Chambal Fertilizers & Chemicals (CHMB IN) - Q4FY23 Result Update - FY23 an aberration impacted by lower subsidy

Rating: HOLD | CMP: Rs286 | TP: Rs300

Q4FY23 Result Update - FY23 an aberration impacted by lower subsidy. We trim our FY24/25E EPS estimates by 14%/15% each and downgrade our rating to ‘HOLD’ from ‘BUY’ with a revised TP of Rs 300 (based on 9XFY25 EPS) (Rs360 earlier) citing a) flat volume growth and lower margin visibility from Non-urea traded business; b) expectations of another round of NBS subsidy reduction from Govt. in 2HFY24, amid a falling RM cost scenario; and c) limited growth visibility in urea business. Chambal Fertilizers (CHMB) reported disappointing results with Revenue/EBITDA/PAT growth of 9%/-70%/-50% YoY lower than our and consensus estimates. Despite revenues up 9% YoY to Rs35.9bn, margins were severely impacted led by provisions of ~Rs2.0bn of high cost inventory in 4Q’23 (for FY23 provisions of ~Rs4.5bn).

Going forward, management alluded that most provisions for high cost inventory are largely behind, however they remained cautious on further cut in subsidy rates during 2HFY24. Further, robust subsidy disbursement from Govt. in FY23 coupled with falling RM cost scenario will likely keep working capital at comfortable levels along with healthy balance sheet. However, lack of earnings growth visibility in core business and delayed capacity expansion in TAN business (3QFY26) may keep stock performance under check. Downgrade to ‘HOLD’.

Growth in marketing volumes (+135%YoY) & urea volumes (+10%YoY) offset by lower subsidy: CHMB posted healthy growth in overall fertilizer volumes up 17% YoY to 0.87mn mt (Urea and NPK sales volumes were up 10%/135% YoY respectively to 0.16/0.10mn mt). Agrochemical revenues were up 52% YoY to Rs7.2bn in FY23. However downward revision of Nutrient based subsidy rates (NBS) for 4Q’23 (applicable from 1st January’23 to 31st March’23) and 1H’24 (applicable for 1st April to 30th September’23) has resulted in inventory provisions of ~Rs2bn (~Rs300mn for 4Q and Rs1.7bn for 1HFY24) impacting margins (for FY23 provisions of ~Rs4.5bn). Further, lower operating performance coupled with negative contribution from its JV (IMACID) of Rs36mn in 4Q’23, as against a profit of Rs493mn last year, has led to overall miss.

Robust subsidy receipts during 4Q’23: Subsidy receipts during 4QFY23 and FY23 stood at Rs55.2bn/Rs212.2bn up 50%/103% YoY. Subsidy payments have significantly improved from end of Q3 onwards.

Capex plans of ~Rs8-9bn in FY24E: CHMB has revised its TAN expansion plans during 1HFY23 with a capital outlay of Rs16.45bn (Rs11.7bn earlier) to build 0.24 mn mt (0.22 mn mt earlier) and is expected to be commissioned by Q3FY26. The project is expected to be funded equally through debt and equity. Company has so far spent Rs1bn during FY23 and has guided to spend Rs5bn in FY24. Management also alluded that they would spend an additional capex of ~Rs3-4bn for further enhancing their energy efficiency in Urea plants FY24.