Buy GSFC; target of Rs 140: Emkay

Emkay's research report on Gujarat State Fertilizers & Chemicals (GSFC)

"Company’s fertilizer business has suffered from higher inventory and poor availability of raw material in FY14 (segment revenues dropped by 27% yoy to Rs 31bn and EBIT dropped by 47% to Rs 2bn) however the same has improved in current year. Complex fertilizer sales volumes are expected to improve by ~25% to 1.4 mn mt in FY15 and further to 1.8mn mt by FY16. Supply of phos acid from its TIFERT venture (a JV between GSFC, Coromandel and GCT at Tunisia) will increase raw material availability. Management expects EBIDTA margin in complex fertilizer to increase to Rs 2500/mt vs Rs 2000/mt seen in previous year driven by price increase taken by the company to compensate for expected increase in gas price.

"Company aims to achieve revenues of Rs 150bn over next five years driven by ongoing capex which includes increase in complex fertilizer capacity and commissioning of Nylon and Melamine plant. Current valuations are lucrative at 25% discount to book value and 6.3xFY16 estimated EPS. Company’s strong investment value of ~Rs 8bn and significant investment in working capital at net current assets of Rs 21bn (with recovery of pending subsidy from the from government) and net debt of Rs 4.5bn makes the company more lucrative. We reiterate our BUY recommendation on the stock with revised price target of Rs 140 based on 6xFY16 EV/EBIDTA", says Emkay Global Financial Services research.

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