Investors holding shares in India’s leading phosphate fertilizer maker, Paradeep Phosphates, may consider booking profits on the meter. We had recommended investing in the stock during the initial public offering in May 2022 at ₹42 per share. The stock, over the past five months, has posted gains of around 62%, outperforming the broader fertilizer sector. Shares of Coromandel International, the largest listed phosphate fertilizer player, have gained a modest 22% over the past six months.
Even though Paradeep’s long-term growth engines are intact, thanks to the acquisition of the Goa unit of Zuari Agrochemicals and the increased capacity of its NPK complex plant, we believe that the stock has exceeded its fundamentals and that short-term risks could weigh on them. Therefore, we recommend investors who had invested in the IPO to take some profits off the table.
Paradeep’s stock is currently trading at around 14 times its trailing 12-month earnings, while leading Coromandel International, with zero debt and superior return ratios (35% return on capital employed for Coromandel versus 15% for Paradeep) is trading at around 17 times its trailing twelve month earnings. While Coromandel International has no debt, Paradeep’s total debt on the books (as of June 2022) is approximately 1.7 times its book value. We therefore recommend that investors reduce their positions in the counter.
Owned by Zuari Maroc Phosphates, a 50/50 joint venture between ZACL and Morocco-based Office Cherifien Des Phosphates Group SA (OCP), Paradeep is the country’s second-largest listed phosphate manufacturer with a total capacity of 2 .85 million tons currently. The company recently acquired the Goa-based phosphate and urea fertilizer manufacturing unit from its parent company Zuari Agro Chemicals (partly funded by proceeds from the IPO), which helped the company to more than double its capacity from the previous 1.2 million tonnes. A further increase in granulation capacity by 50% to 1.8 million tonnes and the increase in phosphoric acid are the growth drivers for the company. Although the long-term growth story has not changed, short-term concerns may weigh on the company’s performance in the coming quarters.
On the one hand, the company’s debt (short term and working capital) has increased considerably in recent quarters. From ₹1,259 crore in FY21, total debt more than doubled to reach ₹2,954 crore at the end of FY22. The company’s total debt-to-equity ratio in March 2022 was 1.33 times. The delay in subsidy payment led to a further increase in the June quarter of 2022 to ₹3,627 crore. Of this amount, the long-term loan is ₹758 crore and the rest is a working capital loan.
The late receipt of the grant and increased working capital requirements due to rising input costs had led to a large increase in working capital borrowings for the company. According to the management, the company will need around ₹1,000 crore of working capital borrowing at all times to finance its operations, given the reliance on the government for the payment of subsidies. Even though crude oil and gas prices have corrected from their peak, the cost of gas for fertilizer manufacturers remains high. In addition, for the additional capacity of 0.6 million tonnes of fertilizer after debottlenecking, the company will have to procure gas at a higher common price. While the government will compensate companies for higher input costs, the impact on Paradeep’s working capital, which is already in operation, may reduce profitability.
Additionally, if input costs remain high – particularly gas for its urea and complex fertilizers and other inputs such as sulfur (raw derivative) and phosphoric acid (which also requires sulfur for acid sulphide), this will only increase the need for working capital. High debt and the need for working capital now take on greater significance, as the RBI has already raised policy rates by 1.9% in one year, and further interest rate hikes are expected. This will impact the company’s profitability in the coming quarters.
The unprecedented sharp rise in commodity prices led to an increase in the subsidy component for all fertilizer manufacturers, as the government had to absorb price increases to insulate farmers. As a result, the outstanding grant component in the June 2022 quarter remained high at Rs 1,700 crore, or about 20% of last twelve months revenue in June 2022. Thus, a higher grant component and payment delays, may have an additional impact on profitability due to a need for working capital and higher interest.
In the last quarter of June, the company recorded revenue growth of 85% to ₹2,435 crore, largely due to a higher subsidy, due to the global increase in input costs. Although the company managed to increase its operating profit by an impressive 54%, net profit saw a marginal increase of 5% to ₹63 crore, due to the steep sevenfold increase in interest charges to ₹51 crore, year after year. -year.
Sharp rise in share price
Stretched working capital