By: ICN Bureau
Last updated : January 11, 2021 11:03 am
The sharp increase in global crop prices to record highs and healthy agri product demand are likely to boost exports for our CPC universe.
Nirmal Bang Institutional Equities (NBIE) Chemical sector 3QFY21 earnings are likely to be supported by healthy soil moisture and water storage levels in key reservoirs, which augur well for Rabi crop prospects and CPC/fertilizer demand. The positive view on CPC is based on expectations of some initial demand and pre-buying for the Jan-March’21 season when Rabi crops peak. ICN carries here NBIE’s full report.
The sharp increase in global crop prices (including soyabean) to record highs and healthy agri product demand (especially for corn and soya from China) are likely to boost exports for our CPC universe. Commodity chemicals company Tata Chemicals (TTCH) is likely to see pressure on volume and margins YoY although the soda ash business will likely see growth QoQ as the lockdown was eased in India and its overseas markets in the US and Europe.
We have also rolled over our estimates and TP for CRIN, PI, TTCH and UPL from Sept’22E to FY23E. We raise our TP for CRIN 10.1% to Rs1003, PI 5.9% to Rs2295 and Tata Chem 21.8% to Rs308. For UPL, we have cut the PE multiple from 11.3x to 10x and as a result cut the TP by 8.4% from Rs626 to Rs574. Post these changes, we maintain our Buy ratings on CRIN and UPL, Accumulate on PI and Sell rating on TTCH.
Key pointers to watch for 3Q FY21: Impact of raw material costs on gross margins, new products, working capital and channel inventories. Early sowing data for Rabi (up 4.3% YoY as of end Dec’20) is encouraging for the Rabi crop outlook. This along with healthy farm income augurs well for CPC and fertilizer demand in the current Rabi season. The caveat: there was excessive rain in the south, especially in Andhra and Telengana,which had marginally hampered the trend in sowing in these two states.
UPL: Consolidated 3QFY21 revenue is likely to increase by 8.4% YoY to Rs96.43bn based on double-digit volume growth in LatAm and India. LatAm/US/EU/India/RoW markets to see revenue growth at 10.4%/5%/2.4%/8%/9.2% YoY. LatAm will still dominate the pie at 48.1% contribution to revenue. We expect the adjusted consolidated PAT to rise by 10.9% YoY to Rs8.6bn. EBITDA margin may sustain at year ago levels of 23.6% due to (a) improved traction in UPL/Arysta products and sequential growth in higher margin NA market. (b) absence of merger related adjustments in COGS and (c) cost synergy benefits of Rs830mn. Watch list:
Positives include potential integration benefits, further monetization of Arysta assets and new launches and potential improvement in cashflows and reduction in working capital/net debt. Negatives could be Arysta merger related adjustments in depreciation, potential pressure from high input costs, higher-than-expected working capital/leverage and fx losses.
PI Industries: We expect consolidated 3QFY21 revenue to grow by 27.5% YoY to Rs10.83bn on the back of contribution from the two plants started in 4QFY20 and Isagro India revenue (not included in 3QF20 results).
Segment revenues-CSM exports growth is expected at 24.7% YoY and domestic CPC growth is expected at 36.2% YoY. EBITDA margin is likely to rise by 5bps to 22.0%. We expect earnings to rise by 44.8% YoY to Rs1.79bn vs. 27.8% YoY growth in EBITDA despite 28.2%/442.9% YoY increase in depreciation/interest expenses. Watch for new product launch, news on QIP funds utilization and new CSM deals.
Sumitomo Chemicals India: We expect consolidated 3QFY21 revenue to grow by 4% YoY to Rs5.44bn based on domestic revenue decline of 0.6% whereas exports are expected to grow at 20.6%. EBITDA margin is likely to rise by 540bps to 14.1%, supported by 562 bps expansion in gross margin to 37.5%- in line with 1HFY21 average of 37.3%. This margin improvement and the beaten down base in 3QFY20 are likely to aid 68.2% YoY growth in EBITDA and PAT growth of 86% YoY to Rs484mn. Watch for new launches and specialty product share.
Coromandel International: Revenue is expected to rise by 8% YoY, driven by the 7.1% YoY rise in the Nutrient segment and 15% YoY growth in CPC revenue. EBITDA is likely to rise by 20.3% YoY, driven by 150bps rise in EBITDA margin. Overall, EBIT margin will likely come in 150bps higher at 13.4%. We see 1.3% YoY growth in manufactured phosphatic fertilizer volume and savings worth Rs206mn in input costs due to captive production of phosphoric acid. We expect this to aid a 2% growth in Nutrient EBITdespite a 61bps EBIT margin contraction YoY. CPC EBIT margin is likely to be healthy at 19.5% vs. 15.4% a year ago.
This along with 15% growth in CPC revenue will likely aid 45% growth in CPC segment EBIT and overall EBIT growth of 21.6%. This along with 44.9% YoY fall in interest expense is likely to aid 28.9% YoY growth in PAT vs. 29.9% YoY increase in PBT. We estimate effective tax rate at 26% vs. 25.4% a year ago.
Tata Chemicals: We expect 3QFY21 consolidated adjusted PAT to fall by 53.1% YoY to Rs810mn. We see revenue falling by 5.1% YoY on account of 7.5% YoY fall in Basic Chemistry (BC) segment to Rs18.59bn. In our view, this is due to the subdued end use of soda ash in float glass (used in auto and construction sectors) that has resulted in lower soda ash realizations in all geographies. Specialty segment revenue, including Rallis, is likely to rise by 13.3% YoY to Rs6.29bn. EBITDA margin is estimated at 14.9% vs. 18% YoY. PBT is expected to be down 51.4% YoY. Segment EBIT – BC to be down 60.6% at Rs1.29bn and Specialty to be up 47.3% at Rs465mn. Segment margin vs. 3QFY20 - BC estimated at 7% vs. 16.3%; Specialty estimated at 7.4% vs. 5.7%.