Chambal Fertilisers' (CFCL) Q3FY11 standalone results were better than our expectation as net sales grew by 18.6% YoY to Rs13.6bn against our estimate of Rs12.1bn on the back of higher trading volumes. Increase in OPM by 39bps to 16.9% owing to higher trading margins YoY, coupled with 40.9% surge in other income resulted in net profit rising by 34.7% to Rs1.1bn.

Higher volumes drives revenue: Revenues from manufactured Urea and traded fertilisers increased by 14% and 23.6% YoY respectively resulting in the net sales growth of 18.5%. PBIT margins from traded goods expanded by 400bps to 6.6% in Q3FY11 which resulted in PBIT margin increasing to 13.2%.

Other business gaining traction: Revenues from shipping and textile business increased by 16.1% and 28.7% YoY and PBIT margin for shipping and textile stood at 33.5% and 10.8% respectively.

New investment policy on the card: We expect Govt. to modify the current Urea investment policy to bring new investment into the sector focusing on achieving self-sufficiency in Urea production. We expect capacity addition/ revival of 8-10mn MT of Urea in the next 5-7 years. One major change that we are expecting in the new policy is the increase in floor price for Urea realisation to ~USD275/ MT and will be linked with natural gas prices.

De-control still away: As we have been saying, unlike complex fertiliser, decontrol in Urea is difficult currently with the heterogeneity involved in the sector. We expect this to happen only after 2 years once all players switch to gas. However, in the coming budget we expect some increase in Urea fixed cost subsidy for all the players on the back of cost escalation over the year and a price hike of ~5% at farm gate level. Chambal should benefit with both the policies as it is the largest private manufacturer of Urea & also interested in putting new Urea facility.

VALUATIONS AND RECOMMENDATION We have not yet factored ~12% upside in our FY12 estimates due to higher fixed subsidy which we have mentioned above and any incremental SOTP valuation for new capacity of 1.2mn MT p. a. post favourable policy. These two events can provide upside to our valuation. At CMP of Rs78, CFCL is trading at PER of 10.6x & 9.7x and EV/EBITDA of 5.7x & 4.9x for FY11 and FY12 respectively. We maintain our `HOLD' recommendation with a target price of Rs80 (10x FY12E EPS),