Chambal Fertilisers' (CFCL) Q2FY11 standalone results were better than our expectation as sales grew by 60.3% YoY to Rs15.4bn on the back of higher trading volumes. OPM contracted by 412bps to 13.8% owing to higher trading. Consequently, net profit increased by 33.2% to Rs861mn. Excluding MTM & other notional losses, adj net profit stands at Rs1.2bn (+55.2% YoY).

Policy boost on the card: Govt. focusing on achieving self-sufficiency in Urea production, should modify the current investment policy and allocate natural gas for the expansion. We expect capacity addition/ revival of 8-10mn MT of Urea in the next 5-7 years. One major change that we are expecting in the new policy is to link the floor for Urea realisation with gas price in-place of keeping it fix. For existing Urea manufacturers also, new policy is likely to be more favourable. Chambal should benefit with both the policies as it is the largest private manufacturer of Urea & also interested in putting new Urea facility.

VALUATIONS AND RECOMMENDATION We have increased our estimates for FY11 & FY12 by 4.1% & 4.4% respectively, on the back of higher trading revenues. At CMP of Rs80, CFCL is trading at PER of 11.2x & 10.2x and EV/EBITDA of 5.9x & 5.1x for FY11 and FY12 respectively. Rolling forward our target price to FY12, we maintain our `HOLD' recommendation with an increased target price of Rs78 (10x FY12E).