GSFC Limited Stock Analysis – Overview
From the author: Gujarat State Fertilizers & Chemicals Limited (“GSFC” or the “Company”) is engaged in the manufacture of fertilisers as well as industrial chemical products and has positioned itself as a dual player, to protect itself against a slowdown in any of its business segments. It generates 65 % of its revenues from the fertilisers segment, while 35 % is contributed by industrial chemicals. For a financial report GSFC including its balance sheet, shareholding pattern and dividend history visit – GSFC Financial Statements
Disclaimer: The stock analysis presented below should not be taken as a buy/sell recommendation. The circumstances of the company and the economic environment may have changed since the date of this stock analysis.
Gujarat State Fertilizers & Chemicals Limited (“GSFC” or the “Company”) is engaged in the manufacture of fertilisers as well as industrial chemical products and has positioned itself as a dual player, to protect itself against a slowdown in any of its business segments. It generates 65 % of its revenues from the fertilisers segment, while 35 % is contributed by industrial chemicals. Over the past 50 years, the Company has stemmed its position as a market leader in Caprolactam, Ammonium Sulphate and Melamine, and is the second largest manufacturer of Diammonium Phosphate (DAP) in the country, contributing nearly 10 % to the total demand for DAP.
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Source: Company; Sana securities
What’s driving the stock
Robust fundamentals and strong growth
GSFC performed well in FY 2013 despite unfavorable macroeconomic scenario, owing to the efficient pricing and logistics. GSFC is the country’s third largest phosphatic fertiliser producer. The Company is the largest manufacturer of caprolactam in India with an annual capacity of 83,180 tonnes and commands a 60 % market share. Gujarat is the primary market for selling fertilizers manufactured by the Company
AT CMP OF Rs. 51.50 (19TH MARCH, 2014), THE STOCK IS TRADING AT A P/E OF 3.96X. AT THIS PRICE, GSFC OFFERS GREAT LONG TERM POTENTIAL AND IS THE CHEAPEST IN THE FERTILISER SPACE, IN TERMS OF VALUATIONS.
Dominant Market Share
The market share of GSFC for DAP in Gujarat for the year 2012-13 was 62%. For APS, the market share of GSFC in Gujarat is 100% whereas on all India level, it is 11%.
Source: Company, Sana Securities
Benefits of Nutrient Based Subsidy
GSFC has been one of the key beneficiaries of government’s Nutrient Based Subsidy (NBS) scheme for complex fertilisers unveiled in April 2010. The NBS HAS several positive implications for non-urea fertilizer manufacturers, including:
- Companies can now compete on cost efficiency, brand equity, distribution network etc by charging competitive prices;
- Companies can introduce various innovative products as opposed to the specific products as mentioned under the Product Based Subsidy Scheme earlier
- Companies with stronger bargaining power with raw material suppliers can broaden their margins
- Non-urea companies can compete as in a free market
- Companies can develop brands, an exercise that could benefit the company in the long-term
- The government can reduce its subsidy related administrative expense.
Union Budget for 3013-14 opened up huge opportunity
The Union Budget 2013-14 opened up a number of positive opportunities that are likely to benefit the chemicals and fertilisers sector. The proposed agricultural reforms like increasing the outlay for agriculture by 22 % to Rs. 27,049 Cr. and direct cash subsidy to end users of fertilisers would lead to demand creation for fertilisers and would benefit the companies at large.
Lending in the agricultural sector has been increased to Rs 7,00,000 Cr. from Rs 5,750,00 Cr. in 2011-2012 which will boost agriculture and allied sector growth, leading to demand creation for fertilizers sector.
First phase of direct transfer of fertilizer subsidy (through mobile Fertilizers Monitoring System (m-FMS) has come into effect from November 1, 2012 Further, DOF would be doing pilot projects in 12 districts spread over 11 states to track the movement of fertilisers from retailer to farmer in the next phase. This can reduce working capital requirement of fertiliser companies.
Moreover, in order to encourage investments in the agricultural sector, the budget has proposed a string of custom duty cuts on the import of equipments for initial setup or expansions. It has also proposed to provide investment-linked capital expenditure at an enhanced rate of 150 % as against 100 % provided earlier.
GSFC would be a direct beneficiary of these opportunities, having chalked out a robust capital expenditure plan to expand its business activities by setting up new capacities for its DAP, urea and phosphoric acid production.
Improving Cost Efficiencies
In light of the high volatility seen between the spreads of caprolactam and benzene prices over the past couple of months, GSFC has undertaken a modernization of its caprolactam facilities. This exercise would enable the company to reduce the consumption of benzene in caprolactam production by 5 %, which would in turn help in stabilizing the margins for the industrial segment.
Based on GSFC’s current volumes, this would help the company increase it’s per tonne EBIDTA by Rs. 2,300, translating into an annual profit of Rs 15 crore in the caprolactam segment. The benefits of this cost reduction would also flow into the manufacturing of products like nylon-6 chips, MEK and other polymer products, as caprolactam is used as feedstock for these.
Further, in order to achieve higher efficiency and reduce cost pressures, GSFC has set up a captive ammonia facility. The Company pumps all its natural gas into this, which then caters to all its other production activities. This also protects the Company from volatility in global ammonia prices, and helps it to achieve a competitive edge over its peers.
What’s Dragging the Stock
Raw Material Prices
The Company is exposed to various types of risks associated with the fertilizers and chemicals business including fluctuation in input prices and changes in pricing policy by the GOI. The prices of Ammonia skyrocketed during 2012-13 as compared to 2011-12. On an average, there was 22% increase in prices of Ammonia as compared to 2011-12. Volatility in fuel prices also impacts the profitability of the Company. The availability of natural gas continues to be of prime importance for production of fertilizers.
Demand Slowdown in industrial products segment
During FY 2013, all major industries registered a slow down as the Index of Industrial Production turned negative. The demand across all user segments like Automobiles, Textiles, Infrastructure, Housing and consumer durable etc observed a declining trend. The exports of MEK Oxime and Caprolactam also showed a decline. During FY 2012-13, the export of Caprolactam was 408 MTs as against 7515 MTs in FY 2011-12. Over the course of the last 12 months, while there has been a marginal improvement in demand, until there is significant improvement in the industrial and agriculture sector backed by strong government measures, it is unlikely that there will be any major improvement in demand.
Rajat Sharma is the CEO at Sana Securities, an independent equity research and financial advisory firm in India. Views expressed here are of the author and RKSV has not verified any facts stated above.