| ZIL, a major player in phosphatic fertilizers, is expected to gain from the nutrient based subsidy regime going forward. ZIL sold 0.33mmt of MOP and 0.25mmt of DAP in FY09.
It is a significant player in urea with a reassessed capacity of 0.4mmtpa. Through its subsidiaries and JVs, ZIL is also diversified into furniture, real estate, cement, terminalling services of petroleum products and EPC. Through its 50:50 JV with Maroc Phosphore S.A., Morocco, it holds 40% stake in Paradeep Phosphates Ltd (PPL). We initiate coverage on ZIL with a BUY recommendation. Using EV/EBITDA of 5x, we arrive at a 12m target price of Rs805/share.
One of the largest manufacturers of phosphatic & complex fertilizers
ZIL has a total capacity of 2,200tpd of complex fertilizers. PPL, in which it has 40% stake, has a total capacity of 0.72mmtpa of DAP and other phosphatic fertilizers. PPL also has a phosphoric acid plant of 0.225mmtpa which meets about 50% of the requirement of PPL, thereby ensuring lesser exposure to highly volatile phosphoric acid prices. PPL recorded sales of Rs56.1bn in FY09. With nutrient based subsidy and freeing of prices, Zuari is likely to gain tremendously.
Subsidiaries, JVs to increase contribution going forward
Through its subsidiaries and JVs, ZIL has presence in furniture, hybrid seeds, EPC, real estate, cement, petroleum terminalling services and specialty fertilizers. Its wholly owned subsidiary Gulbarga Cement is constructing a 3.23mmtpa cement plant and a 50MW power plant at Gulbarga while Zuari Rotem Specialty Fertilisers Ltd, a JV with Rotem Amfert, Negev Ltd, Israel, is constructing a plant to produce 24,000mtpa of water soluble fertilizers. The specialty fertilizer plant will initially produce 19:19:19 and 20:20:20 grades and later other grades would be added as per market demand.
We recommend a BUY with a 12m price target of Rs805/share
The stock is currently trading at 0.9x, 5.4x and 5.1x its one year forward P/BV, P/E and EV/EBITDA respectively. With respect to FY11E, the stock is trading at 0.9x, 5.3x and 4.3x P/BV, P/E and EV/EBITDA respectively. The company has been trading at an average one year forward EV/EBITDA of 5x since 2006 post implementation of NPS Stage-III. We value the stock using the same average multiple 5x and the average EBITDA of FY11E and FY12E to arrive at 12m target price at Rs805/share. At the CMP of Rs583/share, it provides an upside of 38%. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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