GSFC (3QFY15) : Chemical margins to improve. Upgrade to BUY :: HDFC Securities

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Chemical margins to improve GSFC reported a muted EBITDA of Rs 1.4bn (+3% YoY) despite including the prior period subsidy of Rs 473mn. Weak performance was led by increase in the gas cost (eff. 1 Nov 14) and maintenance shutdown in the caprolactam/melamine plants. Impact of lower interest (-69%, low receivables) and depreciation (-32%, change in policy) was negated by lower other income (-33%). FY12-14 was a tough period for GSFC characterized by a multitude of problems (muted cap-benzene spread, unavailability of cheap gas, excess channel inventory and high subsidy/farm receivables). PAT declined by 34% CAGR over the period. Fertiliser business outlook has improved with low channel inventory, higher profits from neem based urea and chances of early subsidy disbursal from FY16. Outlook in the chemical segment is recovering with the expanding cap-benz spread. Stock price correction of ~16% over the last 3-months has made valuations attractive. Upgrade to BUY, with a TP of Rs 120 (8/~0.9x FY17E EPS/BV). 3QFY15 highlights  Fertilisers : Complex volumes declined by 19% YoY to 244 kT. Urea sales were 96 kT (-2% YoY).  Chemicals : Cap-benz spread marginally improved to USD 984/t (+7% QoQ), led by lower benzene prices. Regulatory overhangs  Matter related to subsidy for ammonium sulphate (byproduct of caprolactam, book value impact is Rs 15/sh, ~14% of FY14 BV) is sub-judice. However, we expect the decision to be in favour of the company.  GSFC uses ~2.4 mmscmd of NG for urea and chemicals. Gas price hike has led to pressure on non-urea usage. There have also been discussions in the past related to a cut in gas supply. Key risks  The sharp fall in crude price is favourable; however, a gloomy economic environment across China and Europe will cap upside.  Monsoon remains the biggest uncertainty for the agriculture sector.

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