BackGSFC share gains from production restart, improving business outlook
The stock gained 67% in September to reach a new 52-week high of Rs116, as the company resumed production at units that made ammonia and urea
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Gujarat State Fertilizers and Chemicals Ltd’s (GSFC’s) shares have gained due to improved prospects for the company’s profitability. The stock gained 67% in September to reach a new 52-week high of ₹ 116, as the company resumed production at one unit that made ammonia and another that made urea.
Apart from higher volume, the outlook for GSFC’s fertilizer business too has improved. In the previous fiscal year, the fertilizer business suffered from high inventories at the retailers and also unavailability of raw materials. Better monsoon in the previous fiscal year has helped lower inventories. Besides, the company’s venture in Tunisia has begun supplying raw material (phosphoric acid). Together, these are expected to help GSFC produce more fertilizers in the current fiscal year. According to Emkay Global Financial Services Ltd, the management aims to increase complex fertilizer production by 25% in the current and next fiscal years.
Part of the reason is easing crude oil prices. Most benzene is derived from crude oil and the petrochemical industry. This is helping GSFC improve margins. From $900 per tonne in 2013-14, the caprolactam-benzene spread has improved to about $1,050 now, the company told analysts. “Management expects gradual improvement in spreads from here on," Prabhudas Lilladher Pvt. Ltd said. Improving margins can boost GSFC’s earnings in the current fiscal year. Emkay is estimating the stand-alone operating profit margins (Ebitda margins) to improve 380 basis points to 13% this year. Ebitda stands for earnings before interest, taxes, depreciation and amortization. A basis point is one-hundredth of a percentage point.
That said, the impending gas price hike can pose significant risks to the company’s earnings. Even if the government decides to compensate the urea producers, companies fear long payment delays, which could put pressure on profitability. “Further, it may lead to an increase in interest cost due to higher working capital intensity in case of delays in subsidy payments which has been observed in the recent past. This would be impacting net profitability of the industry," GSFC said in its 2013-14 annual report.
Another point to note is valuations. Post the recent run-up, the stock is trading at more than its previous year’s book value. Low valuations and improving business outlook had led analysts to turn positive on the stock. Its earnings growth needs to measure up now, to justify these gains.
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