Oct 04, 2017 04:17 PM IST | Source: Moneycontrol.com

Sell Gujarat Alkalies and Chemicals; target of Rs 540: Kotak Securities

Kotak Securities is bearish on Gujarat Alkalies and Chemicals has recommended sell rating on the stock with a target price of Rs 540 in its research report dated September 28, 2017.

Kotak Securities' research report on Gujarat Alkalies and Chemicals

Gujarat Alkalies & Chemicals (GACL) stock has rallied ~27% since our initiation date 18th April 2017. The uptick in the stock price was driven by a sharp surge in caustic soda prices, however, the benefit of the same was restricted due to poor demand of chlorine. Going ahead, we believe that 10% increase in caustic soda prices in the last 3 months augurs well for the company. But, excess supply of Chlorine will offset the benefit of the same and hence improvement in the EBITDA margin would be restricted to 100-200 bps for the next two years, as against earlier expectations of over 400bps improvement. Besides Chlorine impact, increase in the cost of production (price of rock phosphate and an increase in power and fuel costs) would also weigh on operating performance. We expect EBITDA to grow at 15% CAGR during FY17-FY19E, with a margin in the range of 22-23%. PAT is expected to grow at 11% CAGR during the same period. We believe that, given the return ratios in the range of 10-11%, the stock is fully valued at 10.2x and 9.1x FY18E and FY19E, revised earnings of Rs53.3 and Rs59.9 for FY18E and FY19E, respectively. Hence, we recommend SELL (earlier BUY), with a revised target price of Rs540 (earlier Rs 590).

Outlook

Current valuations of 10.2x and 9.1x FY18E & FY19E, seems fully valued, considering the return ratios in the range of 10-11%. Sustaining earnings growth on such a high base will be difficult in the near term, given the excess supply of chlorine. Given the risk of caustic soda prices coming down on resumption of US operations and Chlorine consumption. Our revised target price stands at Rs540, and we see limited upside from the current levels. Hence, we recommend SELL (earlier BUY).

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