How strong are fertiliser plays ?

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Investment advisor S P Tulsian gives his take on the fertiliser space, and analyses few stocks from it.

He believes that most fertiliser stocks have been gaining due to chemical and other divisions of the company and not necessarily the fertiliser segment,

Excerpts from CNBC-TV18's exclusive interview with SP Tulsian:

Q: Could you find a reason why fertiliser stocks were going up yesterday ?

A: If I analyse yesterday's upward movement, then I don't think it is mainly because of fertilisers. Now if we single out GSFC and GNFC ; for GNFC in FY05 they had an EPS of Rs 15, and net profit of about Rs 220 crore. The fertiliser segment has not contributed to this, the entire profit has come from the acetic acid and chemical division.

Same is the case with GSFC, they had a EPS close to Rs 27-28 and fertiliser division has contributed 1/3 and rest has come from their chemical division. GNFC cannot make profits because they have their fertiliser plant based on naphtha, it is not a gas based plant whereas GSFC is a gas based plant. So one should not generalise yesterday's movement, because for fertilisers no decontrol is possible.

Coming to the subsidy increase on single super phosphate, SSP; SSP is made by reacting rock phosphate with sulphuric acid and sulphuric acid is also used as waste sulphuric acid which plants give is free of cost. Now if sulphuric acid is ruling for around Rs 2000 per tonne, the moment Indo-gulf will go on stream with their copper plant, the prices will fall to Rs 1000 per tonne.

So I think the SSP subsidy is also not such a big factor and infact SSPs are now manufactured by the unorganised sector because there is no capital investment. There are only four big players in the SSP i.e Basant agro, Dharamsii Morarji Chemical Company , Aarti industries and Khaitan Chemicals and Fertilisers . 

So we should not be very excited by the fertilisers, something might come in the Budget, de-control is on the cards, because SSP is a very low volume business and government has given extra subsidy of Rs 300 per tonne and that is mainly to meet the cost of increase in rock phosphate because Rajastan Mineral, RSML, which supplies rock phosphate is also having a shortage on the supply front and they are importing.

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Q: Where do you put the fertiliser pack in this entire market because you seem to suggest that fertiliser companies aside of their fertiliser business is what makes them attractive ?

A: One has to demarcate fertiliser companies, for example if we take  Deepak Fertilisers  their name suggests fertilisers but they are into chemicals and same is the case for Tata Chemicals , though we say they are into fertilisers, they are mainly into soda ash. They all are now shifting to the chemical side and whichever company is fairing well, it is mainly due to the performance of their chemical division and chemical carries a higher P/E multiple, while fertiliser companies historically have low P/E multiples. So the same scenario will continue.

GNFC and GSFC are showing record performance in terms of both topline and botttomline, and the same trend will continue because of their chemical division and not their fertiliser division. So this will be the scenario with all the so-called fertiliser companies that are not into fertilisers.

Q: Which companies in this space have the highest scope for re-rating upwards when you look at this whole chemical basket?

A: Out of GNFC and GSFC, one should take GSFC, I am again taking FY06 since we have H1 figures before us. So it's very easy to extrapolate FY06. They will have a cash EPS of Rs 50 per share. They will also have a basket of investments close to Rs 600 crore which translates to about Rs 70-80 per share. So if we take a cash P/E multiple of Rs 3, it is less than Rs 5.

At a 9400 level Index if you can identify these stocks which have reasonably good visibility for the next two years from the captrolectrum as well as acidic acid segment, one can definitely take a call. So these are valuation scrips. We are running around so many other scrips, which have a P/E multiple of Rs 20-25. I don't see any risk.

GSFC has shown the highest ever profit in their history while the share price has not gone up so much. Now they do not have any problem with regards to corporate governance. Everything has been set aside, same is happening with GNFC and Deepak Fertilisers. So there are many places, many stocks, which have to be looked more from a chemical angle rather than a fertiliser angle. So these could be three four stocks, the fourth could be Zuari Industries .

We see value in these stocks, they are ruling at a P/E multiple of  4-5 and I think one has to identify the value, they are mainly valuation calls. As regards to GNFC and GSFC, whether they will still get re-rated or show upward movement will have to be seen.

Q: Any disclosures?

A: I have both GSFC and GNFC.

 

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