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Investors holding the stock of India’s leading phosphatic fertiliser maker, Paradeep Phosphates, can consider booking profit in the counter. We had recommended investingin the stock during the initial public offer in May 2022 at ₹42 per share. The stock, in the last five months, has delivered about 62 per cent gains, outperforming the entire fertiliser sector. The stock of Coromandel International, the largest listed player in the phosphatic fertiliser space, gained a modest 22 per cent in the last six months.
Even as the long-term growth drivers for Paradeep are intact, thanks to the acquisition of the Zuari Agrochemicals’ Goa unit and capacity augmentation at its NPK complexes plant, we believe that the stock has raced ahead of its fundamentals and near-term risks may weigh on it. Hence we recommend that investors who had invested during the IPO take some profits off the table.
Paradeep’s stock currently trades about 14 times its trailing twelve-month earnings, while the leader Coromandel International, with zero debt and superior return ratios (Return on capital employed at 35 per cent for Coromandel versus 15 per cent for Paradeep) trades at about 17 times its trailing twelve-month earnings. While Coromandel International is debt free, Paradeep’s total debt in the books (as of June 2022) is about 1.7 times its book value. We hence recommend investors to trim their positions in the counter.
Owned by Zuari Maroc Phosphates, an equal joint venture between ZACL and Morocco-based Office Cherifien Des Phosphates Group S.A. (OCP), Paradeep is the country’s second largest listed phosphatic manufacturer with a total capacity of 2.85 million tonnes currently. The company recently acquired the phosphatic fertiliser and urea manufacturing unit located in Goa from its parent Zuari Agro Chemicals (partly funded by IPO proceeds) which helped the company more than double its capacity from the earlier 1.2 million tonnes. Further increase in granulation capacity by 50 per cent to 1.8 million tonnes and augmentation of phosphoric acid are the growth drivers for the company. While the long-term growth story has not changed, short-term concerns can weigh on the company’s performance over the next few quarters.
Swelling debt
For one, the company’s debt (short term and working capital) has increased significantly over the last few quarters. From ₹1,259 crore in FY21, total debt more than doubled to ₹2,954 crore by FY22 end. The company’s total debt to equity ratio as of March 2022 stood at 1.33 times. Delayed subsidy payment has led to a further increase in June 2022 quarter to a whopping ₹3,627 crore. Of this the long-term loan is ₹758 crore and the rest is working capital borrowing.
Delayed receipt of subsidy and higher working capital requirement due to higher input costs had resulted in a sharp increase in working capital borrowings for the company. According to the management, the company at any given point will require about ₹1,000 crore of working capital borrowing to fund its operations, given the dependency on the Government for subsidy payments. Even though crude and gas prices have corrected from their peak, the gas cost for fertiliser makers continues to remain high. Also, for the incremental capacity of 0.6 million tonnes of fertiliser post the de-bottlenecking the company will have to procure gas at a higher pooled price. While the Government will compensate companies for the higher input costs, the impact on working capital for Paradeep, which is already leveraged, can lower the profitability.
Further, should the input costs remain high – particularly gas for its urea and complex fertilisers and other inputs such as sulphur (crude derivative) and phosphoric acid (which also requires sulphur for sulphuric acid), that will only increase the working capital requirement. High debt and working capital requirement assume greater significance now, given that the RBI has already hiked policy rates by 1.9 per cent in a year, and further interest rate hikes are expected. This will impact the company’s profitability in the next few quarters.
Subsidy dependence
The sharp unprecedented rise in the raw material prices has led to an increase in the subsidy component for all fertiliser makers, as the Government had to absorb the price increases to insulate farmers. As a fallout of this, the subsidy outstanding as of June 2022 quarter has remained high at Rs 1700 crore, which is about 20 per cent of the trailing twelve-month revenue as of June 2022. Thus, higher subsidy component and delays in payment, can further impact the profitability due to higher working capital requirement and interest outgo.
In the latest June quarter, the company posted 85 per cent revenue growth to ₹2,435 crore, largely on account of higher subsidy, on the back of global input cost increases. Though the company managed to grow its operating profit by an impressive 54 per cent, the net profit saw a marginal 5 per cent rise to ₹63 crore, due to the sharp seven-fold jump in interest cost to ₹51 crore, year-on-year.
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