GSFC: Reap the rewards of expansion : Business Line

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Focus on improving profitability and investment in new capacity will aid growth

The stock of complex fertiliser-maker Gujarat State Fertilisers and Chemicals (GSFC) has gained over 53 per cent since our buy recommendation in May, thanks to the strong performance in the June quarter and robust long-term growth prospects.

Yet, at ₹101, the stock trades at less than six times its 2015-16 earnings, a 50 per cent discount to its peer Coromandel International.

This is after adjusting for its equity investment in Gujarat Alkalies, GNFC and Gujarat Industries Power Company (GIPCL), which amounts to ₹13 per share.

Investors with a three-to-five year perspective can use any price correction to buy the stock. Improving profitability in the existing business and revenue from capacity expansions will drive the company’s growth over the long term.

Both engines firing

After declining sharply in 2013-14, GSFC’s operating profit margin has vaulted to 12.8 per cent in the June 2014 quarter from barely 4 per cent last June, aided by improved profitability in its fertiliser and chemical segment.

Reduction in fertiliser inventory with dealers — from around four million tonnes last April to 1.3 million tonnes now — boosted primary sales.

Also, availability of key raw material — phosphoric acid — from its joint venture company TIFERT, Tunisia, enabled GSFC scale up fertiliser production and sales.

Strong demand for fertilisers and availability of phosphoric acid should help the company achieve healthy volume growth, in excess of 20 per cent, in 2014-15. Change in GSFC’s strategy to focus on profitability instead of revenues, particularly for its chemicals segment, is paying off.

Its prudent decision to desist from using the expensive RLNG to manufacture methanol due to non-availability of cheap gas, helped improve the segment’s operating profit margin- from 1.3 per cent in the June 2013 quarter to 9.6 per cent this year. Improvement in the profit margin for its key product, caprolactum (used in tyre manufacturing), on account of higher realisation and fall in price of its key raw material, benzene, also enabled the company improve its chemicals segment’s margin.

Rationalising costs

Higher realisation on caprolactum due to recovery in nylon demand and softer benzene prices on the back of increasing supplies from the US refineries should aid margin improvement in the forthcoming quarters.

Higher wind power generation enabled the company reduce its power and fuel expense as a proportion of revenue from 9.8 per cent in June 2013 to 8.5 per cent in the recent June quarter.

With the commissioning of its 29.4 MW wind power project last quarter, the total wind power capacity now stands at 152.8 MW. In addition to this, the company is in the process of securing long-term supplies of cheaper thermal power.

This will further help the company curtail its power and fuel expense in the long term too.

GSFC’s new Nylon 6 plant (15,000 tpa) at Vadodara is likely to be commissioned by early next year.

This may add ₹265-300 crore to the company’s 2015-16 revenues.

Also, its water soluble fertiliser plant is expected to commence operation by early 2015-16, which should add to its revenues and profits.

The 15,000 tpa high-grade nylon chip plant is expected to be operational by early 2015-16.

Other capacity expansion initiatives such as the 0.5 million tpa complex fertiliser unit at Sikka (Gujarat), 40,000 tpa greenfield melamine plant and the one lakh tpa caprolactam plant will drive GSFC’s revenue and profit growth over the next three-to-five years.

The company also plans to consolidate the financials of its investment companies — GNFC, GIPCL and TIFERT — which can further boost its consolidated earnings.

Further, any positive development in the company’s legal tussle with the Fertiliser Ministry over recovery of subsidy on ammonium sulphate sold, beginning April 2010 and discontinuation of subsidy for the product, may also benefit GSFC.