GSFC: Price target revised upwards to `653, Maintain ‘Buy’:: Sunidhi.

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We highlight several structural advantages that GSFC has and upgrade estimates to reflect the same.

We visited GSFC plant at Vadodara. It has several structural advantages in its operations due to integrated plant with backward/forward integration. It uses captive ammonia for producing fertilisers and various chemicals at Vadodara plant and transfers to Sikka (Jamnagar) unit for producing DAP. GSFC is also taking up Anone plant modernization with capex of `900 million which will reduce Benzene consumption in Caprolactam production process. We upgrade estimates to factor in these advantages and move forex assumption to `48 (from `46 earlier).

Ammonium Sulphate (AS) – by product of Caprolactam

GSFC sells AS to farmers as fertiliser and gets subsidy under NBS policy since April’10. GSFC has 148000 tpa capacity of AS, while 196000 of AS is available as by product of Caprolactam plants. Old Caprolactam plant has higher by-product ratios (over 4.5 tonne of AS for 1 tonne of Caprolactam), while new plant has better conversion efficiencies and produces significantly lower by-product (~2.3 tonne of AS for 1 tonne of Caprolactam).  Profitability on AS has significantly improved post NBS. Subsidy of `5979 per tonne is paid on AS currently.

Backward integration with Phosphoric acid manufacturing for NPK/DAP

GSFC manufactures Ammonium Phosphate Sulphate (20:20:0:13) at its Vadodara plant where it has captive phosphoric acid and sulphuric acid plants which results in higher profitability. TIFERT in Tunisia will bring another 0.18 million tonne availability for producing DAP at Sikka plant by Q1FY13 end apart from 0.42 million tonne of volume tie-ups that GSFC has from global suppliers.

Captive Ammonia - A major competitive advantage

GSFC had invested `11.2 billion for Ammonia expansion with capacity of 0.45 million tonne that was commissioned in April 2000. GSFC uses ammonia in manufacturing of several products such as Urea, Ammonium Sulphate, complex fertiliser, DAP (by transporting Ammonia from Vadodara to Sikka), Caprolactam etc. Rise in ammonia price is advantageous for GSFC in decontrolled fertilisers vis-à-vis its peers who rely entirely on imported ammonia and helps in generating sustainable higher margins. 

Price target revised upwards to `653, Maintain ‘Buy’

We believe that due to significant structural advantages such as captive ammonia and Ammonium Sulphate as by-product in fertiliser segment will have sustainable competitive advantage over its peers. We switch valuation method from P/E to EV/EBIDTA as dynamics of Fertiliser and Chemical businesses are different and accordingly, value fertiliser business at 4.5x on EV/EBIDTA (average of our coverage universe), while chemical business is valued at EV/EBIDTA of 3x given the high volatility and commodity nature of business. We revise price target to `653 (`563 earlier based on P/E of 8x for FY13E). The revision in price target is predominantly driven by upgrade in our estimates. At our target price, GSFC will trade at 7.4x and 7.8x on its FY12E and FY13E EPS. Maintain ‘Buy’