India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
GSFC |
All time high caprolactam spread to drive earnings |
BUY
CMP: Rs 349 Target Price: Rs 530
n Reiterate BUY on the back of sharp increase in caprolactam prices (+38% yoy in H1FY11) and strong valuations
n Benzene and caprolactam spread has increased to US$1800 / mt by Nov’10 as against average of US$1200 / mt in FY10 and US$1675 / in H1FY11
n Strong margins in chemicals segment may trigger H2FY11E earnings upgrade of ~15% while captive ammonia production has helped improve fertiliser segment margins
n Compelling valuations with FY11 P/BV of 0.9x, EV/EBITDA 2.2x and P/E 5.3x with investment value of Rs 120 / share support downside in the stock
Chemical business to benefit from rising caprolactam prices
GSFC’s chemicals business contributed 71% to revenues and 54% to profit in FY10 and
is expected to benefit from strong chemical prices. Key chemicals - Caprolactam and
Nylon – 6 account for 70% of GSFC’s chemicals revenues and are expected to benefit
from rising prices. Caprolactam prices increased to US$ 2750 / mt by Nov’10 and are
higher by 25% than the H2FY10 average prices of US$ 2200 / mt. However the key raw
material – ‘Benzene’ prices at US$ 925 / mt remain flat compared to H2FY10 average
prices of US$ 910 / mt.
Benzene and caprolactam spread increased to US$ 1800 / mt
With increase in finished product (Caprolactam) prices higher than the raw material
(Benzene) cost, spread between Caprolactam and Benzene prices increased upto US$
1825 / mt as against US$1200 / mt in FY10 and US$ 1300 / mt in H2FY10. Key user
industry for caprolactam which contributes ~70% of the total consumption is tyres and
demand from the tyre industry remains buoyant. Industry expects (ICIS article outlook
on Nylon-6 prices) prices for Nylon – 6 and Caprolactam to strengthen further in Dec’10
on the back of healthy demand for Nylon chips from the Chinese markets.
H2FY11 earnings may exceed our estimates by ~15%
GSFC reported strong H1FY11 results with an EPS of Rs 39.6 (+204% yoy) on the back
of 100% yoy growth in chemical’s segment earnings and 340% growth in fertiliser
division. We expect H2FY11 EPS at Rs 30.8 with flat yoy growth. However in light of
current strong margins in the chemical segment we expect that H2FY11 earnings may
exceed our estimates by approximately 15% (from current Rs 30.8). However we keep
our estimates unchanged due to volatility in chemical prices.
Compelling valuations to support downside risk, reiterate BUY
We reiterate our BUY recommendation on the stock with price target of Rs 530, implying
51% upside on our recommendation. The stock trades at compelling valuations of
FY12E P/E of 5.3x and EV/EBITDA of 2.2x. Further P/BV of 0.9x (FY11E estimated
book value of Rs 390 / share) and per share investment value of Rs 120 protects
downside risk.
GSFC has the highest degree of integration for its ammonia requirement
GSFC has benefited significantly post the introduction of Nutrient based subsidy (NBS)
scheme effective from April’ 2010. GSFC is one of the most cost efficient players in
manufacturing of complex fertilisers on account of its captive ammonia plant. Company
meets ~45% of its ammonia requirement for complex fertiliser through captive production
while other key players are largely dependent on imported ammonia for the production of
complex fertiliser
GSFC has benefited significantly from the recent introduced NBS
scheme…
Previous subsidy scheme (prior to NBS) was not favourable for GSFC since subsidies
were based on actual cost of production of ammonia irrespective of global ammonia
prices. However with the introduction of NBS, GSFC benefits from lower cost of ammonia
vis-à-vis players who are dependent on imported ammonia.
…As captive ammonia production cost is ~50% lower than the global prices
GSFC enjoys cost advantage of approximately 50% over imported ammonia since
company’s ammonia production cost at US$200 is significantly lower than the current
global average prices of US$ 400 / mt. This lower cost advantage has helped the
company in improving its EBIT margins from fertiliser business. It is important to note that
the company’s EBIT margins from fertiliser business have improved to 16.8% by H1FY11
post the introduction of NBS as against 6.7% in FY10 and 9.8% in FY09.
Tyre industry growth of > 30% is driving caprolactam consumption
Domestic tyre industry has posted attractive demand growth of more than 30% in the
current year (as in the chart below). Tyre industry is the largest consumer of caprolactam /
nylon – 6 and strong demand from auto sector has been driving the demand growth for
caprolactam. As indicated in the chart below, the demand from tyre industry has strong
impact on caprolactam prices. We expect demand from tyre industry to remain healthy in
the as a fall out of which caprolactam / nylon -6 demand is also likely to remain intact.
Key risks to our recommendation
We would like to highlight that the recently introduced ~20% downward revision in NBS
rates for complex fertilisers effective from 1st Apr ’2011 may put pressure on the company’s
earnings in FY12E (refer to our note dated Nov 23, 2010). Inaccessible management and
volatile earnings in chemical segment are key risks to our recommendation
No comments:
Post a Comment