Fertiliser stocks: Are high PEs justified? - Views on News from Equitymaster

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Fertiliser stocks: Are high PEs justified?

Dec 28, 2012

This is the fourth article in our series that analyzes some expensive stocks in specific sectors to understand if their valuations or "high PE" (price to earnings) multiples are justified.

In the first article of the series we looked at high PE food stocks, in the second, we discussed high PE steel stocks and in the third article of the series we examined auto stocks trading at high PE multiples.

In today's article, we will analyse the fertiliser stocks with highest PEs and try and find if such multiples are justified.

From a list of 24 fertiliser companies, we identified three with the highest PEs, (in descending PE order) as National Fertilizers Limited, Chambal Fertilisers & Chemicals Limited and Coromandel International Limited

Let's look more closely at the reasons for the relatively strong PEs of these companies.


Key financial parameters for 3 highest PE Fertiliser companies
 NationalChambalCoromandel
TTM PE63.618.113.2
Average growth (in %)   
Sales9.814.729.9
Net profits64.720.136.3
Average Profit Margins (in %)   
Operating Profit8.516.911.5
Net Profit3.44.75.6
Return on Equity (in%)11.517.027.4
Note: Numbers are for last 10 years except TTM PE.
TTM: Trailing Twelve Month
National Fertilisers

National Fertilisers is a public sector undertaking (PSU) enterprise that got listed on the stock exchanges in 2001. As the name suggests, National Fertilisers is into the business of manufacturing and selling of fertilisers. The company's main line of operations is urea. However, it is also involved in agri business and sale of industrial products and bio-fertilisers. It has 5 manufacturing units, one each at Panipat (Haryana), Bathinda and Nangal (Punjab) and two plants at Vijaipur (Madhya Pradesh) with a total installed capacity of 32.31 lakh tonnes.

The company's average annual sales growth in the past decade has been disappointing at 9.8% which is one of the lowest in the fertiliser industry. However, the net profits have grown at a higher rate of 64.7% due to an exceptional growth of more than 600% in 2003 due to lower base. It does not have much to boast about in terms profit margins too both at operating and net profit levels. Average RoE has been 11.5%. It has an extraordinarily high PE of 63.6 which does not seem to be justified on back of the company's weak performance.

Chambal Fertilisers & Chemicals Limited

Chambal Fertilisers & Chemicals Limited is a part of the KK Birla group. The company is mainly involved in fertiliser business but has recently diversified into textiles and shipping too. It has 2 hi-tech nitrogenous fertiliser (urea) plants located at Gadepan in Kota district of Rajasthan. The two plants produce about 2 m MT of Urea per annum. It caters to farmers across 11 Indian states.

Chambal Fertiliser's sales have grown by 14.7% on an average basis. However, net profits have been very volatile with the company reporting net losses in 5 years in the last decade. Average operating profit margin stood at 16.9% but net profit margin was subdued at just 4.7%. The company displayed better return ratio in the form of RoE of 17%. The stock is currently trading at 18 times its trailing twelve month earnings, which in our opinion is quite high keeping in mind the unstable performance by the company in the past.

Coromandel International Limited

Coromandel International Limited is involved in fertilisers, speciality nutrients, crop protection and agri and lifestyle retail. Its product range includes insecticides, fungicides and herbicides. The company has displayed a good topline and bottomline performance growing by 29.9% and 36.3% respectively on an average. At operating profit level, margins are lower at 11.5% but net profit margins of 5.6% are among the best in the industry. A robust RoE of 27.4% speaks well of its ability to create shareholder wealth. Currently, the stock is trading at 13 times its trailing twelve month earnings.

Conclusion

Both National Fertilisers and Chambal Fertilisers & Chemicals Limited do not have a good financial track record to boast about. Also, in terms of size, these two companies are much smaller than Coromandel International. Thus, at high PE multiples of 64 and 18 respectively, these stocks are overvalued.

However, Coromandel International seems to have exhibited a decent history of financial performance and an ability to generate good returns for shareholders. The stock is currently valued at 13 times its trailing twelve month earnings which is slightly higher than the industry average PE of 12 times.


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