A fairy among pariahs

SMARTSHARE

If there is one sector that has grossly underperformed in the markets, been a pariah for the FIIs and where the winds of reform have not blown, it is fertiliser. And these are precisely the reasons why I like the sector.

The going could become worse before it becomes better. But if someone is looking for the long term and is willing to average lower, the risk reward ratio in the sector very much favours the investor.

As compared to a rise of 223 per cent in the Sensex during the aforesaid period, all the stocks in the sector have underperformed the benchmark, with most of them giving losses despite a 14-year wait.

From an investor's viewpoint, Zuari Industries (ZIL) seems attractive at the current price of Rs 174. ZIL holds 51 per cent in Zuari Maroc Phosphates (ZMPL), which in turn holds 80 per cent in Paradeep Phosphates. ZIL and ZMPL together make DAP, ammonia, urea and NPK fertilisers.

On the face of it, ZIL is fairly valued. Currently it trades at 14.5 times its trailing twelve-month earnings of Rs 12 per share, which is much more than what a fertiliser company should command. Dig a little deeper and you would know why Zuari is a value buy at the current levels.

For those who came in late, ZIL sold its share in the 2.1 million tonne plant of Zuari Cements for a consideration of Rs 600 crore in June this year.

I do not know what kind of tax the company will have to pay on this, but assuming a worst-case scenario where the company pays tax at the highest rate of 33.6 per cent on the profit of Rs 386 crore, the tax outgo will be Rs 130 crore and we would be left with Rs 470 crore, which means cash per share of Rs 157.

Then, ZIL holds 538.39 lakh shares in Chambal Fertilisers and 3.4 lakh shares in Texmaco, both group companies. At December 27 valuations the value of these investments adds up to Rs 80 per share.

Similarly, Zuari Investments holds 28.96 lakh shares of Texmaco, valued at Rs 332 crore. ZIL's 50 per cent share comes to Rs 186 crore, which would mean Rs 55 per share of investments.

The investments come to Rs 80+55=Rs 133 per share. Prudence demands that these be valued at 50 per cent, which gives you Rs 66 per share. Add to that the Rs 157 per share cash and you have Rs 157+ Rs 66= Rs 223 per share of cash or cash equivalents.

Then there are other subsidiaries: Indian Furniture Products, Zuari Seeds, Simon India, Zuari Indian Oil Tanking and Style SPA Furniture. Style SPA has around 90 branches in the country. I have not valued these companies at all in my investment argument.

Both the plants, Zuari and Paradeep, come with good locations. Paradeep Phosphates is located in the port town of the same name in coastal Orissa, with a sprawling 2,200 acre campus, where it has a private jetty.

ZIL's main plant is strategically located near the Zuari river, just 5 km from Goa's Dabolim airport. Of the 1,100-acre land, the plant occupies around 130 acres and some portion is used by the Birla Institute of Technology and Science (BITS) Goa campus.

What are the negatives? Zuari's plant is based on naphtha, which is not so cost effective. The stock lacks continued liquidity. It is essentially an under-owned stock with the MFs holding at 4.8 per cent and FII holding at 0.69 per cent. This augurs well.

With over Rs 220 in terms of cash or cash equivalents, the stock is a value buy for the long-term investor, as the two plants with huge tracts of unused land and many subsidiaries come for free at the current price of Rs 174.
 

FERTILISER STOCKS: A 14-YEAR EXILE
STOCK	27/12/2006	31/03/1992	% CHANGE
COROMANDEL FERT	85.05	32.91	158.42
GODAVARI FERT	91.70	75.00	22.27
ZUARI INDUSTRIES	174.65	168.68	3.54
TATA CHEMICALS	219.45	253.12	(13.30)
DEEPAK FERT	87.25	115.00	(24.13)
MANG CHEM FERT	15.98	46.83	(65.88)
NAGA FERT CHEM	13.05	43.12	(69.74)

Disclaimer: Financial advisory Anagram may have recommended stocks earlier at lower levels.