chambal to focus on its core business of urea manufacturing and trading in complex fertilizers, where it is planning an aggressive expansion.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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