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Unfavourable urea incentive structure clouds Chambal Fertilisers’ outlook

LiveMint logoLiveMint 21-05-2014 R. Sree Ram

Despite a weak performance, Chambal Fertilisers and Chemicals Ltd’s stock has risen 16% since it announced March quarter earnings. Profits slumped 75% to `5.6 crore. Earnings were hit by sluggish sale of manufactured fertilizers and low trading.

To be sure, revenue of manufactured fertilizer, which generates more than half of Chambal Fertilisers and Chemicals’ sales, increased 6%. But the segment’s economies of scale were hit by low urea production. Incentives for urea production beyond a certain level are linked to international prices. With lower global prices, production above the cut-off level was not profitable for the company, forcing it to cut production. Urea production was reduced from 2.1 million tonnes (mt) in 2012-13 to 1.9 mt in the year ended March, according to Prabhudas Lilladher Pvt. Ltd. Maintenance shutdowns added to squeeze on margins.

Trading was muted. Revenues fell 37% due to higher inventory. The segment, however, continued to generate healthy profits as the company tactically sourced diammonium phosphate at cheaper prices in earlier quarters. Results of shipping and textiles were mixed. Losses in shipping were reduced and revenues at textiles business are similar to the fiscal fourth quarter of 2012-13.

The rally in Chambal Fertlisers and Chemicals’ share price is perplexing because its quarterly performance was lacklustre. The outlook is not rosy either. The company still does not have an incentive to increase production. The government is still deliberating on tweaking incentives linked to import-parity prices.

This uncertainty can weigh on production and earnings. “Lack of clarity is currently weighing down on the production guidance as the management highlighted that if the policy is not adequately addressed, the company will be forced to restrict its production to cut off levels, that is, 1.7-1.8 million tonnes in FY15,” Emkay Global Financial Services Ltd said in a note.

Citing uncertain policy, Emkay Global Financial Services lowered its sales and profits estimates for the firm in the current fiscal year. Prabhudas Lilladher cut its estimates for both the current and next financial years.

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