Khaitan Chemicals & Fertilizers – Stock Investments

Largest as well as the most reputed player in the SSP industry

Khaitan Chemicals & Fertilizers (KCF) is the largest single super phosphate (SP) manufacturer in India. The company produces fertilisers, sulphuric acid, and soya oil. It sells its SSP fertiliser under the Khaitan Khad brand for various crops like oil seeds, groundnut and potato. The company also specialises in production of sulphuric acid and its derivatives, oleum 65%, oleum 25% and liquid S03.

Under the nutrient-based subsidy (NBS), SSP manufacturers get a much higher gross margin than earlier (see: In Focus on SSP). Part of the increased gross margin will be used for increasing marketing and distribution reach, which will boost volumes. So SSP manufacturers will be able to gain substantial increase in margin as well as volume.

KCFL is the largest player in the SSP industry. The company’s state-wise SSP capacity is as follows: Madhya Pradesh four lath tonnes per annual (tpa), Rajasthan 1.98 lakh tpa, and Uttar Pradesh 2,47,500 tpa, totaling 8,45,500 tpa. Khaitan is also the best selling SSP brand in the market due to consistent quality and standardised processes.
As many SSP units are closed and are available for sale, KCFL can also grow inorganically, capitalising on its brand and marketing network. Notably, the company is the strongest player in the SSP industry and, hence, best placed to capitalise on the inorganic growth opportunity. Recently, KCFL entered in a memorandum of agreement with Jairam Phosphates to acquire the fertilizer manufacturing facilities (SSP 66,000 tpa and sulphuric acid 49,500 tpa) in Chhattishgarh.

KCFL also crushes soya beans and manufactures edible oil out of it. However, heightened speculation and international volatility in this space have resulted in negative margin in the past couple of years. The company is waiting for government to take some concrete action and, accordingly, has no plans to produce or expand in this area of business.

KCFL’s net sales were down by 45% to Rs 36.16 crore, in the quarter ended March 2010 over the March 2009 quarter. As the SSP industry was expecting favourable changes in policy, most manufacturers had stopped producing and supplying SSP from the March 2010 quarter. This had run down the inventory at the dealers’ end and got refilled from May 2010, as the new policy became effective. Hence, the results from the June 2010 quarter will be good.

We expect KCFL to report net sales and net profit of Rs 351 crore and Rs 21.44 crore in the fiscal ended March 2011. EPS works out to be Rs 22.1. At the current market price of Rs 82, the scrip is available at P/E multiple of 3.7. Even in highly unfavourable circumstances, KCFL has had cash profit every year since inception in 1987. With the SSP industry expected to revive strongly and the company having vast geographical presence and strong brand, the scrip deserves better PE.

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