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.
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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