"We expect a target of Rs 180 based on SOTP valuation (11x FY19 earnings + investment value of Rs 40 per share after 40 percent holding company discount) in next 12-15 months," says Akash Jain, Vice-president, Equity Research at Ajcon Global Services.
Akash Jain
Gujarat State Fertilizers & Chemicals (GSFC) is the largest manufacturer and one of the only two domestic makers of caprolactam, a chemical used for making nylon fiber, is benefitting from improving realisations and high caprolactam and benzene spreads. Benzene is the key raw material and it impacts the overall profitability of the company.
The spreads between benzene and caprolactum has doubled since the beginning of FY18 to USD 1,340 per tonne. Capro-benzene spread in February stood at USD 1000/MT and is trading around above USD 1340/MT on account of lower production in China and domestic market (FACT plant shut down and no other major producer).
We expect caprolactam prices to remain structurally positive as no new major capacities are to be added in next two-three years. Two years ago, several European companies, including BASF, shut down their caprolactam plants.
Ammonia plant is currently operating at 80 percent utilisation. Management expects utilisation to reach 100 percent in Q4FY18 which would also help in reduction of power cost due to additional steam generation. The company’s capex on Melamine plant is expected to be commissioned by September 2018. The management in its concall has guided for ramp in Nylon plant utilization. Management has kept target of Rs 1000 crore PBT in next 4-5 years.
As on Q3FY18, current subsidy outstanding stood at Rs 1500 crore which included Ammonium sulphate subsidy of Rs 7oo crore and other subsidy of Rs 800 crore. As per management, subsidy is being received with a lag of 3-4 months. As subsidy of Rs 700 crore+ is expected by FY18 which will help to reduce working capital burden.
In Q3FY18 the company witnessed strong results. Fertilizer segment clocked 49 percent YoY growth in topline owing to 40 percent volume growth. Strong increase in volume was on account of increased production volume at Sikka facility (DAP, NPK) and increased trading volume (52 percent YoY growth). Total fertilizer sales volume were +5 lakh MT. Segment EBIT increased by 60 percent YoY to Rs 74.5 crore with margin of 7 percent(vis-à- vis ~6.5 percent YoY and 4.7 percent QoQ).
The company’s fertilizer segment will also benefit from onset of normal monsoons. The Indian Meteorological Department (IMD), in its first-stage forecast, predicted ‘normal’ South-West monsoons (June-September 2018) which could put a lot of agri, FMCG and auto stocks back on investors’ radar. Quantitatively, rainfall activity is likely to be 97 percent of long period average (LPA) as against 95 percent actual rainfall last year, it said. If the forecast holds true, this will be the third consecutive year of normal monsoon.
The company is valued reasonably at a P/E of 11x on tratiling twelve months EPS and P/BV 1.18x (Book value of Rs 166 per share). It will become debt free after Q4 FY19. We are optimistic and hope that this company will deliver strong Q4FY18 results as well.
We expect a target of Rs 180 based on SOTP valuation (11x FY19 earnings + investment value of Rs 40 per share after 40 percent holding company discount) in next 12-15 months.
Disclaimer: The author is Vice-president, Equity Research at Ajcon Global Services. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.