Reduce GSFC; target of Rs 350: Emkay

Emkay Global Financial Services is bearish on Gujarat State Fertilizers Company (GSFC) and has recommended reduce rating on the stock with a target of Rs 350 in its July 12, 2012 research report.
 
“Gujarat State Fertilizers Company (GSFC)’s chemicals segment contributes 1/3rd to total revenues while contribution to profit is 2/3rd. Caprolactam contributes ~70% to chemical revenues / profits and hence company’s earnings closely follow its Caprolactam Benzene spread. (Kindly refer to chart on next page). On account of sharp drop in spreads, we expect GSFC to enter into earnings degrowth phase in FY13 with each quarter reporting earnings drop of 20%- 40%. This earnings degrowth phase along with no positive trigger in near term is likely to keep pressure on company’s stock price. Caprolactam-benzene spreads declined by 50% in US$ / 30% in INR to $1175/mt by June’12. Sharp depreciation in currency by ~20% has helped GSFC protecting its margins to some extent. We believe that current spread at INR Rs 65,000 / mt is still 25- 35% above its break even level. Current spreads are down primarily due to sharp drop in Caprolactam prices (down by 30% yoy to $2200/mt), while key raw material benzene prices is down only marginally by 5%.”

“Though the company trades at attractive valuations of 6xFY13 EPS and 20% discount to FY13BV, EV/EBITDA of 3x and div yield of 2%, we foresee further downside risk. We value the stock at previous three year average P/BV of 0.7x and arrive at price target of Rs 350. We downgrade our FY13E EPS est by 10% to Rs 65.6, which is 20% below consensus est, on account of sharp decline in chemical segment margins. Historically we have seen company’s stock price following its chemical business profitability and downward pressure on chemical segment margins is likely to keep the stock price under pressure.”

“We downgrade our recommendation from Accumulate to REDUCE and wait for improvement in Caprolactam-Benzene spread. However we expect GSFC to benefit marginally from higher ammonia prices,” says Emkay Global Financial Services research report.     

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