Zuari Agro Chemicals’ (ZAC) Q2FY17 standalone revenue and EBITDA at `10.5 billion and `0.7 billion, respectively, surpassed our estimates, primarily owing to better-than-expected volumes. However, revenue fell 20.6% y-o-y due to dip in realisation led by cut in subsidy rates. Despite this, gross margin jumped 400bps on fall in input prices. ZAC is optimistic on upcoming rabi season due to better monsoon. We are raising our target multiple to 10x (earlier 8x) as: good monsoon, post 2 consecutive droughts, will support near-term growth; and receipt of government subsidy has led to fall in receivables and debt, thereby improving financials. Further, effective implementation of gas price pooling policy, normalised channel inventory, improved plant utilisation, better working capital management and lower interest costs will drive performance.
Maintain buy with revised target price of `278 (`218 earlier). Key positives were: 7.8% y-o-y volume growth; gross debt fell to `20.5 billion versus `33.3 billion as on March 31, 2016, and `26.7 million on June 30, 2016; trade receivables declined on standalone basis; benefits of gas price pooling have started accruing; subsidy receivables declined by `3.2 billion q-o-q; and 284bps improvement in EBITDA margin led by 400bps gross margin jump. Key negative was fall in realisation due to cut in subsidy rates.