Accumulate GSFC; target of Rs 530: Emkay

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Accumulate GSFC; target of Rs 530: Emkay

Emkay Global Financial Services is bullish on Gujarat State Fertilizers Company (GSFC) and has recommended accumulate rating on the stock with a target of Rs 530 in its January 27, 2012 research report.

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Emkay Global Financial Services is bullish on Gujarat State Fertilizers Company (GSFC) and has recommended accumulate rating on the stock with a target of Rs 530 in its January 27, 2012 research report.

"Gujarat State Fertilizers Company (GSFC) reported revenues of Rs 13bn, 6% yoy in line with our est. Fertiliser segment reported in line revenues of Rs 9bn, 7% yoy while chemicals segment reported revenues of Rs 4bn, 4% yoy in line with est. GSFC reported EBITDA of Rs 2.6bn, -18% yoy in line with est. EBITDA margins came at 19.8% (-590bps yoy/-410bps qoq) against est of 19.4%. GSFC's employee cost increased to Rs 1.18bn, 75% yoy due to higher provisioning of liability on account of wage revision of Baroda employees. Company reported APAT of Rs 1.72bn, -15% yoy in line with our est. AEPS for the quarter stood at 21.6 against est of Rs 21.8. Despite 6% increase in topline, APAT declined by 15% yoy primarily because of lower margins in chemicals segment."

"GSFC reported EBITDA of Rs 2.6bn, -18% yoy in line with est with EBITDA margins of 19.8%. Fertiliser segment reported margins of 15.3% against estimates of 13% while chemical segment reported margins of 26.6% lower than est of 28%. During the quarter, average caprolactam prices stood at $2900/mt (4% yoy/-17%qoq ) while benzene prices stood at $1000/mt (5% yoy/-11%qoq). Consequently, spreads declined to $1900/mt for Q3FY12 compared to $2400/mt in Q2FY12 leading to decline in chemical margins from 34.3% in Q2 to 26.6% in Q3FY12."

"Though chemical spreads remain encouraging compared to historical average, however with recent decline in spreads, we expect GSFC's earnings to decelerate. GSFC had been a beneficiary of the strengthening caprolactam-benzene cycle during the previous 6-7 quarters however with recent decline in spreads, earnings decelerated in Q3FY12. We maintain Accumulate rating with target price of Rs 530. Valuations still remain attractive with cash of Rs 8.5bn currently which is likely to increase to Rs 15bn (cash/share of Rs 194) by FY13E. Despite attractive valuations, 50% of cmp in cash and equivalents and FY13 EV/EBITDA of 1.5x, P/E of 4.9x we maintain our Accumulate rating on the stock due to declining trend of caprolactam - benzene spreads," says Emkay Global Financial Services research report.

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