The sharp fall in Zuari Agro Chemicals Ltd’s stock price highlights investors’ disinterest in pure fertilizer companies. In five trading days, the stock fell from Rs. 374 on 27 November to Rs. 310 on Wednesday. The steep fall has come as a surprise to many market participants. Buoyed by the performance of recent restructured entities like Cinemax, analysts expected the Zuari Agro Chemicals — the demerged entity of the Zuari Industries- to get re-rated when it relists on 27 November as the new entity is separated from unrelated businesses. However, contrary to expectations, the stock has lost more than 17% of its value since the relisting day.
The steep fall in the stock price can be explained by the nature of businesses the company is left with. The standalone entity has a complex fertilizer capacity of 0.7 million tons per annum. While urea capacities stood at 0.4 million tons per annum, its 40%-owned Paradeep Phosphate mostly manufactures complex fertilizers. Thus, the company’s fortunes are largely determined by the complex fertilizers business, which is facing demand headwinds.
According to Edelweiss Securities, including the trading business, non-urea volumes fell 30.7% in the first half of the current fiscal due to poor demand and scarcity of raw materials. Even though the management is expecting volumes to improve in the second half of the current fiscal, Zuari Agro’s finances may not improve anytime soon. This is because the company is in the midst of addressing the raw material and energy issues, the benefits of which are expected to kick-in only after some quarters.
The company is firming up plans to increase phosphoric acid plant capacities, the main ingredient in phosphate fertilizers. Securing long term supplies of phosphoric acid will help it improve margins. But according to the management, the current efforts to increase the phosphoric acid capacities will fructify only by 2015. N. Suresh Krishnan, managing director of Zuari Agro Chemicals said in a conference call with analysts “We have already signed an MoU and we are taking this forward to the next level of getting into definitive agreements and we are quite committed that by the time end of 2015 calendar year, we should have these projects (phosphatic fertilizer and phosphoric acid plants) fully commissioned and we are getting into a financial commitment mode and all this should be happening in the next 6 to 9 months.” Also, the switch from the costlier naphtha to natural gas for urea production is expected to be completed only in the next fiscal year.
Overall, Zuari Agro Chemicals is in the midst of setting its house in order. The company is shifting to cheaper raw material sources and is expanding its presence in more profitable businesses. The transition will lead to benefits, but only in the long term. Subdued demand for complex fertilizers and tight raw material supplies could weigh on the company’s earnings in near term. Satish Mishra, analyst at HDFC Securities said in a note “Complex fertilizer volumes for ZAL (Zuari Agro) standalone and PPL (Paradeep phosphate) were down 20%+ in 1HFY13. Though 2HFY13 will be better, we expect consolidated EPS for ZAL to be in the range of Rs. 32-35 for FY13 (decline YoY) and Rs. 40-42 for FY14.”