Investment Focus - GSFC: Buy:: :: Business Line

Investors with a one/two-year horizon can consider investing in the stock of the country’s leading complex fertiliser producer, GSFC. Besides the company’s robust fundamentals, the 15 per cent correction in the stock price over the last six months has made it attractive from a medium to long term perspective. At the current market price of Rs 72, the stock trades at 4.2 times the FY14 earnings, translating into a 57 per cent discount to its competitor Coromandel International.

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FERTILISER – GROWTH UNDER WAY

Sharp rise in the international price of key raw materials such as rock phosphate, sulphur and phosphoric acid, coupled with a weak rupee and lower subsidy payment by the government forced complex fertiliser producers to sharply increase the farmgate prices. This led to a shift in the fertiliser consumption pattern in favour of urea. This combined with a delayed monsoon impacted complex fertiliser volumes in the first half of the current fiscal. Complex fertiliser production was also limited by scarcity of key raw material, phosphoric acid. In a challenging environment, the company managed to increase its fertiliser revenues by 19.6 per cent to Rs 921 crore in the September quarter, compared to the same period last year. But, operating margins declined 6.6 per cent year-on-year and 5.4 per cent sequentially to 6.1 per cent.

CHEMICALS – WORST IS BEHIND

Fall in caprolactam realisations and increase in the price of key raw material benzene led to a squeeze in the chemical segment’s margins. The caprolactam–benzene spread, which bottomed out in July, is expected to improve.

Despite a 4.4 per cent decline in the chemical segment revenues for the September quarter to Rs 495 crore compared to the previous quarter, the segment’s operating margins improved by five percentage points sequentially to 26.7 per cent. This was facilitated by higher sales of value added nylon chips during the quarter.

The company has planned capex of Rs 700 crore for the current fiscal, which includes setting up of urea, melamine and caprolactam at Dahej. The new methanol plant at Vadodara expected to be commissioned by end of the current fiscal, can add Rs 300 crore to the GSFC’s revenues at peak utilisation levels. Even as revenues for the September quarter grew 12 per cent to Rs 1,416 crore, higher input costs led to a 9.8 percentage point contraction in the operating margins to 14.3 per cent. This, in turn, led to a 29 per cent decline in the profit to Rs 151 crore compared to the same period last year. But with higher fertiliser volumes, increase in chemical realisations, stable raw material costs and a low base, expect revenue and profit growth to bounce back in FY14.