Rashtriya Chemicals & Fertilisers’ (RCF) Q3FY11 net sales declined by 4.5% YoY to Rs15.3bn due to lower trading volumes. OPM remained flat at 7.2%, however, higher depreciation charges resulted in net profit to decline by 12.1% to Rs684mn inline with expectation (PINCe Rs660mn).

Lower trading volumes drag Q3 result: Revenues from trading decreased by 34.1% YoY. As a result net sales declined by 4.5% in Q3FY11. Trading contribution in total revenues has shrinked from 45% in Q3FY10 to 31% in Q3FY11.

De-bottlenecking in progress: RCF is increasing its Urea capacity at Thal through de-bottlenecking by 0.26mn MT (linked to IPP) and reducing energy consumption by ~0.4Gcal/MT of Urea for the whole unit (completely retained by RCF for five years as per current policy). Additional capacity is expected to become on-stream in FY12.

New investment policy on the card: We expect Govt. to modify the current Urea investment policy to bring new investment into the sector. 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. RCF is also looking out for opportunities to put up Urea facility in gas rich African nation and is also a front runner for opportunities regarding revival of sick units.

De-control still away: As we have been saying, unlike complex fertiliser, decontrol in Urea is difficult currently until all players switch to gas. However, in the coming budget we expect some increase in Urea fixed cost subsidy (~Rs350/MT) for all the players.

VALUATIONS AND RECOMMENDATION

We have reduced our estimate for FY11 and FY12 by 6.8% and 8.7% respectively on the back of delay in commissioning of Urea’s debottlenecking capacity. At CMP of Rs76, RCF is trading at PER of 19.5x & 16.2x and EV/EBITDA of 9.0x & 6.9x respectively for FY11 & FY12 estimates. We maintain our 'HOLD' recommendation with reduced SOTP target price of Rs71 (12x PER FY12 and Rs15 for expected new capacity of 1.2mn MT p. a.). Any development regarding the commercial usage of large land bank at Chembur and disinvestment (not valued in our estimates) will be the positive triggers.