Zuari Agrochemicals - Value emerges with declining concerns - Edelweiss

Post a conference call with Zuari Agrochemicals (ZAC), the management is of the view, its non-urea volume could see an uptick in FY14. Urea volume is expected to be higher by ~10% YoY in FY14 post changeover of feedstock. We expect higher volumes and lower interest cost in FY14 to boost ZAC's growth despite challenges from the domestic markets that has excess inventory levels. We maintain 'BUY' because of its highly attractive valuations. It is worth highlighting that ZAC's present market capitalization is equal to its FY12 net current assets less debt which implies valuing its existing 1.2mnMT of complex fertilizer (standalone plus 40% stake in PPL) and 0.4mnMT urea plant for free.

Higher volume, lower interest to fuel FY14 surge

Post witnessing the non-urea plant shutdown on account of non availability of raw material and adverse market conditions in FY13, the management believes the company's performance would improve in FY14 owing to better capacity utilization of existing facility despite adverse fertilizer market conditions. Further, changeover of feedstock from naphtha to gas in urea plant has already been done and plant has started receiving gas in Q4FY13. ZAC is expected to increase urea production by ~10% in FY14 and this will also lead to reduction in working capital. The company expects standalone interest cost to be lower at INR1-1.2bn (Edel est. - INR1.8bn) in FY14 on account of better cash and inventory management. In FY13, standalone interest cost was as high as INR2.1bn.

Outlook and valuations: Positive; maintain 'BUY'

We believe domestic market challenges could pose temporary hiccups in the near term. At CMP, stock is available at market capitalization equivalent to its net current assets less debt. Stock is trading at P/E of 4.6xFY15E and PB of 0.5xFY15E. We maintain 'BUY' with the TP of INR227 (7xFY15E EPS). Our estimate doesn't include any benefit on account of non urea capacity expansion. Further we have not considered major improvement for FY14 working capital. This could be an upside risk to our estimate.

Source : Equity Bulls

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