By: JS Global Capital Limited
Potential total return of 25%, ‘Buy’: We resume our coverage on Fatima Fertilizer Company Limited (FATIMA) with a ‘Buy’ rating, where our Dec-2015 Target Price of Rs42 offers a potential upside of 16% along with 2015F dividend yield of 9%. We expect FATIMA’s profitability to grow at a 3-year (2014E-17F) CAGR of 12.4% led by (1) debottlenecking of its Ammonia plant and (2) expected monetary easing. Also working in favor of FATIMA is (1) protection from tariff hikes on feedstock gas until June 2021 and (2) limited gas curtailment on Mari Network.
We believe, FATIMA remains steeply undervalued, trading at 2015F P/E of 7.6x vis-à-vis sector’s 2015F P/E of 10.5x, despite better growth prospects (3-year CAGR of 12% vs. industry’s 3-year CAGR of 10%). FATIMA intends to invest up to US$150mn (35% stake) in a Greenfield fertilizer plant in Indiana (US), which is likely to provide the next leg of growth for the fertilizer manufacturer. That said key downside risk is removal of GIDC exemption for feedstock gas, which can drag down FATIMA’s earnings by an average 28%.
Ammonia Plant expansion to improve utilization: FATIMA is expected to complete first phase of debottlenecking of its Ammonia plant by 4Q2015, increasing capacity by ~105tpd. Subsequently, we expect urea’s capacity utilization to improve to 84% in 2016F vs. 73% in 2014E, resulting in incremental earnings of Rs0.5/share annually starting 2016E. FATIMA is also likely to go ahead with the second phase of debottlenecking at a cost of US$86mn, increasing capacity by an additional 1,800tpd. We await further details, before incorporating the same in our estimates.