GSFC: bleak outlook to weigh down stock

It isn’t the best of times for fertilizer companies. For the June quarter, they had to deal with higher inventory in the system at the end of last fiscal, which posed a threat to volume growth. And now, there is the impact of the drought, which should result in lower fertilizer demand. While it’s difficult to quantify the extent of the damage on account of the deficient monsoon, what is clear is the dismal outlook. Complex fertilizers stocks such as Coromandel International Ltd and Gujarat State Fertilizers and Chemicals Ltd (GSFC) have already corrected since the beginning of fiscal 2013 (FY13). The GSFC stock, however, was up on Monday after better-than-expected results for the June quarter.

In the June quarter, a little less than two-thirds of GSFC’s revenue came from the fertilizers business and the rest from the chemicals business. But the contribution of the chemicals business to earnings before interest and tax (Ebit) was high.

Unfortunately, the chemicals business did not perform well in the June quarter. The reason: weak caprolactum prices (caprolactum is an organic compound used as an input to make a type of nylon used to manufacture tyre cord and textiles). Caprolactam accounts for 50-60% of GSFC’s chemicals business revenue. As a result, the Ebit margin of the business declined sharply by 17.84 percentage points on a year-on-year (y-o-y) basis to 21.7%. The Ebit margin for the segment is also lower sequentially by about 1 percentage point.

What’s worse is that the outlook for the chemicals business is unlikely to improve materially in the near future. “We reduce our FY13 assumption of Caprolactam Benzene spreads from $1,600 per tonne to $1,400 per tonne,” pointed out a post-results update from Sunidhi Institutional Research. During the peak of FY11, spreads were as high as $2,500 per tonne.

Ebit margins of the fertilizers business, too, declined, both on a y-o-y basis and sequentially. For the quarter, GSFC’s fertilizers business suffered on account of limited availability of raw material for diammonium phoshphate fertilizer. However, fertilizer volumes are expected to improve in this quarter. For the company as a whole, net profit increased by 22% to Rs 172 crore.

The GSFC stock has declined by 15% since the beginning of this fiscal. While a strong balance sheet is a plus, near-term challenges will weigh down the stock.

Also See

Weak performance (PDF)

Intraday & quarterly performance (PDF)