SHAREKHAN SPECIAL - Q2FY2012 Agri inputs earnings review

Q2 results ahead of expectations: Our universe of agriculture stocks reported a surprisingly strong performance in Q2FY2012 with aggregate revenue growth of 27.4% driven by both higher realisations and a smart uptick in the volume offtake. The adjusted profit after tax (PAT) grew by 77.9% during the same period. The outperformance was driven by a strong upsurge in the margins of Tata Chemicals.

Margin improvement is one-off: The overall increase in the operating profit margin (OPM) was mainly due to the higher margin of Tata Chemicals during Q2FY2012 on the back of a price rise taken in the inorganic chemical segment (soda ash) and the last quarter's fertiliser subsidy that was included in Q2FY2012. The management of Tata Chemicals believes that going ahead there will be pressure on the margin due to a strong demand for raw materials and that the company would not be able to pass on the increase in the cost beyond a certain limit. This could hurt the margin. The margin of Deepak Fertilisers and Petrochemicals Corporation (Deepak Fertilisers) and United Phosphorus declined due to input cost pressures. The sales of complex fertilisers were affected due to the lower availability of MOP which adversely affected the sales mix and the margins.

Government to hike subsidy pay-out for fertiliser companies in current fiscal: The Government of India has made an additional provision of Rs13,779 crore for fertiliser subsidy during FY2012. So the total outlay for the fertiliser subsidy has increased from Rs53,837 crore to Rs67,616 crore. Out of the total incremental outlay of Rs13,779 crore, the bulk, ie Rs5,200 crore, has been allocated for indigenous complex fertiliser followed by Rs3,000 crore for imported complex fertiliser. The allocation to fertiliser subsidy was increased mainly due to a higher input cost and deprecation of the rupee against the dollar.

Deepak Fertilisers and United Phosphorous remain our top picks: Deepak Fertilisers and United Phosphorus remain our top picks post-Q2FY2012 results because currently both the stocks are available at much attractive valuations. After the Q2FY2012 results, we remain positive on Deepak Fertilisers on account of the higher utilisation ratio of its newly commissioned ammonium nitrate plant and the higher trading margin in the specialty fertiliser business. United Phosphorus will grow at 20 to 25% for the next two years on the back of a higher inorganic growth from its recent acquisition of AVG Agro Brazil and is likely to maintain its OPM in a tight range.

Source : Equity Bulls

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