Buy GNFC; target of Rs 157: Emkay

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Buy GNFC; target of Rs 157: Emkay

Emkay Global Financial Services is bullish on Gujarat Narmada Valley Fertilizers Company (GNFC) and has recommended buy rating on the stock with a target of Rs 157 in its April 11, 2011 research report.

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Emkay Global Financial Services is bullish on Gujarat Narmada Valley Fertilizers Company (GNFC) and has recommended buy rating on the stock with a target of Rs 157 in its April 11, 2011 research report.

"Gujarat Narmada Valley Fertilizers Company (GNFC), ammonia plant break down in Q4FY10 and Q1FY11 has adversely affected GNFC's urea production and company reported losses of Rs 383 million and Rs 227 million, respectively. Urea production declined by 53% / 69% and fertiliser segment reported loss of Rs 485 million / Rs 762 million in Q4FY10 / Q1FY11. However company regained its profitability from Q2FY11 onward. It is to highlight that GNFC's complex fertiliser business benefited from NBS and fertiliser segment margins improved to 7% by Q3FY11 as against nil in previous year. We expect fertiliser business profitability in Q4FY11 to remain strong and fertiliser segment to contribute EBIT of Rs 300 million against loss of Rs 485 million previous year."

"We expect GNFC to post strong Q4FY11 results (APAT of Rs 902 million against loss of Rs 383 million) leading to FY11 PAT revision by 14% and AEPS of Rs 14.1 (previous Rs 12.4). Prices of company's key chemicals like Nitric acid, Formic acid, Methanol etc have increased by 15-20% resulting into higher margins despite increase in input cost. Insurance claim of Rs 1.4 billion is likely to boost the profitability for Q4FY11 / FY11. Resulting FY11 reported PAT to be higher by 45% than our estimated APAT of Rs 2.2 billion. Stock trades at compelling valuations of 4.8 x FY12E EPS, 3.3x EV/EBITDA and 30% discount to its FY11 BV of Rs 144."

"We expect GNFC to benefit from strong chemical prices in current scenario. Companies' key products like acetic acid has witnessed price increase by 21% qoq / 22% yoy during Q4FY11 while Nitric acid prices increased by 17% qoq / 17% yoy. Methanol (2% qoq / 33% yoy), Formic Acid (14% qoq / -8% yoy) and Aniline (8% qoq / 3% yoy) has also witnessed strong realisations on back of firm demand. Though the prices of key raw materials like Benzene (22% qoq / 9% yoy) and Toulene (13% qoq / 6% yoy) has also gone up, but we expect spread has been favourable to the company hence resulting into margin expansion. We expect chemical segment margins to expand by 500bps yoy / 250 bps qoq in Q4FY11."

"During Q4FY11, GNFC has received a sum of Rs 1.4 billion against claim for disruption in the operation of the plants towards the loss of profit and material damage. This is likely to boost company's profitability for Q4FY11 / FY11 and expected to drive reported profit for FY11 to Rs 3.2 billion as against our estimated APAT of Rs 2.2 billion. Driven by higher chemicals margins, we expect GNFC's Q4FY11/ FY11 results to be higher than our estimates. We believe that at current valuations of 4.8 x FY12E EPS, 3.3x EV/EBITDA and 30% discount to its FY11 BV, the stock looks attractive and hence we reiterate our BUY recommendation on the stock with price target of Rs 157. Further company's ongoing capex of Rs 28 billion in phase - 1 & 2 is likely to drive its earnings from FY13 onwards," says Emkay Global Financial Services research report.

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To read the full report click on the attachment