Stock Review: Chambal Fertilizers

 

The proposed demerger of Chambal Fertilisers' shipping business has boosted the company's valuation, of late. Post demerger, the shipping business is likely to enjoy a better valuation than the fertiliser business, which will unlock value for retail shareholders. A favourable decision by the government on urea decontrol will be a further booster. Chambal transferred its shipping business, representing only 7% of its total revenues, to its whollyowned subsidiary India Steamship. This was followed by an equity infusion of . 338 crore, including 4.1 crore equity shares at . 80 each. Since ISSL will be issuing one share for every eight shares of Chambal Fertilisers at the time of its demerger and separate listing, it will have equity capital of . 93.5 crore. The promoter group capital infusion values the shipping business at around . 750 crore — or 2.2 times its revenues.

Chambal's shipping business can be realistically expected to command a valuation at around 1.5 times its revenues considering its small size and the overall sluggishness faced by the industry. Still, it will be higher than Chambal's current valuation of 0.8 times the revenues.

The demerger will mean that the promoter group will directly control 29% in ISSL, apart from 44% held by Chambal and retail shareholders of Chambal will get 27% stake.

Since the shipping business is capital intensive, its separation will enable Chambal to make more profits per rupee of investment. "Proposed de-merger of shipping division will drive company's RoCE by 280 bps to 16.3%," mentioned an Emkay report on the company.

Furthermore, Chambal is the largest private player in the Indian urea sector by production capacity, and has around 10 per cent share in total domestic urea production. Currently, urea prices are ruling at high levels globally on the back of strong demand and high energy cost. The company is expected to benefit with the firm urea prices going ahead given its de-bottlenecking resulting in incremental capacities in the coming quarters. Besides, the Committee of Secretaries (CoS) will take up the topic of urea decontrol on August 5. Any positive decision would be a big positive for Chambal.

The scrip has gained nearly 9% on the bourses since the demerger was announced while the benchmark Sensex dropped 3% and is now trading around 12 times its earnings for last twelve months. This is in line with its peers.