| Recommended Price | Rs. 204 |
|---|---|
| Target (Rs) | Rs. 240 |
| Upside | 18% |
| Holding period | 1 Year |
Rashtriya Chemicals and Fertilisers Limited (RCF) is a ‘Mini-Ratna’ company, with about 75% of its shares owned by the Government of India. It is a leading manufacturer of fertilisers and chemicals. RCF’s product range includes urea (about 51% of sales in FY2024), complex fertilisers (13%), traded fertilisers (25%), and industrial chemicals (10%). RCF has a strong market position in urea and complex fertilisers. It also produces specialty nutrients like bio-fertilizers (Biola), micronutrients (Microla), and water-soluble fertilisers (Sujala). Additionally, RCF manufactures industrial chemicals used in dyes, solvents, leather, pharmaceuticals, and other products. The company operates two plants in Maharashtra: one in Trombay and one in Thal. The Thal plant mainly produces urea with a capacity of 2 million metric tons per annum (mmtpa), along with some industrial chemicals. The Trombay plant produces a variety of industrial products, complex fertilizers with a capacity of 0.66 mmtpa, and urea with a capacity of 0.33 mmtpa. RCF also has a nationwide marketing network with over 5,800 dealers across India.
Investment Rationale
Significant independent ownership and established leading position in urea augur well for the business
Rashtriya Chemicals and Fertilisers Limited (RCF) is one of India’s largest urea manufacturers, known for its efficient and vertically integrated operations in fertilisers and chemicals. The company maintains high plant utilisation levels and also trades products like diammonium phosphate (DAP) and muriate of potash (MOP), providing farmers with a wide range of products. The Government of India (GoI) holds a 75% share in RCF, giving it significant financial flexibility. RCF has been tasked with importing phosphorus (P) and potassium (K) and diammonium phosphate to ensure these raw materials are readily available. The pricing of these products is controlled by the GoI, with assurances that any trading losses will be covered. The company expects steady long-term demand for fertilisers, both urea and non-urea, and India’s ongoing reliance on imports due to the demand-supply gap is favourable for RCF.
Strategic capex plan to drive future growth
The company has invested around Rs. 2.3 billion in building a new ammonia storage tank, an ammonium nitrate melt plant, and other projects up to FY24. RCF plans to spend Rs. 13.7 billion by FY25 to expand storage and renew facilities. Additionally, it will invest Rs. 10.7 billion in Talcher fertilisers due to increased project costs. These investments will be funded with a 70:30 debt-equity ratio. Despite taking on more debt, the company’s profitability is expected to grow due to strong EBITDA generation and stable interest costs from lower working capital debt. With agricultural growth increasing the demand for fertilisers, this new plant is expected to boost domestic capacity and utilise coal reserves, ensuring low-cost production. The Government of India is also considering a special policy for urea produced from this plant, offering a post-tax equity IRR of 12%, ensuring the project’s viability.
Valuation and Outlook
RCF is a major manufacturer and marketer of fertilisers and chemicals in India, known for its strong brand recognition. As one of the largest urea producers, RCF held a significant market share of about 10% in the urea sector in FY24. The company is vertically integrated, producing both urea and non-urea fertilisers, as well as various industrial chemicals. RCF’s Thal and Trombay units operate efficiently with high-capacity utilisation, and profitability is expected to improve due to energy-saving projects. Financially, RCF saw a revenue CAGR of 27% from FY21-24. The company aims for consistent growth by diversifying its income, focusing more on non-urea products. With a strong market position, significant government stake, diversified product range, and robust operational and capex plans, we believe RCF’s revenue and operating performance will continue to improve. We recommend a “Buy” rating for RCF, valuing the company at 22x FY25 earnings with a target price of INR 240, offering an 18% upside over 12 months.
