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STOCK UPDATE Gateway Distriparks
Recommendation: Buy
Price target: Rs166
Current market price: Rs129 Expect limited impact of hike on haulage rates Key points -
Indian Railways to hike haulage rates: Indian Railways is proposing to hike the haulage rates by up to 16-31% for the container train operators in two phases (December 2012 and February 2013). The increase in haulage rates would depend on the weight (tonnage) of the containers, with an overall increase of 31% (per TEU) for containers of 10-20 tonne and 16% for containers of over 20 tonne. This increase is expected to impact both the domestic and export-import businesses. -
Limited impact of hike on the consolidated business: The steep increase in the haulage rates (after many years of stable tariff structure) would negatively impact Gateway Distriparks Ltd (GDL)'s rail freight business both in terms of a shift to the road transport and an increase in the margin pressure. The company indicated that the absolute increase in cost would be in the range of Rs3-4 crore. But, it would pass on some of the cost to its customers. The overall impact on the consolidated financials of the company would be quite limited (as the segment contributes to only around 4% at the consolidated EBITDA level). At the moment, we are keeping our estimate and price target unchanged. The changes would be made based on the revision of tariffs and the extent of pass through of the increased cost to the customers. -
Maintain Buy with price target of Rs166: We continue to like GDL given its leadership position in all the three verticals, ie container freight stations, rail transportation and cold chain services. The company would be among the key beneficiaries of a revival in trade and an expected movement of goods with the opening up of retail sector for the foreign companies. At the current market price, the stock traded at 10.3x and 8.8x its FY2013E and FY2014E earnings. The valuations turned attractive after a sharp correction in the past few days. We maintain our Buy recommendation on GDL with a price target of Rs166.
SECTOR UPDATE Fertilisers Weak demand for complex fertilisers; expect improvement in H2 We have attended the conference call on "Current affairs on P&K fertiliser" by Zuari Agro Chemicals. Zuari Agro Chemicals is the demerged entity of Zuari Industries, which focuses on the business of agricultural inputs (installed capacity of 4 lakh tonne of urea and 7.2 lakh tonne of non-urea). Zuari Agro Chemicals is scheduled to soon get relisted on the bourses. The key takeaways of the conference call are as follow: Industry scenario -
Weak demand for complex fertilisers: Use of complex fertilisers (non-urea fertiliser) is witnessing a sharp decline in demand because of its higher price in comparison with urea fertilisers and an uneven monsoon in the khariff season. Artificially keeping the price of urea low and increasing the price difference between urea and non-urea fertilisers are affecting the sales of non-urea fertiliser. During H1FY2013, use of non-urea fertilisers has seen a demand destruction of 25%, whereas consumption of urea fertilisers has increased sharply. -
Margins in complex fertilisers under pressure: Currently, the price of ammonia (a key raw material for non-urea fertilisers) is also ruling on the higher side on back of lower supply due to closure of plants producing ammonia around the world, which is also impacting the margins of the fertiliser manufacturers. -
Better demand outlook for H2: Demand for non-urea fertilisers may improve from the current level due to an increase in the sowing acreage during the current rabi season due to a late revival of monsoon and an increase in the level of water in the reservoirs. On other side, raw materials, like ammonia and phosphoric acid, may see some moderation in their prices due to a higher incremental supply in the global market and a lower demand from the high-importing countries like India and China. In the upcoming contract renewals for the raw materials, we expect the Indian companies to drive a hard bargain to offset the impact of a depreciating rupee. -
Non-availability of raw materials lead to lower production/sales volumes: In H1FY2013, fertilizers sold by Zuari Agro Chemicals stood at 7.07 lakh tonne (which include 1.9 lakh tonne of urea, 1.9 lakh tonne of complex fertilizer and 3.3 lakh tonne of traded fertilisers). This amounts to a decline of 23% in volumes sold in H1FY2013 as compared with the same period of last year, mainly due to closure of plants (for 69 days in Q1FY2013) resulting from non-availability of raw materials (namely phosphoric acid). Thus, the margins were much lower than steady state level. The EBIDTA margins of the non-urea fertiliser stood at Rs1,500 per tonne. In traded volumes, the margins stood at Rs750-1000/tone, which the company believes is in a reasonable range. -
Natural gas supply to ease cost pressures: The company will start receiving natural gas by the end of December 2012 and will start the trial run of its urea plant from January 2013 for the next three month. The conversion of feedstock from naphtha to gas will help the company to reduce the cost of manufacturing and will boost the production of urea. The company is also setting up a 1-MT plant of complex fertilisers along with a phosphoric acid plant, which will take care of the raw materials for the complex fertilisers. The company has also tied up for procuring rock phosphate from Peru for the next 25 years. Backward integration for raw materials will help the company to improve its EBIDTA per tonne margin and will also help it to reduce the risk of availability of the raw materials. -
Valuations-could relist at Rs260-280/share: We expect Zuari Agro Chemicals to post a profit after tax of around Rs150-160 crore (rough estimate) in FY2013 (EBITDA of Rs144 crore in H1FY2013 but performance to improve in H2FY2013 due to a better demand and an expected easing of cost pressures). We expect the stock to relist at around Rs260-280/share on the bourses. However, we do not actively cover the stock and do not have a recommendation on it. For the past one year, we have been advocating preference for single sulphur phosphate manufacturers like Liberty Phosphate and Rama Phosphate among the complex fertilisers companies due to a growing demand for the low-cost phosphate fertilisers.
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