Buy GNFC Positive surprise by fertiliser division: Target: Rs 157- Emkay

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GNFC

Positive surprise by fertiliser division

BUY

CMP: Rs 112                                       Target Price: Rs 157

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n     Q3FY11 APAT at Rs 884 mn (+5.8% yoy on previous year APAT of Rs 835 mn) is ahead of estimates - driven by strong performance of fertiliser segment

n     Chemical segment margins remain strong at 27.6% (vs 25.9% previous year) on account of buoyancy in chemical prices 

n     Fertiliser EBIT margins at 7.3% against historically reported losses - a positive surprise. Margins higher due to receipt of previous year subsidy and introduction of NBS policy

n     Upgrade FY11E estimates by 7% to Rs 12.4 (previous Rs 11.6) driven by strong Q3FY11 results. Maintain BUY

Results ahead of estimates on account of strong fertiliser results

GNFC’s Q3FY11 results were ahead of estimates mainly due to strong performance of

the fertiliser segment. However fertiliser segment also accounted for some subsidy

amount (amount not disclosed) related to previous year. Fertiliser segment revenues

increased by 14% yoy to Rs 4.9 bn (ahead of estimates of Rs 4.1 bn). Surprisingly

fertiliser segment reported margins of 7.3% with EBIT contribution of Rs 355 mn

(against our expectation of mere Rs 41 mn). It is to highlight that historically fertiliser

business has not contributed to EBIT. Though high EBIT of current quarter may not be

sustainable (since it includes subsidy related to previous year), we estimate that

fertiliser business profitability has improved under the NBS regime and contribution is

likely to improve, going ahead.

Chemical segment performance remain encouraging

Chemical segment revenues increased by 3% yoy to Rs 3.36 bn (in line with estimates)

while this segment witnessed EBIT margin expansion of 170 bps yoy to 27.6% (though

below our estimates of 31%) on account of increasing chemical prices. The company

benefited from increase in methanol prices (+27% to Rs 16,500 / mt over Q2FY11),

although the prices of other key chemicals like Acetic Acid, Aniline and TDI remained

stable for the quarter.

Previous year results adjusted for EO loss of Rs 360 mn

GNFC’s Q3FY10 results also included EO loss of Rs 360 mn and adjusting for that,

EBITDA margins declined by 120 bps yoy to 18.5%. Resulting EBITDA remained flat at

Rs 1.5 bn which is marginally ahead of our estimates of Rs 1.4 bn. With negligible

changes in company’s interest and depreciation, PBT also remained flat at Rs 1.3 bn

and APAT grew by 6% yoy to Rs 884 mn (which is higher than our estimates of Rs 764

mn) resulting into AEPS of Rs 5.7 as against Rs 5.4 in the previous year. Reported

profit increased by 48% on previous year RPAT of Rs 597 mn.

Upgrade FY11 estimates by 7%, maintain BUY

With company reporting Q3FY11 results – ahead of estimates, we upgrade our FY11

EPS estimates by 7% to Rs 12.4 (previous Rs 11.6) and maintain FY12 EPS estimates

at Rs 22.4. At current price, GNFC trades at 5 x FY12E EPS, 30% discount to FY12 BV,

3.4x EV/EBITDA. We maintain our BUY recommendation on the stock with price target

of Rs 157 based on 7x FY12E EPS of Rs 22.4. We believe that the ongoing capex is

likely to drive the company’s earnings FY13 onwards.

Capex plans to drive growth

GNFC’s aggressive capex plan of Rs 40 bn over next 2-3 years is on track.

¾ Phase - 1 capex with estimated cost of Rs 12 bn is scheduled for commissioning by

Q3FY11. It involves increasing WNA and DNA capacity and the energy efficiency and

is likely to generate incremental revenues of Rs 3 bn and drive profit margins

¾ Further, Phase - 2 capex, with cost of Rs 16 bn to put TDI plant is expected to

complete by Q3FY12

¾ Capex for Phase - 3 with cost of Rs 12 bn to convert its ammonia plant from LSHS to

gas based is expected to complete by Q3FY13