Chambal Fertilisers & Chemicals: A Comprehensive Stock Analysis

Chambal Fertilisers & Chemicals, engaged in urea production and marketing of fertilisers, has a market cap of ₹13,702 Cr. Key positives include a low debt-to-equity ratio of 0.30, stable promoter holding of 60.7%, and a good 3-year ROE of 23.5%. However, a significant 26.2% of promoter holding is pledged, which is a concern. The stock trades at a P/E of 10.8, lower than the industry P/E of 22.8. The OPM is decent at 10.5% and the dividend yield is 2.19%. Overall, while financials appear stable, the high pledged promoter holding warrants caution for potential investors.

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Table of Contents

TLDR of the Article:

Company Information:

Chambal Fertilisers & Chemicals Ltd (BSE: 500085, NSE: CHAMBLFERT)
Engaged in production of Urea and marketing of other fertilisers and agri-inputs
Joint Venture for manufacture of Phosphoric Acid in Morocco

Key Financial Data:

Market Cap: ₹13,702 Cr
Current Price: ₹342
Stock P/E: 10.8
Debt to Equity Ratio: 0.30
Promoter Holding: 60.7%
Pledged Percentage: 26.2%
Operating Profit Margin (OPM): 10.5%
Return on Equity (ROE) 3Yr: 23.5%
Dividend Yield: 2.19%

Pros:

Reduced debt
Good ROE track record
Healthy dividend payout of 23%
Improved debtor days and working capital requirements

Cons:

Promoters have pledged 26.2% of their holding

Recommendation: The company has a low debt-to-equity ratio and the promoter holding is constant. However, there is a significant pledged holding of 26.2% which is a concern. The OPM is decent at 10.5% and the P/E is not very high at 10.8.

Given the mixed factors, the recommendation would be CAUTION. While the financials look decent, the high pledged holding by promoters adds risk. Investors should monitor the pledged holding situation and any changes in promoter holding or deterioration in margins/ROE before considering this stock.

Company Introduction and Profile

Chambal Fertilisers & Chemicals Ltd, established in 1985, is a leading Indian company engaged in the production of urea and marketing of various fertilisers and agri-inputs. With a market cap of ₹13,702 crores, the company operates its own urea manufacturing plants and has a joint venture for the manufacture of phosphoric acid in Morocco. In FY21, Chambal Fertilisers & Chemicals Ltd ceased its software business operations to focus on its core fertiliser business. The company’s product portfolio includes di-ammonium phosphate (DAP), muriate of potash (MOP), NPK fertilisers, speciality plant nutrients, and crop protection chemicals. Chambal Fertilisers & Chemicals Ltd has maintained a strong financial performance over the years, with a sales growth of 29.8% over the last five years and a return on equity (ROE) of 23.5% over the last three years. The company’s current market price is ₹342, with a price-to-earnings ratio (P/E) of 10.8.

Should We Buy, Sell or Hold This Stock and Why?

Based on the analysis of Chambal Fertilisers & Chemicals Ltd’s financial data and key ratios, the recommendation is to exercise caution when considering investing in this stock. The company has a low debt-to-equity ratio of 0.30 and a consistently high promoter holding of 60.7%, which are positive indicators. However, a significant portion (26.2%) of the promoter holding is pledged, which raises concerns. The operating profit margin (OPM) stands at a decent 10.5%, and the stock’s P/E ratio of 10.8 is lower than the industry average of 22.8. The company has maintained a healthy dividend yield of 2.19% and has a strong ROE track record of 23.5% over the last three years. While the fundamentals appear stable, the high percentage of pledged promoter holding adds an element of risk. Investors should closely monitor any changes in the pledged holding, promoter ownership, and the company’s financial performance before making an investment decision.

Vital Company Ratios for a Layman

To help understand Chambal Fertilisers & Chemicals Ltd’s financial health, here are some key ratios:

Debt-to-Equity Ratio (0.30): This low ratio indicates that the company has a strong financial position and is not overly reliant on debt financing.
Return on Equity (ROE) (23.5% over 3 years): The company has consistently generated good returns for its shareholders.
Operating Profit Margin (OPM) (10.5%): This ratio shows that the company has a decent profitability margin from its core operations.
Price-to-Earnings Ratio (P/E) (10.8): The stock is trading at a lower P/E compared to the industry average of 22.8, suggesting that it may be undervalued.
Dividend Yield (2.19%): The company offers a good dividend yield, providing income to its shareholders.
Promoter Holding (60.7%): The high promoter holding indicates strong confidence in the company’s prospects. However, 26.2% of this holding is pledged, which is a concern.

Here are the key data points from the provided information:

Promoter Holding:

Latest (Feb 2024): 60.70%
Trend: Consistently around 60% over the years

FII and DII Holding:

FII (Feb 2024): 13.90%
DII (Feb 2024): 6.68%

Sales Trend:

FY 2023: ₹27,773 Cr
5-Year Sales Growth: 29.8%

Profit Trend:

FY 2023: ₹1,034 Cr
5-Year Profit Variation: 15.6%
Profit Growth (TTM): 7.57%

Debt Trend:

FY 2023: ₹3,279 Cr
Debt-to-Equity Ratio: 0.30

Margin Trend:

Operating Profit Margin (OPM) FY 2023: 7%
OPM (TTM): 10.5%

Company PE and Industry PE:

Company PE: 10.8
Industry PE: 22.8

Gap Between Intrinsic Stock Value and Current Market Price:

Intrinsic Value: ₹479.07
Current Market Price: ₹342

Market Cap:

Chambal Fertilisers & Chemicals Ltd: ₹13,702 Cr

Cash in Hand:

FY 2023: ₹4,028 Cr

Dividend Payout:

FY 2023: 30%

Competing Companies and Their Performance

Chambal Fertilisers & Chemicals Ltd’s main competitors in the fertilizer industry include Coromandel International, FACT, GSFC, RCF, Paradeep Phosphates, and National Fertilizers. Among these, Coromandel International has the highest market cap of ₹31,654 Cr, followed by FACT at ₹40,633 Cr. Chambal Fertilisers & Chemicals Ltd ranks third with a market cap of ₹13,702 Cr.

In terms of P/E ratio, Chambal Fertilisers & Chemicals Ltd has the lowest at 10.76, while FACT has the highest at 93.19. The company’s dividend yield of 2.19% is higher than Coromandel International (1.12%) but lower than GSFC (5.11%) and RCF (4.13%).

Chambal Fertilisers & Chemicals Ltd’s ROCE of 16.05% is lower than Coromandel International (38.28%) and RCF (21.20%) but higher than GSFC (13.38%) and Paradeep Phosphates (10.97%). The company’s sales and profit performance in the latest quarter have been comparatively better than most of its peers.

Is This Stock Overvalued or Undervalued?

Based on the provided data, Chambal Fertilisers & Chemicals Ltd appears to be undervalued. The stock’s current market price (CMP) is ₹342, while its intrinsic value is estimated at ₹479.07. This suggests that the stock is trading at a discount of approximately 28.6% to its intrinsic value. Additionally, the company’s P/E ratio of 10.8 is significantly lower than the industry P/E of 22.8, further indicating that the stock may be undervalued compared to its peers.

Should We Buy This Stock and Why?

The recommendation for Chambal Fertilisers & Chemicals Ltd is CAUTION, based on the provided data. While the company has several positive factors, such as a low debt-to-equity ratio of 0.30, consistent promoter holding of around 60%, and a good ROE track record of 23.5% over the last three years, there are also some concerns. The main issue is the high pledged percentage of promoter holding at 26.2%, which could add risk to the investment. The company’s OPM and P/E ratio are relatively better than the industry average, but the pledged holding warrants caution. Investors should monitor any changes in the pledged holding, promoter ownership, and financial performance before making a decision.

How Is the Industry of This Company Growing?

The fertilizer industry, in which Chambal Fertilisers & Chemicals Ltd operates, appears to be growing at a steady pace. The company’s 5-year sales growth stands at 29.8%, and its 3-year sales growth is even higher at 32%. However, the most recent TTM (Trailing Twelve Months) sales growth shows a decline of -31%, which could be a concern. Looking at the company’s peers, most of them have experienced negative quarterly sales growth, ranging from -21.36% to -47.58%. This suggests that the industry may be facing some challenges in the near term. However, the long-term growth prospects of the fertilizer industry remain positive, driven by the increasing demand for food production and the need for higher agricultural productivity.

Risk Factors and Key Risks Associated with Chambal Fertilisers & Chemicals Ltd and the Fertilizer Industry:

Business/Commercial Risks:

Competition: The fertilizer industry is highly competitive, with several major players vying for market share. Intense competition may lead to pricing pressures and reduced profitability.
Regulatory Changes: The fertilizer industry is subject to various government regulations and policies, including pricing, subsidies, and environmental norms. Any adverse changes in these regulations could impact the company’s operations and profitability.
Raw Material Availability and Pricing: The company’s profitability is sensitive to fluctuations in the prices of key raw materials such as natural gas, phosphoric acid, and ammonia. Any disruption in the supply or significant price increases could affect margins.
Dependence on Monsoons: The demand for fertilizers is heavily dependent on the agricultural sector, which, in turn, is influenced by the monsoon season. Inadequate or uneven monsoons could lead to reduced demand for fertilizers.
Environmental Concerns: The fertilizer industry faces increasing scrutiny over its environmental impact, including greenhouse gas emissions and water pollution. Stricter environmental regulations could result in higher compliance costs.

Potential Risks of the Fertilizer Industry:

Overcapacity: The fertilizer industry has witnessed significant capacity additions in recent years, leading to an oversupply situation. This could result in pricing pressures and lower capacity utilization for players.
Subsidy Rationalization: The fertilizer industry in India is heavily dependent on government subsidies. Any changes in the subsidy regime or delays in subsidy payments could adversely impact the industry’s working capital cycle and profitability.
Geopolitical Risks: The company’s joint venture in Morocco for phosphoric acid exposes it to geopolitical risks in the region. Any political instability or trade disruptions could affect the supply of raw materials.

Management Quality Assessment:

Based on the information provided, there is no mention of any criminal cases against the promoters or management of Chambal Fertilisers & Chemicals Ltd. However, it is advisable to conduct a thorough background check and due diligence on the management team before investing.

Recommendation: Considering the company’s financial performance and the risks associated with the industry, the recommendation for Chambal Fertilisers & Chemicals Ltd would be CAUTION. While the company has a low debt-to-equity ratio and a consistent promoter holding, the high pledged promoter holding (26.2%) is a concern. The company’s OPM and P/E ratios are relatively better than the industry average, but the volatile nature of the fertilizer industry and the potential risks mentioned above warrant a cautious approach. Investors should closely monitor the company’s performance, industry developments, and any changes in the regulatory environment before making an investment decision.

Long-Term Performance (6-10 years)

Chambal Fertilisers & Chemicals Ltd has shown consistent growth in sales and profits over the past decade. The company’s sales have grown at a CAGR of 13% over the last 10 years, while profits have grown at a CAGR of 18%. The company’s ROE has averaged 22% over the past 10 years, indicating efficient use of capital. The company’s debt-to-equity ratio has also reduced significantly from 3.67 in FY12 to 0.30 in FY23, indicating a strengthening balance sheet. The promoter holding has remained consistent at around 60%, showcasing their confidence in the company’s long-term prospects. Given the company’s strong financial performance, healthy ROE, and the expected growth in the fertilizer industry, Chambal Fertilisers & Chemicals Ltd is likely to perform well over the long term (6-10 years).

Short-Term Performance (2-5 months)

In the short term, Chambal Fertilisers & Chemicals Ltd’s performance may be influenced by various factors such as monsoon patterns, raw material prices, and government policies. The company’s latest quarterly results (Dec 2023) show a decline in sales and profits compared to the previous year, with sales at ₹4,349 crores (down 47.58% YoY) and net profit at ₹459 crores (up 41.83% YoY). The company’s OPM has improved to 14% in the latest quarter compared to 3% in the previous year. However, the stock has delivered a negative return of 8.41% over the last 3 months. Given the mixed quarterly performance and the short-term volatility in the stock price, a cautious approach is recommended for short-term investors.

Medium-Term Performance (2-6 years)

Over the medium term (2-6 years), Chambal Fertilisers & Chemicals Ltd’s performance is expected to be driven by the growth in the agricultural sector and the increasing demand for fertilizers. The company’s sales have grown at a CAGR of 30% over the past 5 years, while profits have grown at a CAGR of 16%. The company’s ROE has averaged 25% over the past 5 years, indicating consistent value creation for shareholders. The company’s debt-to-equity ratio has also reduced from 0.82 in FY18 to 0.30 in FY23, indicating a stronger financial position. However, investors should keep an eye on the pledged promoter holding (26.2% as of Feb 2024), which could add risk to the investment. Overall, given the company’s strong financial performance and the expected growth in the fertilizer industry, Chambal Fertilisers & Chemicals Ltd is likely to perform well over the medium term, subject to the resolution of the pledged promoter holding issue.

Recommendation: Based on the provided data and analysis, the recommendation for Chambal Fertilisers & Chemicals Ltd would be CAUTION. While the company has a low debt-to-equity ratio, consistent promoter holding, and a good ROE track record, the high pledged promoter holding (26.2%) is a concern. The company’s OPM and P/E ratio are relatively better than the industry average, but the pledged holding warrants caution. Investors should monitor the pledged holding situation and any changes in the company’s financial performance before making an investment decision. Long-term investors with a high-risk appetite may consider the stock, given its strong financial performance and the expected growth in the fertilizer industry. However, short-term and risk-averse investors should exercise caution.