Dated: 24 Jun 23
Company: Zuari Agro Chemicals Ltd.
CMP: Rs. 141.15
Market Capitalisation: Rs. 593.65 Cr.

Intrinsic Value Of Zuari Agro Chemicals Ltd.

In this article we will try to analyze Zuari Agro Chemicals Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this fundamental analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Zuari Agro Chemicals Ltd. is an Indian company engaged in production and distribution of fertilizers. The company is a part of Adventz group, a conglomerate with interests in engineering, infrastructure and agriculture. Its most famous brand is “Jai Kisan” through which it caters for the demand from all across the country. Its product portfolio range from fertilizers, specialty fertilizers, organic manure and micro nutrients.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Before we enter into the calculation of Intrinsic value of Zuari Agro Chemicals Ltd. we have to make some logical assumptions based on the previous six years financial statements and ongoing yield for 10y Government Of India bonds.

Assumptions:

• The increase in Free Cash Flow is assumed to be Rs. -607.02 lakhs per year for the first five years and then Rs -303.51 lakhs from sixth to tenth year. The growth rate is projected based on the past growth of Free Cash Flow (refer to figure below). In the past Free Cash Flow has increased at the rate of Rs. -1214.03 lakhs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Terminal growth rate is assumed to be 0%.
• Discount rate is assumed to be 12%.
• Increase in Revenue is assumed to be Rs. -39669.70 lakhs per year for the first five years and then Rs -19834.85 lakhs per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has decreased at the rate of Rs. -79339.39 lakhs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Free cash flow will be 20% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.25. Since we see an upward trend in Revenue in post COVID period and attribute the fall in Free Cash Flow to the heavy investment made by the company towards property, plant and machinery we can assume that FCF will see growth in future.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free Cash Flow and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Free Cash Flow Growth Model

Intrinsic Value: Rs. 333.94

Stock Entry price with 25% margin of safety: Rs. 250.46

Revenue Growth Model

Intrinsic Value: Rs. 312.07

Stock Entry price with 25% margin of safety: Rs. 234.05

The average of the above two stock entry prices works out to be Rs. 242.26. When the stock starts trading below this price it becomes attractive for long term investment.

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Fundamental Analysis Of Chamanlal Setia Exports Ltd.

Leverage Ratios

Observations:

1. Year 2019 and 2020 were very bad for the company as both were loss making years and the interest coverage ratio dropped below 1. Company had to rely on its reserves and surplus to cover the interest expenses. However, it has managed to improve from this situation post COVID.
2. The debt levels have been at alarmingly high levels, but the company has brought it down below 1 (debt/equity) which is remarkable recovery and brought itself within a healthy leverage limit.

Operating Ratios

Observations:

1. The company has been operating with negative working capital for most part of the period in observation. The negative working capital is mainly due to high amount of short-term borrowings and outstanding dues of creditors. After showing improvement year 2022 it has again gone into negative territory. This can be attributed to sub-par cash flow from operating activities during the year 2023. However, Cash flow may see an improvement in next financial year due to extraordinary PAT achieved by the company during this financial year.

Profitability Ratios

Observations:

1. Company has been able to showcase an improvement in PAT and PAT Margins post COVID period.
2. ROE, ROCE and ROA all have shown consistent improvement post COVID.

Author

Jibu Dharmapalan

Fundamental Analyst
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Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.

References:

https://www.zuari.in/investor/annual_reports

https://www.zuari.in/investor/quarterly_results

https://www.bseindia.com/stock-share-price/zuari-agro-chemicals-ltd/zuari/534742/financials-annual-reports/

More about the Company:

Board Of Directors

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