May 22, 2013 01:13 PM IST | Source:

Accumulate GSFC; target of Rs 66: PLilladher

Prabhudas Lilladher is bullish on Gujarat State Fertilizers & Chemicals (GSFC) and has recommended accumulate rating on the stock with a target of Rs 66 in its May 17, 2013 research report.

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Prabhudas Lilladher`s research report on Gujarat State Fertilizers & Chemicals (GSFC)

"GSFC.s Q4FY13 result disappointed on the margin front. Adjusted EBITDA margins stood at 9.9 percent (-930bps YoY/-50bps QoQ) primarily due to pressure in the chemicals segment. However, capro-benzene spreads have bottomed out and we expect subsequent quarters to witness gradual improvement in chemicals margins. Commencement of TIFERT is likely to boost manufactured fertiliser volumes and margins in FY14E. We have downgraded estimates by 7 percent/2 percent to Rs 13.9/15.7 in FY14E/15E due to lower fertiliser prices and volumes combined with slow recovery in capro-benzene spreads. However, we maintain .Accumulate. (revised target price Rs 66) due to attractive valuations. Union Ministry.s directive to recover subsidy on ammonium sulphate is likely to remain a major overhang on the stock (though management clarified that they have approached the Delhi High Court and are confident of the outcome in GSFC.s favour)."

“GSFC reported PAT of Rs584m, -75 percent YoY which included employee provisioning of Rs520m related to wage revision of employees at its polymer and fibre units. This employee provisioning included Rs400m of one-off items related to gratuity, pension liabilities and was non-recurring in nature. After adjusting for the one-offs of Rs400m, adjusted PAT stood at Rs984m, -47 percent YoY and significantly below est. of Rs1.4bn. Though revenues at Rs 17.0bn, 11 percent YoY were slightly lower than est. of Rs17.7bn, the primary disappointment was at the margins front. Adjusted EBITDA margins stood at 9.9 percent (est. of 13.3 percent) due to lower margins in the chemicals segment.”

“We expect subsequent quarters to witness gradual improvement in chemicals margins (stabilization in caprolactam prices coupled with softening in benzene prices, reduction in benzene consumption by 4 percent and strong downstream demand). Fertiliser demand is expected to pick-up with the onset of monsoons. GSFC continues to trade at attractive valuations of 4.1x FY14E earnings and 50 percent discount to book value. We maintain ‘Accumulate’ with revised target price of Rs66,” says Prabhudas Lilladher research report. 

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