Monday, May 14, 2012

Liberty Phosphate - Buy - Initiating coverage

Update - 12 July-2012 -I believe earnings growth will be a challenge in FY13 ( on 30% reduced subsidy). So basis is - cheap may continue  to remain cheap/ get cheaper. So I would rate as SELL /Exit .I`ve sold my long position at ~ breakeven.When one is not sure,better to exit.One can always enter gain.Will enter again if I see some triggers.
Liberty Phosphate - Initiating coverage -Fertlize your portfolio !

Rating / Reco = Buy  at cmp /LTP 77 with 2x upside target in a year i.e 150.
Been tracking this stock since over ~1.5 years. I believe time is right for increasing exposure.
Great results.Details & target rationale below

Q4 FY12 Vs Q4 FY11 ( vs Seq QoQ)
  • Sales up +2.3x (Rs 150 crores. vs 66 crores) ( QoQ Sales up +39%)
  • EBITDA up 67% ( 26 crores vs 16 crores) ( QoQ EBITDA up +19%)
  • EBITDA Margin 17% vs 23%     ( Prev. Qtr OPM% at 20%)
  • PAT up +89%  ( 17 crores vs 9 crores)      ( QoQ up +31%)
FY12 Vs FY11
  • All time high results.
  • Sales up +30% to 473 crores
  • EBITDA +34% to 84 crores
  • EBITDA Margin at 17% vs 18%
  • Tax rate 32% vs 35%
  • PAT up +43% to 50 crores
  • Other highlights
  • Promoter holding has increased by 5% in past 4 quarters from 52% to 57% ( i.e promoter buying from open market)
  • FY12 RoE 45%
  • Recent announcement in March 2012 - Ongoing Capacity expansion by +65% to be completed in near future- from 562,000 MT p.a to 924,000 MT p.a or to 0.92 Million Tonnes p.a
  • It seems the balance sheet not yet released in the announcement but last year debt was ~ 60 crores.This year could be ~80 crores (based on Interest paid for FY12.)
  • Cash flow statement also - not yet released. But going by last year- FY11 CFO ( Cash flow from Operating Activities) was +27 crores, an all time high.
India SSP Single Super Phosphate Fertilizers  Macro
  • Liberty is one of the top 3 SSP Single Super Phosphate Fertilizers in India. ( other two are Rama Phosphates & Khaitan Chemical & Fertilizers)
  • New subsidy scheme by govt. NBS led to a turnaround in SSP.
  • Price wise -SSP is very competitive vs Rs 6 per Kg vs cheapest ( and most subsidized) Urea price of ~ 5 per Kg.
  • SSP has the lowest govt. subsidy per MT of Rs 3,673 per MT  = 67% lower vs average subsidy for other fertilizers of Rs 11,300 per MT.Latest subsidy list for FY13 here ( SSP in row no. 7)
  • India Govt. is reeling under subsidies and wants to discourage over-usage of Urea.Any hike in Urea will benefit SSP.
  • In latest budget ,in Mar 2012, FM also clearly says govt. will encourage use of SSP. Summary news here
  • SSP fertilizer use is 5% of total vs >50% of Urea but SSP usage is growing at a very fast pace.
  • Leading players such as Tata Chemicals,Coromandel are also entering SSP space.
  • Due to increase in imported inputs costs,other fertilizers prices have gone up by 2x-3x leading to difficulty for farmers and thus benefiting relatively cheaper SSP.News here and here Difficulty faced by farmers
  • Robust Demand for SSP is evident by recent fertilizer consumption report by Prabhudas Lilladher for the period Apr11-Feb12 :- Overall fertilizer sales volume has shown growth of mere 0.3% YoY due to (- 8.7%) YoY decline in non-urea fertilizers volume excluding SSP. Urea grew by +4% YoY,SSP grew up +37% YoY. PL Report
  • HDFC Sec also has a SSP macro update. (Opens in pdf )
Risk factors
  • This sector has government / regulation risk.So one has to be careful
  • Due to rising subsidy pressure, govt has reduced subsidy from this year FY13 by 31% for SSP. This is negative as then the only way to maintain margins would be to increase the price. ( But given the next expensive fertilizer is DAP that is already highly priced at Rs 19 per Kg vs ~5 for Urea and ~6 for SSP, it seems SSP has a good chance to grab market share from DAP)
  • A further worse scenario could also happen - that is alongwith reduced subsidy, input prices go up.( as of now this seems less likely as commodities are falling)
  • Lots of big players entering this SSP fertilizer segment - which might lead to lower margins
  • Since subsidy from next quarter is going to be 31% lower, good Q4 FY12 results - could also have resulted from some `channel push`  factor that could have pulled forward the future demand. ( As of now other SSP peers Rama Phosphates & Khaitan haven't declared their results)
  •  Forex - Most SSP use forex to import raw material rock phosphate and they have neg. exports so a falling rupee will affect margins negatively.
  • So starting from Q1 FY13 - will be the true test to see to what extent margins would be hurt. And stock prices might remain muted till market sees evidence of results under the new reduced subsidy regime.
  • YTD +50%
  • 1 year +28%
  • 5 Years +399%. Chart below ( click to zoom)
Valuation Rationale
  • Comparison of Liberty Phosphate with peers such as Tata Chemicals,Rallis India,Coromandel International,Chambal Fertilizers & Khaitan Chemical & Fertilizers
  • Have compared recent EBITDA growth for FY12 ( where FY12 where not avail. have taken 9 months FY12 vs 9mFY11).One can cleary see in the Table comparison below - row 10 - Liberty Phosphate has shown the highest EBITDA growth but trading at lowest valuations.
  • At cmp of 77 ,Liberty Phosphate is trading at market cap of 111 crores, FY12 PE & EV/EBITDA of 2.2x.
  • I also doubt few companies would match Liberty `s tax rate of 32%. (I.e EPS can be booster by lower tax rate)
  • A 100% rally from these levels i.e 2x target would results in increase in Liberty Phosphate valuation to PE & EV/EBITDA of 4.4x vs peer avg. of 13x and 7.4x respectively. i.e even after 2x rally,Liberty Phosphate would still at a big discount to peers.
  • Comparison shows that Liberty is trading at an UNJUSTIFIED ~83% discount on PE basis,~70% discount on EV/EBITDA & EV/Sales basis despite having superior fundamentals such as in line EBITDA OPM% margins ,highest RoE,highest growth numbers and lesser leverage.
  • Ultimately the bullish case comes down to a bet that SSP demand will continue to grow at rapid pace due to competitive pricing ( and hopefully with decent margins)
  • Table comparison below. ( click to zoom)

  • Disclosure - I hold an initial exposure and intend to buy more.


sood said...

one risk comes true. govt defers urea price hike. This will undo the recent jump in the phosphate fertiliser group

Anonymous said...

Are Urea and SSP substitutes for each other,in which case increase of Urea prices would increase demand for SSP? What is the use of respective fertilizers?

Admin said...

Urea & SSP are substitutes in general as both are fertilizers.But obviously both will provide slightly different benefits to the crop ( Ratio of N,P &K).Eg Tea & Coffee are substitutes.I.e high coffee prices could led to increase in tea demand but obviously they offer different benefits to a customer.
Yes.Urea price hike possibility by Indian Govt. is similar to diesel price hike as it covers `vote bank`. Nevertheless,Liberty Phosphate valuations are cheap & seems discounted.

Anonymous said...

Liberty seems to have corrected quite a lot. Is this the right time to buy the stock? Are you still sticking with your target of 150? Btw, how do you see it venturing in hotel business? Thanks.

Anonymous said...

@Anonymous ... "Liberty seems to have corrected quite a lot.."

Had already mentioned under "Risk Factors" that Target of 150 is conditional if it posts superior earnings growth in FY13 also.(that too after 31% cut in govt. subsidy from FY13).

So will have to wait for results & management comments.But personally,I think it`ll be a tough task to maintain earnings growth in FY13 after 31% subsidy cut.
Also,always better to have a stop loss -20-30% & combined even with a time loss i.e if no return after `x` months then EXIT.
~ The Fixer (Admin)