Chambal Fertilisers & Chemicals | Buy for upside of 62% | IndiaNotes.com


Sale of non-core business to turn Chambal a pure urea company


As  part  of  long-term  strategy,  Chambal  has  divested  its  non-core businesses (textiles,  shipping  and  BPO/BPM  arm  of  IT  business  solutions).  These  three businesses  were  either  loss-making  or  had  relatively  lower  margins,  but accounted for ~30% of the company’s capital employed.


The  business  reorganisation  has  enabled  Chambal  to  focus  on  its  core business  of  urea  manufacturing  and  trading  in  complex  fertilisers,  where  it  is planning an aggressive expansion.

Valuation


Chambal  is  the  largest  private  urea  manufacturer  with  robust  distribution  network and has planned a well timed capex to bridge structural demand supply  gap in the industry. Post FY19, it is well placed to reap the benefits of reforms  such  as  DBT  of fertilizer subsidy  and  possible  steps  towards  removing  price  regulations  on  urea  in  the  long  term.  Its  earnings  and  margins profile  is  also  likely to improve substantially. We  have  valued  the  stock  at  a  P/E  of  10x  of  FY20E  EPS  of  Rs 22.8 and  recommend buy on the stock with a target price if Rs 228 (~62% upside) in 18  months.

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