Multibagger Recommendation Update - Zuari Agro

Chemicals Ltd - ROI +62.96% in just 3 months

Dear Investor,

We are pleased to update you that our Multibagger recommendation -

Zuari Agro Chemicals Ltd (BSE Code: 534742) has given astonishing
returns of 62.96% in a very short span of time (just 3 months) to our
Multibagger Package subscribers. Whereas the Index has given a
negligible 1.52% return during the same period. Here are the details:

Our recommendation has outperformed the Index substantially. (Click

Here to know our investment rationale for Zuari Agro Chemicals Ltd.)

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Zuari Agro Chemicals Ltd

Reco Price
Rs. 207.00
Price Target (1.5 - 2 Years)
 Rs. 432.00
Upside
108.70%
Date
Nov 09, 2016
Sensex
27252.53
CNX Nifty
8432.00
Exchange
Code
NSE
ZUARI
BSE
534742

Strong Monsoon and release of subsidy payment

will be the key trigger for the stock.
Improved Industry scenario:
We observe that Q2FY17 was subdued for the industry on account of high channel inventory.
Rainfall was 3% below LPA with a good spread across all regions, except some parts of
Karnataka and Andhra Pradesh. Sowing was 4% above the normal level. Crop area increased to
106.8mn hectares from 103.09mn hectares. Sowing of pulses and paddy increased 2.6% and
29% respectively. Sugarcane and cotton acreage declined 7.7% and 11%, respectively. Sales of
urea increased by mere 2.6% for the quarter. However, for H1FY17, sales of urea declined 6.8%.
DAP and complex fertilizers sales declined 3.2% and 3%, respectively, for the quarter and 16%
and 7%, respectively, for H1FY17. MOP sales improved by 10% during the quarter. Potash sales
improved 6% during H1FY17. Due to fall in raw material prices, import of DAP also declined.
Management highlighted that despite low sales from the company to dealers on account of high
channel inventory, demand from farmers increased. Due to better rains, moisture level in the soil
is good and hence we remain optimistic about the rabi season and expect bumper sowing.
Strong Capex:
With a capex outlay of Rs 150-175 crores on the sulphuric acid plant, gypsum pond and
debottlenecking of detrain of complexes which will get commissioned in April or May 2017, ZAC
is expanding its complex fertiliser capacity by 0.25mn0.3mn MT in FY18. Further, management
is also evaluating plans to revamp the Goa plant and Mangalore chemicals and fertilizers plant
which will lead to increase in capacity and energy savings in the future. We believe effective
implementation of gas price pooling will likely lower the subsidy burden and result in debt
reduction in FY17. Further, normalized channel inventory, better plant utilization and lower
interest costs will drive future performance of the company.
Direct Benefit Transfer (DBT):
It has been observed that both the NIC and fertilisers department have been proactive in
implementation of DBT. For the pilot run, 16 districts have been selected out of which the
scheme has to be implemented in 8 districts by October 31, 2016 and in the remaining 8 by
December 31, 2016. Management has highlighted that the government has been constantly
working towards developing infrastructure for DBT and the scheme would prove to be a
turnaround for the sector.
Subsidy:
Subsidy outstanding as on September 30, 2016, stood at Rs 1040 crores versus Rs 1038 crores
on June 30, 2015, and Rs 1710 crores on March 30, 2016. ZAC has received Rs 670 crores till
date. Going forward, management believes subsidy is likely to be lower on effective
implementation of gas price pooling. Consequently, it will help cut debt and boost the margins by
reduction in interest outflow.
Raw material:
Prices of the raw material have remained stable in Q1FY17. However, they are expected to
decline from the present levels. Management highlighted that the prices of DAP have reduced
from USD765/MT in Q1FY17 to USD610/MT in Q2FY17 and are expected to be USD580/MT
going forward. Ammonia prices have corrected from USD370-380/MT to USD230/MT.
Non-subsidy business:
Contribution forms a minor portion of the business. However, for the first five months of FY17, all
100 stores were operational. Out of the 100 stores, 24 stores were profitable. Overall, the
management expects this business to perform better going forward.
Stock Data
CMP (Rs)
229.05
Face value (Rs)
10
52 Week Range (Rs)
262.90 - 117.15
Market cap (Rs Crores)
969.44
Price To Book Value (x)
1.06
P/E Ratio (x)
-
EV/EBIDTA (x)
15.95
One Year indexed Stock Performance
Zuari Agro Chemicals LtdSensex

Return (%)
1m
3m
12m
36m
Absolute
19.58
26.76
53.83
 103.60
Sensex
-2.95
6.09
4.33
33.00
Shareholders
(in %)
30-Sep
Promoter
73.84
Public
26.16
Others
0.00
Total
100
+91 22 6639 3000
research@stockaxis.com
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For Private Circulation Only
01

Industry
The agro-chemicals sector in India is expected to reach the market size of US$ 7.5 billion by FY
2019, growing at a compound annual growth rate (CAGR) of 12 per cent from US$ 4.25 billion in
FY 2014, as per a report by the Tata Strategic Management Group. Exports are expected to
contribute 60 per cent of the industry by FY 2019. Mr Narayan Yadav, Chairman of the
Parliamentary Standing Committee on Agriculture, who released the report, suggested a
balanced approach in the use of agro-chemicals and environmental care. He urged the scientific
community to develop agro-chemicals that boost the yield without having adverse impact on the
environment. The report also indicates that using original crop protection chemicals can increase
productivity of crops by 25-50 per cent. The report further underscored the need for both the
government and crop protection chemicals manufacturers to work closely with farmers to
educate them on correct usage of pesticides and new researches and developments.
Profile
Zuari is a single-window agricultural solution provider. They partner with Indian farmers for
progress and prosperity. It enables agricultural self-sufficiency and economic independence by
providing fertilisers that are both affordable and effective.
Zuaris operations are spread across five key marketing areas. The company has a
manufacturing facility at Goa, with four plants, dedicated to manufacturing urea, DAP and NPK
based fertilizers. Their wide variety and reach has enabled to diversify into additional sectors like
furniture, oil tanking, seeds, and investments, apart from agricultural inputs.
Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar 14
Mar 15
Mar 16
Mar 17E
 Mar 18E
Income:-

Net Sales
Growth (%)
Total Expenditure
EBITDA
Margin (%)
Other Income
Operating Profit
Interest
PBDT
Depreciation
Profit Before Taxation & Exceptional Items
Exceptional Income / Expenses
Profit Before Tax
Provision for Tax
Profit After Tax
Adjusted EPS
7340.75
-
7132.92
207.84
2.83
80.20
288.04
379.82
-91.78
34.02
-125.80
59.80
-66.00
-9.44
-56.56
-10.52
7635.39
4.01
 7336.88
298.51
3.91
72.94
371.45
318.29
53.17
30.06
23.11
-
23.11
6.62
16.49
2.13
9997.46
30.94
9616.47
380.99
3.81
85.16
466.15
500.15
-34.00
72.32
-106.32
-5.53
-111.85
-24.38
-87.47
-21.64
11300.50
13.03
10805.60
494.90
4.38
 145.50
640.40
500.00
140.40
65.30
75.10
-
75.10
20.50
54.60
13.51
12350.60
9.29
11800.50
550.10
4.45
150.50
700.60
500.00
200.60
69.40
131.20
-
131.20
36.50
94.70
23.43
Source: Stockaxis Research, Company Data
Valuation
ZACs FY13-15 performance was spoiled by multiple headwinds. We believe these were odd
events and anticipate a rebound in FY17/18 owing to better monsoon and release of government
subsidy. We Initiate BUY on attractive valuations with TP of Rs 432 based on 18.43x FY18E
EPS. The stock trades at 15.98x FY17E and 9.21x FY18E EPS.
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