Efert BMR of old plants improve their production

EFERT production has improved and grew at a 3-year CAGR (2018-2021) of 5% against an industry CAGR of 2%. This was on the back of the improved gas supply and efficiency of the Enven plant. Further, the company has undertaken a BMR of old plants, which is expected to improve their production. Higher production and ending inventory will boost sales in CY23.

Meanwhile, experts reiterate our “BUY” stance on EFERT with a Dec-2022 DCF-based target price of Rs109/share, along with a dividend yield of 17%, thus making a potential total return of 39%.

The stock has rallied significantly over the past six months; our Target Price for the scrip still offers a 22% upside from last day’s close.

Our liking for stock emanates from (1) Higher output due to improvement in gas supply and plant efficiency, (2) Strong pricing outlook, (3) Beneficiary of price hikes, (4) Attractive dividend yield, and (5) Higher trading margins.

Strong pricing outlook: Fertilizer companies are comfortable passing on the impact of any price hike due to 1) Disparity between local and international prices, 2) Robust demand, and 3) Limited suppliers.

The beneficiary of price hike: EFERT is currently procuring feed gas at two rates, i.e. Industry normal gas rate and Petroleum policy 2012 rate (PP-12). If gas prices are hiked by 15%, this will bring EFERT on edge because of an incremental gain of Rs16/bag.

Attractive dividend yield: EFERT has had an average payout of ~101% for the past three years, and we expect this trend to continue. EFERT offers a dividend yield of ~17% for CY22-CY23, higher than the forward market dividend yield and 3-year PIB yield of ~10% and 13.84%, respectively. To highlight, EFERT is among the highest dividend-yielding stocks amongst blue chips.

Higher Trading Margins: DAP’s rising prices have increased the companies’ trading margins due to inventory gain. EFERT’s trading margin, which has been at a 5-year average of 17%, increased to 21% in CY21. The trading margin of EFERT is expected to remain elevated at current levels as we do not see the super commodity cycle reverse in CY22.

Key Risks: (1) Unexpected change in schedule for GIDC payment, (2) Unfavourable decision on GIDC regarding Even (3) higher than expected feed and fuel gas hike, (4) higher than expected feed and fuel gas hike, (5) Unfavourable taxations, (6) Gas shortage and (7) Government intervention in setting prices.

EFERT trades at CY22E and CY23F PE of 6.0x and 5.9x, respectively.

Courtesy- AHCML Research

Posted in Fertilizer & Petrochemical Industries.

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